(Bloomberg)—One of the largest single-family landlords in the U.S. is betting more than $1 billion that it can use the tools it developed for buying and managing rental houses to forge a new business serving ordinary homebuyers.
Amherst Holdings LLC, which owns or manages about 20,000 single-family rentals, is launching a subsidiary to purchase, renovate and resell properties, combining the home-flipping business with new features to simplify the consumer experience of buying a home.
Amherst has already spent $225 million this year to roll out Bungalo Technologies LLC, as the unit is called, and plans to invest $1 billion next year, according to Drew Flahive, president of Amherst Residential. The service launches this week with 25 homes listed for sale in Dallas and 10 more in Tampa, Florida, with prices ranging from $220,000 to $560,000, offering fully renovated kitchens and bathrooms, new flooring and fixtures, and smart-home appliances.
“A lot of the distress in the U.S. housing market right now is not necessarily people upside down in mortgages,” Flahive said in an interview. “It’s really the fact that a lot of these assets have a significant amount of deferred capex. An individual who wants to live in that home knows they have to come up with a down payment and a repair budget.”
Amherst is starting the business as a shortage of homes for sale has driven up prices and created hot competition for available listings, prompting bidding wars and all-cash offers and forcing prospective buyers to shoot first and ask questions later. U.S. housing inventory increased on a year-over-year basis in June for the first time in three years, but it’s still a long way from normal levels.
The lack of listings has helped attract a wide field of companies trying to make a profit by simplifying the process. That includes startup Opendoor, which has raised more than $2 billion in equity and debt to build a system for making almost-instantaneous offers to would-be sellers. Zillow Group Inc. and Redfin Corp. have launched similar businesses, while yet another group of companies is fronting homebuyers cash to help them compete in tight markets.
Amherst’s approach is to translate its experience finding and fixing up rental homes to acquire and renovate houses for resale. Separately, Amherst is raising more than $1 billion to buy rentals, according to people familiar with the plans, who asked not to be identified because the matter is private. For the most part, the homes Bungalo plans to sell are more expensive than those that single-family landlords would seek to acquire.
Bungalo is packaging a series of features it says can improve the experience of buying a home. The company is offering no-haggle pricing, listing homes for sale on its website and promising to sell to the first pre-approved buyer to meet its price. It’s also offering warranties, akin to those homebuilders extend, as well as mortgages, notary services and a system to help buyers manage it all.
“We’ve streamlined an A-B-C-D approach, explaining the process in layman’s terms, so our buyers really understand the road map to close with us,” said Greg Stewart, chief operating officer of Bungalo.
The company has more than 250 homes under repair and plans to eventually expand into more “markets people want to live in and are moving to,” Stewart said.
Whether or not those features appeal to homebuyers, Bungalo will have to turn over houses at a time when flippers are accepting thinner margins. Flippers’ per-house returns have decreased in each of the past seven quarters, according to Daren Blomquist, senior vice president at Attom Data Solutions.
“As it becomes increasingly competitive, we’re seeing the margins on home-flipping profits squeezed,” Blomquist said. “The traditional home-flipping model is to buy property at a steep discount, add value by rehabbing and sell for a premium because it’s fixed up. These days, it’s tougher to get that discount on the front end.”
© 2018 Bloomberg L.P.