In the early part of 2012, Warren Buffet was quoted saying, "I'd buy a couple hundred thousand homes." This quote was blasted all over several media outlets, as most investment thoughts that Warren Buffet has, is. The part of the interview that was much less highlighted was that he also believed it to be a impractical.
Right around this time several institutional investors (think huge companies, banks) starting buying hundreds and thousands of single family homes by the portfolios that banks and Fannie and Freddie were selling. The pools of these houses were available due to all of that great recession stuff you have heard about. Houses were foreclosed due to banks giving out money to people who could not afford to repay the loans. Almost all major lenders got in trouble for this subprime lending and have had to shell out almost $100 billion since 2008 in restitution to the federal government.
Until this time, the single family rental market was dominated by the local players owning 5-20 houses and producing some profits and tax shelters for themselves. However, with the banks selling them at the steepest of discounts, it would be hard to lose money on these and therefore easy for funds to pour billions into this investment. They are in it to make money, plain and simple. These activities produce some incredible benefits to several other entities including the renters, the local construction teams, realtors, management companies and most importantly, the cities and villages. It puts thousands to work and depending on the politician, jobs are the most important thing in the country.
Foreclosed/Real Estate Owned (REO) homes are usually left in awful condition. Someone is kicked out of their home by the law and that house then sits for months, sometimes years. It looks awful, brings down the neighborhood and usually smells awful. The benefit that this type of investing brings to the local communities is incalculable. They drastically improve properties that are in rough shape, actually pay their taxes and are providing carefully screened residents.Which is why cities should welcome these groups with open arms. Unfortunately, it is the opposite. Small time villages often view these funds and companies as wealthy and decide to tax them until the get their share. The strictest of village codes are enforced, fees are constantly assessed and the paperwork does not end. The properties must bow to every violation that a city cites. Driveway cracked; fix it, dent in wall; patch it; landscaping not pretty; sod it, smells bad? bring out the mold team. If you don't fix them in 30-45 days the fines quickly reach the thousands and you will meet your local gov rep in court.While these properties are held to unreasonable high standards the house right next door that Joe Doe owns is collapsing and has 5 broken down trucks in the driveway but he is in compliance and not subject to any fees.
Remember the billions that the banks had to pay in fine to the fed? That money trickled down to the states and subsequently to the individual counties. The majority of counties reinvested this money into their market and it is a good idea. They purchase a "bad" house and hire a crew to fix it and sell it. Their biggest benefit is that they will provide additional down payment loans at 0% interest and are payable upon reselling the property. The counties do essentially the exact same thing with the goal of "increasing surrounding property values." They will complete maybe 5 homes a year and will receive a great amount of praise for their efforts. Just two weeks ago there was a full page article in a local paper that lauded the county for providing 1 home to a first time homeowner.
This new asset class is here for the short term but may just be a shooting star in the investment world, never to be seen again. The most substantial reason that is makes sense is that the properties were acquired so cheap. In order for that environment to replicate itself we would need a repeat housing crisis.
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