The long simmering dispute between the California Association of Realtors, and to a lesser extent, the National Association of Realtors, over bulk sales of Fannie Mae and Freddie Mac foreclosures to well-heeled investment partnerships erupted into name-calling and calls for resignations Monday and Tuesday as the rest of the nation focused on electing the next President and Congress.
The largest state Realtor association has been waging a bitter battle over plans by the Federal Housing Finance Administration that oversees Fannie Mae and Freddie Mac to sell large lots of foreclosures to well-financed investment firms to be managed as single family rentals.
Last week FHFA announced the third of the the four buyers it has selected and the firm that won the right to buy the California properties. Colony Capital, LLC purchased 970 properties in Los Angeles and Riverside, California; Phoenix, Arizona; and Las Vegas, Nevada. Colony Capital is a closely held real estate investment firm based in California.
C.A.R. opposes bulk sales in California because the state is experiencing a severe shortage of available housing, and keeping large numbers of GSE foreclosures off the market will negatively impact the state’s housing market. The median home price in the Inland Empire is up 15 percent from $172,000 in February 2012 to $198,270 in September, and unsold inventory is down from 5.3 months to 3.8 months during the same period. The median home price in Los Angeles has risen 37 percent from $272,920 in February 2012 to $373,020 in September, and inventory is down from 5.7 months to 3.7 months.
Similar concerns are growing in Florida. “Today’s real estate market is very different than it was when FHFA started this project,” says Florida Realtors’ Senior Vice President of Public Policy John Sebree. “Market dynamics have shifted dramatically, and few people still believe a bulk sale program is needed. REO time on market is very short, prices are increasing in most areas of Florida, and demand is up nationwide.”
These state associations have their ears a lot closer to the ground than national, so it’s worth paying attention. Realtors who represent small investors are ticked off, as well as those who can’t do deals because inventories of foreclosures are so slim. Ditto small investors themselves. If small investors like the readers of BiggerPockets.com had anywhere near the clout of Realtors, they’d be howling holy Ned too. Absent that, CAR is doing a pretty good job on investors’ behalf.
A great deal has been written about these “pilot” deals, yet a lot of misinformation lingers. What’s certain is that if the current policies that FHFA are pursuing are indeed a sign of things to come, these four pilot deals merits CAR’s undivided concern–as well as every small investor.
Though its finances are private, Colony Capital has anything but a low profile. Twelve years worth of press clippings on its web site feature glowing profiles of its CEO, Thomas Barrack: Ahead of the Curve, the Worlds Greatest Real Estate Investor and LA’s Lineup of Heavy Hitting Investors. Here’s what Fortune Magazine had to say about Barrack in a 2005 cover story:
“Arguably the best real estate investor on the planet today, he runs a $25 billion portfolio of trophy assets, from the Raffles hotel chain in Asia to the Aga Khan’s former resort in Sardinia to Resorts International, the largest private gaming company in the U.S. Barrack has done deals with Saudi princes, Texas oilmen, a Caribbean dictator–even with Donald Trump. He bought the Fukuoka Dome, Japan’s Yankee Stadium, in part because he calculated that the titanium in the retractable roof was worth as much as the purchase price. He bought and sold New York City’s Plaza hotel, turning a fast $ 160 million profit, as well as London’s tony Savoy chain, netting another $ 270 million. Even Trump defers: “Tom has an amazing vision of the future, an ability to see what’s going to happen that no one else can match.”
The Colony deal, like the other three bulk sales, is not really a bulk sale. Fannie Mae has structured the transactions so that it keeps majority ownership, while giving investors a small minority stake and pays them fees to manage the portfolios of homes. Colony will receive 20 percent of the cash flows generated by the rental properties in management fees. Of the remaining 80 percent, Colony will receive 10 percent in equity profit. After a period of time, Colony’s profit portion could increase, but the terms of that arrangement weren’t available. Most of the homes in the transaction already have tenants.
According to the Wall Street Journal, Paul Fuhrman, a managing director at Colony, said he expects the firm will earn about $1 million a month for managing the homes, or a total return of about 18 percent to 20 percent. Colony typically projects a total return of 15 percent on the homes that it buys itself for its rental-home company, Colony American Homes.
“This ended up being a trade on the structure of the deal with Fannie Mae, not a trade on the value of the homes themselves,” Mr. Fuhrman said. “The 20 percentage we get off the top is far more important than the price of the homes.”
In other words, Colony is making its money from what might be considered property management fees. Does this sound like the work of the “best real estate investor on the planet today”?
I know a few property management firms that would like to do business at 20 percent of rental income, but I don’t think that’s the bottom line for Barrack. Hey, we’re talking about a guy who made killing on a baseball stadium in Tokyo because he knew the value of the titanium in its roof.
There’s more here than meets the eye.
However Fannie and Freddie end up, being landlords is not on the likely list. When conceived, one of the goals of bulk “sales” was to keep a lot of foreclosures off the market to support the recovery. Now they are having exactly the opposite effect, as John Sebree pointed out. Soon enough, a member of Congress is going to start raising questions and FHFA will sells the properties. To whom, you ask? Silly question.
In the coming reality of single family rentals, the big bucks will go to those who manage them and package the leases into SFR-based securities to be sold on the secondary market that’s being organized on Wall Street. Guess who will be in the cat bird’s seat to do that?