Buying Single-Family Homes in Bulk

Horse on the East Hartford RiverfrontWarning: What follows is a long, dry, stat-heavy summary without much original commentary or insight. It’s here because putting this together helped me think through the subject better. Proceed at your own risk. Hopefully at least one other person will find it interesting…

I came across an article a while back that I’m still trying to wrap my head around. It’s a wide-ranging piece on the Bloomberg site called Private Equity Has Too Much Money To Spend On Homes. The author/editors include quotes from a huge range of people, and the narrative bounces around to all different points of view. It’s a dizzying collection of factoids and thoughts that covers a market we have very little visibility to here in Greater Hartford.

The overriding theme is that investors have raised a lot of money to buy and operate distressed single-family homes as rentals, but so far they have not been able to acquire many properties at all. Below I’ve reorganized the points to first focus on the supply and then the demand side of the equation.

Supply of new distressed homes has been down in recent years, and is controlled by a limited number of mortgage lenders and government entities.

Fannie Mae is reviewing final bids on the bulk sale of 2,490 properties. A couple paragraphs later the author cites a Guggenheim Securities LLC note that said future REO-to-rental bulk sales by Fannie Mae and Freddie Mac may be delayed to “monitor the properties in the pilot program.”

Fannie Mae’s bulk sales will be based on regional pools – Atlanta, Chicago, three regions of Florida, Las Vegas, Southern California, and Phoenix. Pools will either be sold outright or used for joint ventures with Fannie Mae. 85% of the homes have rental tenants. Buyers will face restrictions on resales to prevent flipping and flooding a market. A March filing showed that Fannie owned 114,157 foreclosed homes and that 8% of them had tenants.

The FHA (Federal Housing Administration) manages about 35,000 repossessed homes, and “plans to sell 5,000 properties with delinquent loans.” (KB: It’s not clear if this would be a bulk sale or individual property sales. Also, how do you sell a property with a delinquent loan? I can understand selling a loan. Or foreclosing and selling the property. But not “properties with delinquent loans.”)

Bank of America is avoiding bulk sales with their REO inventory, preferring to approve short sales, sell properties through real estate agents or auction them off individually.

Foreclosure processing – the taking of homes – has not yet recovered after the robo-signing issue and related settlement.

Short sales are increasing, and RealtyTrac expects them to exceed the number of REO sales in the second quarter of 2012.

CoreLogic reports that there are 1.6 million homes that are either owned by banks and not yet for sale, or are more than 90 days delinquent on their mortgage. They refer to this as shadow inventory.

PIMCO (Pacific Investment Management Co) believes that 6 million homes will be lost through a distressed sale in the next five years, and that will create demand for 4 million new rental units. By their calculations, $6 billion spend on foreclosures, at an average price of $150,000, only equals 40,000 homes. So the opportunity is much larger than $6 billion.

On the other side of the equation, there are many different groups hoping to buy and rent single-family homes in the United States. Here is what they are seeing in this market.

Investors have committed at least $6.4 billion to this investment theme. A managing director in the real estate investment banking group of Jeffries Group Inc. is quoted as saying “less than $2 billion of institutional capital has been spent.”

A company called PropertyAccess currently manages about 10,000 single-family rentals for banks and investors, and is expecting to be able to buy 500 to 1,000 per month by the fourth quarter. The gentleman quoted from that firm thinks the ability to buy these types of properties is more of a challenge than the ability to operate them.

Private Equity firm Colony Capital hopes to buy $1.5 billion worth of single-family houses by April 2013, and believes the operation of the properties is more of a challenge than the acquisition. The gentleman quoted estimated that 7.5 million homes with a market value of $1 trillion will be lost to foreclosure by 2016.

Investors at Carrington Capital Management LLC, who received a $450 million commitment from an Oaktree opportunistic fund, believe the primary challenge is finding homes to buy.

GTIS Partners, another investment firm, hopes to buy $1 billion worth of single-family houses by 2016, but prefers not to buy in bulk. Their chairman is quoted as saying “if you buy by the pound, I think you’ll underperform” since you haven’t done your due diligence on the individual properties and will end up with a lot of junk.

Delavaco Properties Inc, an owner/operator that is planning to go public, focuses on single-family homes that generate a stable rental income. They own 450 homes and also like to be selective in their purchases.

The Phoenix area was specifically mentioned a couple of times, with the point being that investor demand for distressed home is outpacing supply.

Landsmith LP sold 75 homes they had previously bought in the Phoenix area for about 3.4x their purchase price. (KB: No information was provided about how much they spent improving the properties) They are now looking to other markets that are earlier in the foreclosure cycle.

American Residential Properties, Inc., a REIT that is planning to go public in 2013, also sees the Phoenix market as more competitive.

