The tentative recovery in the residential housing market has not put a damper on the supply of single-family home investment properties―or buyer demand.
Both individual and institutional investors continue to find ample opportunities to acquire properties at discount prices. Since starting to buy single-family homes at the beginning of 2012, Los Angeles-based Colony American Homes has amassed a portfolio of nearly 10,000 homes. “The ability to buy homes at attractive values in all of the markets that we are in continues to be very compelling,” says Justin Chang, CEO of Colony American Homes. For example, Colony expects to buy 1,000 or more properties in South Florida alone over the next year.
Colony isn’t the only institutional investor active in the single-family home niche. Blackstone Group LP recently secured a $2.1 billion syndicated loan from Deutsche Bank AG to facilitate its REO-to-rental investment program. These buyers are facing more competition and rising prices as the housing market begins to improve in many metros. Yet there continues to be a solid inventory of available properties including properties in foreclosure or distress, as well as homes listed on the open market at prices that are well below peak 2006 prices.
“There really seems to be a continued flow of distressed properties and shadow inventory,” says Stephen Karbelk, CAI, AARE, co-chairman and founder of AmeriBid LLC in Reston, Va. AmeriBid conducted an auction of single-family homes on behalf of the New Orleans Redevelopment Authority (NORA) last October where approximately 125 homes were sold. Nearly half of the properties that sold, 47 percent, sold to investors.
AmeriBid had a second NORA auction planned on March 23to sell about 130 homes. In addition, the firm has multiple auctions in the works with other public agencies that it will be announcing in the next week, one of which involves the auction of as many as 6,000 properties, Karbelk notes.
“Buying opportunities are not drying up for us in Chicago,” agrees Eric Workman, vice president of sales and marketing for MACK Companies in Tinley Park, Ill. MACK is a veteran investment group that has been buying distressed or foreclosed single-family homes and redeveloping them as rentals for the past 15 years. Earlier this month, the firm announced the sale of 93 single-family homes to American Residential Properties,an Arizona-based REIT, for more than $12 million. MACK is continuing to actively pursue acquisition and redevelopment opportunities to provide additional inventory for ARP on an ongoing monthly basis.
Prices edge higher
Single-family home sales prices have appreciated in the past year. Markets such as Phoenix, Southern California and Atlanta in particular are becoming very competitive with acquisition prices rising 20, 30 and even 40 percent, notes Workman.
Price appreciation in some markets is a combination of growing demand from both investors and home buyers, as well as a recovery in the housing market. The economy is showing signs of improvement, and people are looking to buy again. “Your average homeowners is feeling a little bit more bullish about things than they have in quite a few years, and there is a lot of pent-up demand out there,” says Workman.
Nationally, single-family home prices rose 6.0 percent to average $176,800 in 2012, according to the National Association of Realtors. Although a notable improvement, it is still well below the peak home prices of $221,900 in 2006. “I think we have multiple years of opportunity ahead to try to acquire homes,” says Chang.
Despite interest from high-profile investors such as Blackstone, the reality is that large investors still represent a very small segment of the single-family home market. In 2012, 81 percent of the single-family homes purchased were bought by individuals, and 19 percent were bought by investors, notes Chang. But most of those investors are small, mom-and-pop investors buying a few homes in their local market.
“The institutional investors are a pretty small portion of the overall picture,” he adds. “So, we don’t think it is all that competitive in the sense that there are a lot of good homes out there to buy and a lot of homes for different buyers.”
Building long-term strategies
Although depressed values have been a key to sparking investor interest, firms such as Colony see the long-term possibilities in the sector due to a strong demand for rental housing. “As fast as we are buying, we are leasing up at a good rate,” says Chang. That speaks to the fundamental shift in America of families that want to rent quality, well-located homes.
Colony owns properties in Florida, Georgia, Texas, Arizona, Colorado, Nevada and California. The firm has targeted those markets both for its opportunities to buy homes at a discount, as well as the strong renter demand. “Fundamentally, we want to acquire homes where we like the long-term economic prospects for those cities and states,” says Chang. Colony typically buys three- and four-bedroom homes and then investments between $20,000 and $30,000 in improvements before renting them out to end users.
Certainly, single-family rentals are not a new concept. Even before institutions started snapping up properties in the past two to three years, about 11 percent of the housing stock was earmarked as rental properties–about 13 million homes, notes Chang. What is new is that firms such as Colony and ARP are bringing institutional capital, as well as professional management to the niche on a much broader scale.
How effective investors are in creating a profitable platform for single-family homes remains to be seen. One of the challenges to the industry is the management costs. Unlike managing an apartment building where all of the tenants are in one central location, single-family homes are scattered throughout a metro area or community.
So far, institutional investors seem to be following the strategy that creating a sizable portfolio with properties that are clustered in certain markets is creating efficiencies and economies of scale. Property management is going to be the key to creating successful portfolios. “From a management standpoint, it is a very local business where you have to have strong local operators with a lot of experience,” says Workman.