By Sanjay
Bhatt
Seattle
Times business reporter
March
10, 2014
Last April, amid the region’s tightest
housing supply in a decade, a Wall Street-backed company stormed into the
Invitation Homes, a subsidiary of investment
giant The Blackstone Group, purchased the homes from banks, foreclosure
auctions or individual sellers, and turned them into rentals. Often buying
entry-level homes under $300,000, it almost always paid cash.
“Cash is king,” said Bob Papke, a RE/MAX
real-estate agent in Sammamish. “Your first-time buyer who’s scrambling to get
their down payment together is going to get trumped by the investor.”
By year’s end, Blackstone’s Invitation Homes
had hoovered up at least 1,585 single-family homes here, according to market
researcher RealtyTrac . Nationwide, Blackstone says it has spent $8 billion
amassing a portfolio of 43,000 single-family homes.
Big companies such as Blackstone are a new
force in the single-family home market, offering more ready cash than ordinary
buyers and helping push up prices.
As homeowners from coast to coast wake up to
learn they have a Wall Street fund as their neighbor, some are happy to see the
houses spruced up and occupied. Others complain it’s hard to get the landlord
to address problems that surface.
When Invitation Homes’ for-rent sign was
posted in front of a house two doors down from hers in
“That rental, I fear, is going to be another
group of kids who will change the character of the neighborhood,” she said.
Over the past two years, institutional
investors such as Invitation Homes, Pretium Partners and American Homes 4 Rent
have spent more than $20 billion to acquire 130,000
Locally, about half of the homes bought by
Invitation Homes and Pretium Partners last year were in King and Snohomish
counties, according to data from RealtyTrac.
And they haven’t let up: In January,
Invitation Homes bought at least 55 homes, RealtyTrac said. Private-equity fund
Pretium, formerly called Fundamental REO, was next with 52 homes.
The buying spree has potentially far-reaching
consequences.
In a market already low on inventory, big
investor purchases could artificially pump up home prices, said Yale economist
Robert Shiller, whose book “Irrational Exuberance” warned in 2005 of a national
housing bubble.
“I don’t quite understand why the housing
market shot up so much in the last year when expectations didn’t go up, at
least not among homebuyers,” he said.
The big investors also take out of
circulation houses priced for the lower rungs on the economic ladder.
“Obviously that makes it harder for the
first-time homebuyer, as if they didn’t have enough challenges already,” said
Glenn Crellin, associate director of research at the University of Washington’s
Runstad Center for Real Estate Studies.
Window
of opportunity
Owning a home isn’t as popular or feasible as
it once was: Since 2004, the homeownership rate among younger households has
plunged. Stagnant income growth, high levels of student-loan debt and tighter
lending policies — not to mention bad memories of the housing bust — all could push
more households toward renting homes, analysts say.
Major investors — defined as buyers who
acquired 10 or more homes in a year — overall made at least 7 percent of all
single-family home purchases in the Seattle metro area in 2013, RealtyTrac
estimates. They bought about 3,100 single-family homes, five times more than
the previous year. They were most active from April to September, the peak time
of year for regular homebuyers.
The big buyers are targeting three-bedroom
homes in middle-class neighborhoods. About half the homes they bought in the
metro area were in foreclosure or owned by a bank, according to RealtyTrac.
Blackstone, a global private-equity and
investment-advisory firm with $6.6 billion in revenues last year, is the
largest of the big buyers, both in the
To the new Wall Street homebuyers, their
business model is an innovation that serves families who don’t qualify for
mortgages or want the hassles of homeownership.
“We don’t have any plans to sell the homes we
own,” said Andrew Gallina, a spokesman for Dallas-based Invitation Homes.
“We’re creating a new industry. We’re professionalizing the single-family
home-rental market in a way that’s not been done before.”
The big buyers operate on an unprecedented
scale.
American Homes 4 Rent, a California-based
investor in single-family homes that raised $887 million in an August stock
offering, said in a recent regulatory filing that it screens about 50,000 homes
a month. It takes American Homes just 20 days to buy a house, 72 days to
renovate it and 30 days to rent it out.
Jon Dillingham, a
“They didn’t even look at it. They just
bought it,” he said. “These guys came rolling into town with cash and we were
done.”
And Wall Street appears prepared to lend the
big investors more money to keep buying.
Last fall, Invitation Homes raised $479
million in a bond offering — the first rated bonds ever backed by the rents and
value of single-family homes.
After that “watershed event,” said Jade
Rahmani, an analyst with Keefe, Bruyette & Woods (KBW), Wall Street could
pour $20 billion a year for the next three or four years into bonds to finance
the acquisition of single-family rental homes.
Buy
it, fix it, rent it
Along a tree-lined avenue in Seattle’s
Broadview neighborhood, million-dollar homes sit across the road from starter
homes — one of which Invitation Homes recently put up for rent at $2,395 a
month.
Last March, Darrell McManus and his wife had
listed that house for $350,000. Their first deal with a buyer collapsed after
inspection.
Then came Invitation Homes with an offer of
$343,500, about $5,000 lower than the first buyer, McManus said.