Finally, it was noted that real estate agents hate the idea of foreclosed homes selling in bulk. One reason is that brokers feel the buyer market is deep enough to absorb the coming inventory. Additionally, the Chairman of brokerage firm Realogy was quoted as saying that large-scale foreclosure sales “would put further downward pressure on home prices, take away local investment opportunities, and enrich Wall Street investment funds.” The author concludes by noting that real estate agents do not receive commissions for the bulk sales.

Since this article was published, Fannie Mae has put out this press release about the next step in their REO program.

Now that I’ve sorted through all that information…

There aren’t enough distressed situations in Greater Hartford to warrant bulk sales of repossessed homes. There are a handful of agents who seem to have relationships with the banks and government organizations and they handle all the REO sales. The rest of us – the vast majority of local real estate agents – work directly with owner/sellers who are not in distress. There are short sales periodically, but they are not overwhelming the system either.

A billion dollars is a lot of money. For example it would be almost enough to buy all of the single-family houses in the City of Hartford (about 7,100 of them), which the Assessor valued at $1.12 billion as of October 1, 2012 in the most recent revaluation. If another billion-ish dollars were laying around it could be used to buy all the two-family and three-family properties in the City (another 6,300 total), which were valued at $1.11 billion.

Six million homes (or 7.5 million) lost to distress is an even larger number. So they’re saying that nationally the problem is about 1,000 times worse than if every single-family home in the City of Hartford were lost to foreclosure.

According to this recent housing survey on census.gov, there are about 79.7 million detached single-family homes in the country and 125.5 million residential units in total. So somewhere between 5% and 10% of them are going to be lost, with much higher concentrations in some areas.

What does this mean for Connecticut real estate and for Greater Hartford in particular? Are we late to the foreclosure party, or was the housing boom and bust so tame in this area that we’re going to miss the mass foreclosures entirely?

Hurricane Irene: Feeling Fortunate

The storm has passed, the skies have cleared, and the wind has died down. It is a bright and sunny Monday.

Sunday morning – before the eye of the storm arrived – turned out to be the worst of the weather for Greater Hartford. That’s when the bulk of the rain came through, and the strongest wind gusts, though they did not approach hurricane strengths. The rain died out quickly as the storm moved north of us, and the heavy winds that were forecast never materialized.

Sealing the Pit to keep Hurricane Irene OutOur biggest concern before the storm was that massive trees would not be able to withstand the heavy winds, especially with the saturated soil. We were worried about cars and homes getting hit, and were mentally prepared for a power outage. Thankfully, neither happened for us (though we know others in the immediate vicinity that were affected).

Our biggest actual issue during the storm was the heavy rain. Like most homes in the area, our basement has a portion of the foundation floor cut out at the low point to allow water to drain from inside to outside. During especially rainy stretches we sometimes see water collect in the pit, and attribute it to the rising water table. Early Sunday morning we began to see signs that the water may try to use the hole to come into the basement.

Our makeshift solution is shown in the picture – we basically tried to plug the hole using whatever we could find. The key components ended up being over sized garbage bags as a liner, wet kitty litter to mold the the bags to the irregular shape of the hole, a sheet of foam insulation to hold down the perimeter, and then lots of weights to apply pressure and seal the edges. It’s an ugly solution, but we didn’t get any water in the basement.

We feel very fortunate that we seem to have emerged unscathed, and are also grateful that the scope of the damage in the region was much less than expected. Other areas of Connecticut experienced considerably more problems – flooding, trees down, and power outages. Some friends in NYC were evacuated from their high rise apartment and then came back to water damage. Friends further south have also reported major problems.

Worst of all, it seems like just about all of southern Vermont, our home state, was devastated by flash flooding. All the major routes we would take to get from Hartford to Rutland are washed out – Route 103 in Chester and Ludlow (near Okemo). Route 9 in Wilmington (near Mt. Snow). Route 4 in Woodstock and Mendon (near Killington). Other towns sustained major damage away from the primary roads, especially Brattleboro. It’s the worst flooding pictures and video I have ever seen. Please consider taking a trip up to VT this fall or winter for some touristing activities – it’s a wonderful place to explore and their economy is going to need our help.

More on Demographics and Real Estate

Red Flowers in the West End of HartfordBelow is another article about demographics and other real estate trends that builds on the research of Arthur C. Nelson. It came to my attention after being posted by City of Hartford COO David Panagore. This continues on the themes of Mr. Condon’s piece from Sunday and our take on specific neighborhoods that may benefit from the market shifts.

I’ll be honest, I couldn’t get through the whole thing in the first sitting, but when I finally did, it seemed worth the effort.

