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, 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?

My Saturday Showing Debacle

Showing in the SnowThis past Saturday I had two showing appointments with two different clients, one in the morning and one in the afternoon. The morning appointment went fine. The afternoon appointment was a doozy.

I had called the listing agent for the house the previous day because it was a fairly expensive short sale and I wondered how involved the bank was and if it would be a quick turnaround if my client was interested and put in an offer. I’ve had other clients wait months and months to hear nothing back from the bank, so it’s nice to at least have some idea going into it. The listing agent assured me that the bank was on board and it would be a quick turnaround. They also warned me that the house was vacant and that it probably hadn’t been plowed, so be prepared to deal with snow. Oh fun. I told my clients to wear their boots and I would do the same.

I arrived at the house about 15 minutes before my clients were supposed to meet me so I would have adequate time to open up the house and deal with the snow. When I got there I realized that there had been no snow removal the entire winter. Awesome. The house was also set up on a hill, so I would need to trudge up the driveway about 150 feet to get to the house and the front door. Which of course had about a 6 foot snow drift because of the roof above dropping snow on it. Awesomer.

So I started trudging up the driveway. That’s a picture of me, above, taken by my cell phone camera. At first the snow came up to my knees. Then I kept sinking in further and it was up to my mid thigh. This house is located in a fairly remote area so they have gotten tons of snow. It’s also near a hiking trail and there were some folks out with snowshoes and their dogs, marveling at me as I schlepped my way through the snow to the front door. Talk about a dedicated real estate agent. Or a crazy real estate agent. You pick.

I finally made it to the front door and was happy to see the electronic lockbox where it was supposed to be, and working. But then I looked in the sidelight window next to the door and saw water on the hardwood floors. Uh oh. I opened the door and there was a running water sound. Not a running water sound like a faucet is running. A running water sound like something is gushing water. “Uh oh” quickly turned to some expletives. I walked in to see water all over the hardwood floors in the kitchen/dining room/family room area. The ceiling above the dining area was soaked and water was pouring from that area. Awesomest.

You guessed it, a pipe burst. I quickly turned around to try and find the source of the water which was apparently coming from upstairs. I went upstairs and saw that a bathroom in one of the bedrooms appeared to have blown something in a shower stall. I didn’t investigate too closely because by that point I was skeptical about the integrity of the floor based on all of the water that was downstairs.

Now I’m on the phone with the listing agent’s office telling them that they’ve got a big problem on their hands. They took the information and said they would start making calls. The listing agent didn’t have a cell phone number that is given out, so I called the only number listed for them and left an urgent message. I then also called a team member they have and left a message for them.

I wondered if I could potentially find the water shutoff in the basement to try and stop things. I trudged down to the basement to find water all over the floor and leaking through the ceiling there too. I thought the electricity was off, but wasn’t sure and then thought to myself “Really? This is a vacant house where they don’t have the heat turned on. There are no lights for me to see anything. How much more should I be doing here? And what if I do find the water and something else happens as a result causing more damage?”

I went upstairs again and called the listing office for a second time. They hadn’t been able to reach the listing agent either, but said they left an urgent message for them too. I said I was going to go and that whoever was coming needed to prepare to walk through thigh-high snow drifts. They thanked me for calling and said that I had done what I could, so I should just go.

I then called my clients and told them not to come to the house. It wasn’t safe and they weren’t going to want to buy it at this point anyway.

Talk about a disaster. What was once a very nice house now has significant damage and I have my doubts whether the owner’s insurance company will cover any of the damage costs. The house was vacant and the heat was off. The lack of snow removal will show that the house was not inhabited. Sometimes I wonder what people are thinking.

This was by far my worst (non)showing to date.

Multi Family Property in Distress

I had some downtime last night, so I decided to look through the MLS to see how the multi family markets are holding up in the current environment. Although multi family properties can be found throughout the region, they make up a small fraction of the overall residential market in most towns. I started by identifying the towns in which they represent a meaningful portion of the housing stock, which makes the data more interesting and relevant. I settled on Hartford, New Britain, New Haven, and Waterbury as the focus of the research.

All data was pulled from the CT MLS and reviewed and compiled manually. “Distressed” property to me means that either a bank already owns the property or the sale will require lender approval because it is a Short Sale. This analysis does not include properties going through foreclosure if they are not listed in the MLS because there is no central data source which collects that information. And when I say “reviewed manually” that means me going through every single MLS listing for that type of property and counting it manually. The MLS does not require agents to enter in the owner, nor does it require us to enter in a Short Sale, although those data fields do exist. Some agents fill in the information, but most do not, so the easiest way to gather the data is just to look through and manually count. It is not fun, but is doable while sitting on a couch on Tuesday night, watching TV. I counted a property as Distressed if the owner was listed as Corporate or a bank, if the Short Sale field said Yes, or if anywhere in the listing description or agent remarks it said that the sale needed lender approval, was bank owned, or was a short sale.

