Big boys entering Residential Foreclosure market via Hedge funds (again)

27 Replies

Thought this was interesting to see in "Institutional Investor" Magazine. The banks and big asset managers are creating new private placement (Hedge) funds to enter the Foreclosure market. They want to acquire and rent out foreclosed homes.

Yes there is many things behind the scenes in the talks/works. You don't hear much of this in the main stream media. If these pilots ever take off and are successful, we may see some major changes in the heavy REO markets.

Can't speak for other markets but I think they are very late to the party, won't find many decent homes here in the Phoenix area.

Someone should call up Jamie Dimon (J.P. Morgan Chase) and tell them to jump in so they can recoup some of their $2 Billion loss.

I concur, the ship has sailed in many of the markets.

I was at the FC sale last week and normally only a handful of houses go, because the banks get them back for more than they are worth, but last week a large number of them were sold to a few groups of investors. Turns out one has an agreement with the Alaska teacher retirement fund...go figure...

This is a going to be the beginning of the next real estate bubble.

"Can't speak for other markets but I think they are very late to the party, won't find many decent homes here in the Phoenix area. "

Do you all think that the REOs are slowing down or running out? I thought I read on hear a few weeks ago that there are still over 2 billion in REOs that have not hit the market yet.

Right now active inventory levels are low but this does not mean the banks do not have the inventory still. Right now they are still in the process of trying out different programs etc. We will see more inventory in the upcoming months. Get your cash up now and wait patiently.

The slow is a bit of a mirage. There are still 3.6 Million homes that are delinquent or in the foreclosure process. The number we proceeded through to date since the crash was 2.7 Million.

What you have seen is the large banks have developed ways to manipulate the market in an attempt to stay value declines, which is is simply a slow drip of supply. That said, there is plenty of supply still.

One of the private equity funds has now begun buying at the central Texas foreclosure auctions. American Homes 4 Rent (AH4R) showed up at the August 2012 auction in 3 of the counties we buy in around Austin. They completely dominated the purchases that day. They are clearly buying for rentals, but even so they were paying extremely high prices for the properties.

My firm has tradtionally been the largest buyer at our auctions, and private equity is going to have a big impact on our business. They outbid us on 8 properties last month which we would have been the buyer of had they not showed up. I'd be very curious to hear what other people are seeing in other markets around the country, whether from AH4R or any of the other private equity firms that seem to be entering the market.

This article has been syndicated in a few newspapers in the last few weeks.

A couple of highlights:
G8 Capital, based in Ladera Ranch, has been at this for a while. That firm has bought more than 3,800 residential REO properties across more than 50 bulk portfolio acquisitions since 2008, says CEO Evan Gentry.

"Although G8 Capital has successfully repaired and sold the large majority of REOs acquired, the firm has begun holding single-family properties in a growing rental portfolio,'' the fund states on its website. "G8 Capital's long-term strategies include lease-to-own and contract sales to tenants ... The firm has successfully worked with communities to restore blighted properties and neighborhoods.''

G8 buys exclusively in bulk, typically targeting two- to four-bedroom single-family homes or condos, picking them up for $50,000 to $100,000 in mostly inland areas.

"The market for residential rental properties has gotten much more competitive in the last few months,'' Gentry says. "A large number of major investment groups have entered the single-family residential rental market this year.''

@Chris Montgomery

I'd be very curious to hear what other people are seeing in other markets around the country, whether from AH4R or any of the other private equity firms that seem to be entering the market.

AH4R started buying at the Chicago area Sheriff sales this summer. In the past three months they have bought almost 100 homes.

They are paying very high prices here as well. Most homes were purchased for well over retail value. They have also bought numerous townhomes & condos in developments where rentals are not even allowed.

It will be interesting to see how long they will keep buying at this volume.

AH4R is buying the majority of the homes in the Indy market. They have reps at every sheriff sale and are buying HUD's for stupid money (they bought a rehab from me for market value).

I don't see how flippers are going to compete with them if they stay long... going to have to find new avenues to generate properties.

I'm meeting with the their local rep sometime in the next few weeks and am going to try and figure out if they're going to be around long (hopefully not!)... will keep you posted if I find anything out.

These hedge funds are going to bundle the rentals and sell them as securities to investors. They wont have any money at risk when it is all said and done. The people that buy the securities will hold all the risk.

The hedge funds will clear their money on the front end and the financial advisers will get huge commissions. This is very similar to the last real estate bubble.