The Next Real Estate Boom: How Housing (Yes, Housing) Can Turn the Economy Around
Patrick C. Doherty and Christopher B. Leinberger
Washington Monthly, November/December 2010

A New Home for Steve Jobs

Will the Bulldozers Roll onto Steve Jobs' Property?Steve Jobs, Apple CEO and technology visionary, has a gift for designing things. People have been going bananas over Apple’s various portable devices for the past decade, and he is credited with many of their important design principles.

Although gadgets are fun, we’re more about the real estate on this site. And this news piece definitely caught our attention – Steve Jobs is going to be building a new home! And the site plans are available on the internet!

The story of this property is too long and complicated for us to fully understand the details, but there seems to be two interesting themes – historic preservation and design.

Jobs bought the estate in 1984, lived in it for a while, rented it for a while, and let it sit vacant for a while. The existing structure is a 30 room Spanish Colonial Revival mansion with 14 bedrooms and 13.5 baths over multiple structures on 6 acres. Although Jobs has wanted to demolish the home for years, local preservationists have successfully intervened on the property’s behalf, working to either save the structure or move the home to a different site. In 2006 someone made their way onto the vacant property and took these pictures, which show significant neglect. There seems to have been rulings in favor of each side, with the most recent victory being for Jobs when the preservationists dropped their lawsuit seeking to prevent demolition. At this point, the demolition is on.

The other interesting subplot is about what the new home will look like. Jobs has the resources to build anything he wants, so what will it be? Conceptual plans for the new home were submitted to the Woodside Town Council, and they have reached the interwebs. I haven’t found images that I can zoom in on (please post a link in the comments if you find some), but these small images and the accompanying commentary give a good flavor for the space. The basic conclusions of those who have studied the plans in detail are that Jobs is sticking with the clean, simplified aesthetic popularized by Apple products. Also, that he won’t be throwing large parties at his house, it’s designed more as a peaceful retreat than a showpiece property.

Jobs has won the most recent battle with the preservationists, but will it be the end of the war? And if he actually follows through with his plan, will the final product truly be as restrained as the current plans? Only time will tell.

Comping Hartford: What is Hartford?

Pricing a house is all about using “comparable sales.” We always try to compare similar properties and the more similar the better. There is rarely a perfect match, but we can usually get pretty close.

Hartford looking southwest from over the Connecticut River

It seems to me that in evaluating a city we should be using a similar approach. When comparing our area to others around the country, we need to be comparing like to like. The current dust-up about Hartford being a “dead city” is the most recent, but far from only, example of how inappropriate comparisons skew reality in one way or another.

A wonderfully positive example is Kiplinger Personal Finance Magazine recognizing West Hartford as a town for the coming decade next to Austin and Seattle. The point isn’t that West Hartford is unworthy, or to minimize all the hard work of the town’s leadership, rather that comparing West Hartford and Washington DC (#3 on the list) as equals is not apples-to-apples.

We unfortunately can’t control how other people do their analysis, but we can draw our own conclusions so that we can decide on our own what truly matters and what doesn’t. Amy and I have lived in a few different parts of the country, but we’re going to need help from our readers to find appropriate cities to use as comps for Hartford.

But before we get to that, our first order of business is to define what we mean by “Hartford.”

The word “Hartford” can be used in a lot of different ways, and means different things to different people. In some of the most common uses the speaker means…
– The Downtown neighborhood where all the tall buildings are.
– Everything within the Hartford City limits.
– The general geographic area that is centered on the City of Hartford.
– The seat of the County and State governments.

Normally defining the city wouldn’t be a challenge, but boundary lines are drawn differently in Connecticut than in many other parts of the country. Is it appropriate to compare Hartford to Detroit? Hartford (as defined in the article) is strictly the City of Hartford, which is 17.3 square miles of land. Detroit, on the other hand is 138.8 square miles. In order to make a geographic area of comparable size, we would need to include Hartford, West Hartford, Wethersfield, Newington, Rocky Hill, Bloomfield, Windsor, and half of Windsor Locks. Would the conclusions be the same if the analysis included all of those towns?

I propose that we think of “Hartford” as the region – the general area centered on the City of Hartford, but including all the surrounding towns. There is no right answer, of course, but I think that taking a regional view is most appropriate because we have a regional economy with people frequently traveling between towns for work, to shop, and to have fun. Additionally, taking this view is the only practical way to compare Hartford to other cities since they are usually geographically much larger. The negative of looking regionally is that it will be very difficult to gather data on the Hartford region.

Going back to the article praising West Hartford, I think that Hartford (as a region) would still be worthy of inclusion as a best city for the coming decade. I’m no expert on Washington DC, but if Kiplinger is able to look past their challenges to see the potential, then they should be able to see past our challenges too.

I’d love to have folks weigh in with their take on how we should define “Hartford.” And if we can agree, then we can begin to look for other similar cities to which we can compare our current situation and future ambitions.