“It was an all-cash offer,” he said. “We had
a close in two weeks.”
Invitation Homes replaced the roof and
windows, installed new fixtures in the kitchen and bathroom, and tore down a dilapidated
backyard shed.
Nationally, it costs Invitation Homes an
average $150,000 to buy a house and then $21,000 to renovate it, according to
research firm Morningstar Credit Ratings. The average home is 25 years old.
Marsha Weese, McManus’ former neighbor in
Broadview, sold her home last year to a different kind of buyer: a first-time
homeowner who’s organizing neighbors to lobby the city for speed bumps on the
busy avenue.
Weese said it’s unfortunate that more homes
on the street are becoming rentals. But big national landlords aren’t the only
ones raising her ire.
She and her fellow neighbors had petitioned
city officials in 2012 to do something about an overgrown and abandoned house
on the corner that was infested with rats and possums.
A local real-estate investor bought the
eyesore last May at auction to demolish it and build a new single-family home.
Nearly a year later, the eyesore remains.
“It’s my assumption an investor with a rental
property is going to spend minimal time and energy to keep it up,” Weese said.
Neighbors
concerned
Invitation Homes says it’s the exact opposite
of a slumlord. The 1,600-employee company has more than 100 employees in
“We really feel like we’re filling the void
with high quality, well maintained, professionally managed homes,” said
spokesman Gallina. “You’ll almost always find that we’re the nicest house on
the street.”
But some neighbors say the company turns a
blind eye to their concerns.
Seven cars are parked on the street outside
the house, Brady said, and sometimes block mailboxes.
“The cars are broken-down, some with flat
tires and some jacked up as if they are being worked on,” Brady said.
“Invitation Homes clearly does not care. They told us it was our problem, that
if we want to have the tenants’ cars towed, to do so.”
Invitation Homes says its leases bar tenants
from subleasing rooms and the company follows all applicable housing laws. It
wouldn’t comment specifically on the
The company also has occasionally run afoul
of cities for failing to maintain yards and obtain permits for renovations.
And last September, the
Six weeks later, he said, the company paid
for the $6,800 permit and resumed work.
“It looked to me like they were using
Craigslist people,” Diamond said.
She’s worried about the impact the
fast-growing company could have on neighborhoods.
“They seem like the heroes on the surface,
don’t they?” Diamond said. “My biggest concern is you’re dealing with a company
that you can’t reach.”
Invitation Homes spokesman Gallina said the
company has 22 employees in the
“I think it’s a challenge when you’re giving
birth to a new industry, that people can be negative towards change,” Gallina
said. “This is no different from back in the 1970s and 1980s when they were professionalizing
apartment buildings: Apartment buildings were being purchased and bundled
together into real-estate investment trusts.”
Big
buyers’ impact
Experts disagree on what the big buyers’
presence means for the housing market.
“I see nothing negative about it,” said Susan
Wachter, professor of real estate and finance at the
These big investors are taking over
distressed properties that otherwise might be a drag on a neighborhood’s
property values, she said. Moreover, they’re transforming an inefficient rental
business.
“It’s helping to heal our housing market
quickly,” she said.
If big investors continue to raise money
easily and cheaply from bonds backed by single-family rentals, that may create
“a paradigm shift in the
“Over the long run, we believe this should
lead to higher home prices and improved neighborhood quality, particularly at
the low end of the market,” he said.
Regular homebuyers, however, may be hurt
because “investor demand for rental properties could further raise both home
prices and rents.”
Shiller, the Yale economist, said the big
investors are serving a real demand from some renters. But the economics may
not be sustainable because converting single-family homes to rentals and
managing them is costly.
“The real problem for home prices is that
detached, dispersed single-family homes are not designed to be rentals,”
Shiller said.
To be sure, the big investors deserve credit
for putting a floor under home prices and helping the market recover, said
Daren Blomquist, RealtyTrac’s vice president.
“For the long-term health of the market we
want to see the pendulum swing back to more potential first-time homebuyers
being able to buy these homes, rather than just rent them,” he said.
“This could just represent a shift away from
a homeownership-dominated society to more of a renter-dominated society, and
that in itself is maybe not a bad thing. But it does take away from one of the
primary means that many Americans have to build wealth.”
Sanjay
Bhatt: 206-464-3103 or sbhatt@seattletimes.com On Twitter @sbhatt
Biggest
buyers
Over the past two years, corporate investors
have bought thousands of single-family homes in King, Snohomish and Pierce
counties and turned them into rentals. These are three of the most active:
Invitation Homes: Dallas-based subsidiary of
The Blackstone Group bought at least 1,585 homes in the tri-county area last
year, up from 32 in 2012. Has spent $8 billion buying about 43,000 homes
nationwide.
Pretium Partners: The New York-based firm,
formerly called Fundamental REO, bought at least 272 local homes last year.
Founded by a former Goldman Sachs executive who oversaw his bank’s bet against
subprime mortgages.
American Homes 4 Rent: The Agoura Hills,
Sources:
RealtyTrac, Seattle Times staff research, Bloomberg News