Here’s what I found. Remember, data from the MLS is deemed reliable, but not guaranteed. My ability to count correctly while watching House Hunters is deemed fairly reliable, but also not guaranteed…

Distressed Property Stats, 06/24/09

Some Observations…

1. The levels of distress among multi family properties is consistently above 20%, and in some cases above 30%. In absolute terms, these numbers are higher than we have seen in previous years and show that the Connecticut’s cities have felt some of the impact of the “housing crisis.”

2. The levels of distress among multi family properties is generally higher than among single families. Unfortunately, the data does not give any clues as to why multi families have become distressed at a higher rate. There are many factors that play into a property owner’s decision to default, but the most likely explanation is that investors took on too much debt to buy marginally profitable properties in hopes of continued price appreciation.

3. Inventory levels vary between the towns. This suggests that there are more buyers shopping in New Haven, where the multi family inventory is 7.3 months, versus Hartford. The other side of the coin is that there may be more opportunities for buyers right now in Hartford.

Connecticut is experiencing distress in its multi family markets, and seeing it at a higher rate than the single family properties in the same markets. This creates opportunities for buyers with cash, whether they are looking for investment properties or plan to live in one of the units themselves. Next month’s market statistics post will include updated data for distress in the single family markets of our usual towns.

More on Short Sale Delays

Foreclosure SignThe Courant had an interesting article this morning about a family in Farmington that recently tried to sell their home as a short sale. They had an offer on their home and waited for 3 months for their bank to respond to the offer and authorize the short sale. The bank did not respond. The buyer eventually got tired of waiting and walked away. The house is currently in the process of being foreclosed upon.

Unfortunately this is very common and I was actually involved in more than one of these situations (representing a buyer) last year. Here’s what transpired with just one of the properties from then until now…

My buyer saw a short sale property last spring in Hartford that they liked and put in a bid about 10% off the asking price. We waited for 2 months to hear back from the bank. Repeated calls were made by me and the listing agent to try to get some response out of the bank. Nothing. Frustrated and needing to buy a place, my buyer walked away and pursued something else in Hartford.

Fast forward ahead several months from the spring of 2008. Still no offers accepted by the bank. The property goes under foreclosure and the bank becomes the owner.

This property is now currently listed for sale with the bank as the owner. The listing price is 10% below what my buyer offered last year. I recently showed this property to a current client. The home has been vacant for over a year. There is now water damage on one of the internal walls from a pipe that leaked/burst because no one was properly maintaining the property.

The bank’s inability to respond to legitimate short sale offers is driving down property values through decreased sale prices, as well as a slew of vacant homes. Buyers become frustrated with the short sale process and refuse to look or bid on these homes because they don’t want to waste their time waiting for the bank. Agents also grow frustrated as they try to help buyers successfully purchase short sale properties, but wait for months with no response. Neighbors are upset as they watch homes sit vacant and fall into disrepair, negatively affecting their own property values.

In my experience short sale response time has not decreased recently in our area. It’s unfortunate because if there are buyers willing to buy earlier in the process, it just drags things out unnecessarily for all those involved. The mortgage lender may not be in the immediate area, but they are affecting our property values. In addition, they are hurting their own balance sheets with these delays by incurring foreclosure and carrying costs before being willing to accept an offer for less than the mortgage amount.

Needless to say, it frustrating for all those involved and unfortunately there doesn’t seem to be an easy solution in the near term.

Hartford Multi-Family Opportunities

I was just messing around with some data in the Multiple Listing Service. If you’re a real estate investor, toying with the idea of becoming a real estate investor, or a home buyer that would consider purchasing and living in a multi-family- you should take a very strong look at Hartford right now.

Year-to-date, multi-family homes sales are down 24% in Hartford, compared to the same timeframe in 2007. The median price for multi-families in Hartford is down 37% this year, compared to the same timeframe in 2007. And there is a whopping 15.4 months of multi-family inventory on the market in Hartford right now. That means if no more multi-families were listed in Hartford, it would take 15.4 months to sell what’s currently out there based on the current rate of closings.

As I mentioned the other day in my Short Sale post, 15% of the available multi-families are short sales. If you’ve got time and some cash, this may be an excellent opportunity for you to score a bargain in Hartford.