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Blackstone Group LP
After millions of Americans lost their homes to foreclosure, bargain-hunting investors have stepped in to buy them up. At first, many investors looked to flip the properties quickly with only minimal repairs or improvements. Over time, as it became harder to find buyers, the investors began renting the homes en mass to the growing number of people in need of rental housing—including those who lost their homes to foreclosure.
A new study by Dan Immergluck, a professor at Georgia Institute of Technology, is one of the first on-the ground reports about the effect investors are having in rental markets. Immergluck looked at the trend in Atlanta as part of a four-city study through the Urban Institute’s What Works Collaborative. (The other case studies are not yet published). He found investors made more than 8,000 purchases in the city from 2008 to 2011. Earlier, investors had been particularly active buying in neighborhoods with high poverty and vacancy rates, low home values, and that were predominantly African American. As housing troubles spread to middle-income neighborhoods, investors followed.
How the investors bought the homes matters to the communities. When a home goes into foreclosure, it’s auctioned off on the courthouse steps. If the house doesn’t sell there, it becomes the property of the bank, which sells it either directly to investors, usually in a bulk deal, or on the open market through a public listing. Investors told Immergluck they spent between $19,000 and $70,000 to buy and renovate the homes and that they expected annual rates of return from about 8 percent to 15 percent from renting them out.
Although homes sold in bulk or at auction cost less, buying them this way was risky, said several investors interviewed in the study, because they didn’t get a chance to go inside the properties before purchasing them. Some said they tried to visit a home and peer in the windows—one even told Immergluck that he got into a house by telling the resident that he worked for the bank. But investors can easily end up with properties in poor condition, increasing the likelihood they might dump the property and cut their losses. They may let the home sit vacant and deteriorate rather than pay for upkeep, or they may sell to more predatory landlords.
Some investors maintain the properties on their own, while others hire outside managers to do repairs, collect rent checks, and handle other day-to-day tasks. Managers are a weak link, reducing returns for investors and being unresponsive to tenants. One investor told Immergluck: “The best job a property manager does is a C-.” Investors often found managers didn’t have incentives that aligned with the owners. For example, some property managers are compensated for signing up new tenants, creating less motivation to keep existing tenants happy by providing prompt service and repairs.
Since the period covered in Immergluck’s study, a new trend has hit Atlanta. Major national private equity firms such as Colony Capital and Blackstone Group (BX) have swooped in to by distressed homes, particularly in middle-income areas. These newer buyers are more likely to buy properties in auctions at the courthouse, and investors who were working in the area said these new investors were paying too much, something the big investors deny. “One of the big questions is what are they going to do when they get properties that aren’t profitable,” says Immergluck. He’ll be keeping an eye on that, as well as the related case studies due out in other cities, as investors become landlords of single-family homes at unprecedented rates.