The major ratings agencies have already come out and said that they are devising rules right now for how such bundles would be rated as securities and it is not going to be pretty. They are not going to take into consideration a short term ROI position or even an equity position. They are going to be digging deep into the partner companies such as the property managers and using factors such as length of time in business, business history including judgements, suits and other legal actions including bk's and tenant retention programs.

They said, and we'll see if their actions match their words, that they were going to place these tranches of properties to be securitized under heavy, heavy scrutiny.

The same agencies that rated MBS, CDO's, CLO's, and CDS's with a AAA.

But don't worry they fixed all those problems and now the agencies are on top of their game.

If I am not mistaken the agencies are paid by the companies selling the security. No problems there.

So what's the play here?

Specifically, how do you securitize a rental income payment stream? It isn't debt, per se, so are you would you just offer an equity based yield and say like... "we promise"? Or do you instead knowingly over-collateralize the assets with a REIT, take new securitized debt as profit, and sell the corresponding rental yield payment overages to the pension funds and municipalities of the world willing to eat your "sexy" 6% dividend?

I'm not sure I know what their endgame is... but I'm damn sure I want to figure it out and start doing it too.

When they're buying at market prices or over they are starting off behind the 8 ball. They have to be making money on commissions, buyers fee's and/or management and hoping that someday in the long run appreciation will kick in again. I think they will take advantage of alot of people who don't know what to do with their money and will fall for the salespitch these companies are giving.

In the beginning they will look amazing because they're national and have billions in assets, but I predict they're little ponzi scheme will blow up like before.

Why not put in the work to find and negotiate good deals that are below market to begin with? Because that takes hard work, patience and dilligence which these companies don't have. They have alot of cash burning a whole in their pocket. If they don't buy something fast, even if it's overpriced, they don't make any money. The easy route usually kills you in the long run.

I think they're counting on forming funds that capture IRA & 401k money. Once they have the bucks, they can enrich themselves on fees & deliver 0% returns. It's a theives paradise, just like the slots market.

Most of these rental funds are created by a larger fund or company. For example Morgan Stanley is starting one.
Most of the funds are buying at current prices because they are chasing a yield. Morgan Stanley is one of the first ones I have seen that has a specific focus of buying properties where they will be completing value added repairs. Other do it, but they are the most recent example I can think of at this time.
Whether this is all good or not - time will tell.

This is the problem when Wall St sees an opportunity. The little guy gets crowded out because the Investment Funds can survive on a lower yield than the typical investor. This happened with storage units a long time ago - for awhile Wall St started buying all of the properly zoned land and drove down the yield to where their investors were happy but that fewer and fewer local small investors could compete.

In the end this is the price of the free market. As it is increasingly simple to deploy nationwide, with instant communications etc, efficiency enters the market and drive down returns in other words we are the local hardware store and Wal Mart just opened a store across the street.

Once these big boys figure out it not as easy as it looks, I will be there with a big pot of cash buying them to unwind their positions. Cash is and will be king.

Just thinking out loud here as I''m no expert. Their cost of money is next to nothing. These guys are going to securitize and package these income streams then sell them off before the music stops. They are locusts operating on the greater fool theory. Considering how well-heeled they are and how much money is at play they'll probably pull it off. One big legal ponzi scheme. IMHO.

Hopefully enough jobs will be created and communities saved in the process to have at least moved the ball forward before they pull out so the end result will be a net positive in some markets.

So how to take advantage of this movement?

Short term?

Medium term?

Long term?

I see much of this in a different light. Just because any buyer has deep pockets doesn't mean they get a good deal. If you're complaint is that they out bid you, I suggest you nail down your requirements better and bid up to what still works for you, holding a property for 4 or 5 years that simply breaks even cash wise is not something most investors expect here, but it doesn't hurt to own if it doesn't eat your lunch. I'm saying, investor expectations can be too high that in reality, apprceation should be there in 5 years.

Bid them up and make them pay!

You should have no problem competing, they have to hit a yield with more expenses applied to each property than an individual, more flexible and local investor would ever have in the property.
If they own 200 properties in some area, they will have a more efficient operation, but from the ground up, that local maintenance guy, there will be a sting of managers and staff up the food chain adding to the expenses.

This is an expirement, there are forces on Wall Street that would like to see private land ownership be history and limited. There is an economic war going on. :)

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