| As real estate prices recover, the single-family rental mortgage securitization trend that’s caught on in the Sand States isn’t getting much traction in Massachusetts, due to the Bay State’s dearth of large swathes of distressed property that can be bought en masse.
But as both local rental markets and home prices heat up, our investor-owned rental market showing signs of moving to the next stage. Some investors are holding on to their properties to benefit from sometimes-rich rental income streams, while others are selling to realize profits on properties bought at the bottom of the housing bust.
Single-family rental housing securitization was launched by the big buy-to-rent enterprises: Invitation America, owned by buyout behemoth Blackstone, and Colony American Homes (CAH), which last year packaged and sold securitized mortgages on single-family rental homes it bought, mostly out of foreclosure, for a song (with the intention of fixing them up).
Invitation America’s $993 million offering, sliced into four tranches, is a two-year term, floating-rate loan requiring interest-only payments, with three 12-month extension options, according to presale documentation, and covered a portfolio of 40,000 housing units in 10 states. CAH, which owns and manages more than 15,000 homes for rent in seven states, followed suit by expanding a $500 million loan package to $1.2 billion. Early this year, American Homes 4 Rent, which owns a reported 21,000 homes, announced its intention to package a loan.
These deals raised a few questions among housing advocates and industry observers: First, how much would the companies be willing to invest in their big supply of distressed properties to make them habitable, and would the tenant screening process show due diligence to ensure a reliable rent stream? Invitation Homes hired outside help to manage the properties and screen tenants. Nonetheless, some consumer horror stories have surfaced on the Internet.
Massachusetts Not The Target Market
There are less of those questions about the Massachusetts housing market. In Suffolk County, the housing stock is older and the rental-property category favored by private investors includes one- to four-family units. Their portfolios are smaller and more selective, according to a study, “The Role of Investors in Acquiring Foreclosed Properties in Boston,” completed last year by the Joint Center for Housing Studies at Harvard University. Utilizing data from The Warren Group, publisher of Banker & Tradesman, it focuses on Suffolk County distressed property purchases between 2007 and 2012. Its findings: Of the largest investors who responded to the study, only four investors purchased 50 or more REOs at auction during the time studied.
The pattern is to make vest-pocket purchases, house by house, based on knowledge of the local market, particularly in neighborhoods that were overfinanced during the boom. The largest investors in the study bought 9 percent of 2007 foreclosures, but by the study’s end in 2012, had bought more than 25 percent of the foreclosure market.
Massachusetts investors also engage community banks. At foreclosure auctions, they either paid cash or obtained short-term, high-interest “hard money” loans through their own connections. They then sought longer-term financing through community banks to see them through the renovation and rental phases. Community banks are more likely than larger, superregional banks to have an understanding of a particular neighborhood. So, instead of slicing and dicing a bond offering to investors who live out of state or beyond, the financing that happens in Massachusetts is more likely to stay in Massachusetts, the study found.
Once the longer-term financing is in place, the investors in the study weigh their next step – sell and take profit once the price gets to a designated place above acquisition and maintenance costs, or hold if the rent stream will yield them the same outcome over time.
David Azanow, manager at MASSREO, says the outcomes are “all relevant to the ZIP code.” He cites the example of an influx of foreign investment in Metro Boston, where upward price pressures in the Back Bay are pushing more buyers out to Somerville, Malden and Everett. His company does business with investors who buy, fix and rent, and he can toss off numbers for typical rehab jobs on income properties – $6,000 for a bath, $20,000 for a kitchen, for example – that can drive property value up well above the price the investors paid three or more years ago (purportedly without overspending on the renovations).
Charles Ferraro, president of William Raveis Mortgage LLC, says he has recently seen an uptick in investor sales activity, particularly among investors who bought very early and who have locked in a profit. With the rental market so heated, it’s a good time to sell. However, he adds, other investors like their rental margins and are sticking with their investments.
Email: coneill@thewarrengroup.com
