Big buyers drive housing market

Deanna Cox arrived at her first foreclosure auction armed with a list of properties she had never seen, with plans to bid for a buyer she didn’t know.

Like more than 20 other bidders at the Gwinnett Justice and Administration Center, Cox wore an orange band around her forearm to identify herself as a bidder for Fundamental REO.

The New York investment fund had buyers in 11 metro Atlanta counties for auctions that March day. Since November, it has bought more than 200 properties in the region, and has its sights on 2,500 more.

As the metro housing market begins to rebound after a dizzying fall, investor-buyers like Fundamental REO are driving an outsize share of the activity. Their purchases help stabilize prices but also foster concerns about the longer-term effect of neighborhoods filled with bulk-purchased homes owned by out-of-state investors.

Last fall, investor-buyers accounted for 26 percent of all Georgia home purchases, according to research by the Federal Reserve Bank of Atlanta. Once attended mainly by smaller mom-and-pop buyers, monthly county foreclosure auctions have — since last summer — been overrun by industrial-scale buyers with millions to spend.

“We never before had the opportunity to buy so many single-family homes,” said Justin Chang, the CEO of Colony American Homes, another investor firm that owns about 1,800 houses here, and 8,000 in seven states.

Unlike house flippers who hold properties for just a few months, counting on quick appreciation to make them a profit, many of the funds will pour tens of thousands of dollars into new appliances and fresh paint, then rent the homes to families that lost similar houses in the financial crisis. By buying the houses at or below market value and collecting rent for several years, the funds expect to make a profit. What they will do with the homes in five to seven years remains to be seen.

The funds’ willingness to bid up good properties in neighborhoods with high-quality school districts has been a catalyst for rising prices of metro Atlanta homes, which were 10 percent higher at the end of December than they were the year prior.

“It may be very well that they’re solving the problem,” said Barry Bramlett, president and CEO of Equity Depot. “If there’s anything that solves this to any degree, it’s going to be property values rising.”

But this is the first time corporate America has invested in single-family rental homes in this way, and the model is unproven. Carter, the Atlanta commercial real estate firm, thought it would be able to turn a profit on 271 distressed houses it bought from the failed Omni Bank in southwest Atlanta in 2009. Instead, it lost money on the deal, and many of the houses were cited for maintenance or tenant issues.

Whether all the companies can successfully answer maintenance requests and collect rents from houses scattered across the metro area and nationwide remains to be seen. And as prices go higher, so does the chance of a new housing bubble in desirable rental neighborhoods.

“I don’t believe the current trend of investor purchases and pricing is necessarily sustainable,” said Oliver Chang, co-founder and managing director of Atlanta-based Sylvan Road Capital.

The investment firms are outbidding individual landlords who were buying many of the houses at auction before their arrival. Their fervor may also lead new-home and move-up buyers to being priced out of the market.

“If they’re overpaying to buy in bulk because they have capital to deploy, that scares me – that scares me a lot,” said John O’Callaghan, president and CEO of the Atlanta Neighborhood Development Partnership. “They may strip out the home ownership base. If they saturate it with rental, we will have price declines.”

Colony American Homes, which started buying metro Atlanta houses for Colony Capital last July, is — with Blackstone’s Invitation Homes — one of the two biggest investors in area houses. The company spends between $25,000 and $30,000 to landscape and update homes it buys, said Jay Byce, managing director of the southeast for Colony American Homes.

In a split-level home built in 1975 on a Lawrenceville cul-de-sac, Colony updated cabinets and replaced kitchen floors and countertops. It added molding to a living room ceiling, and painted a mantle around the fireplace. The house got a new coat of blue paint, and the carport was stained to match. Standard lamps and chandeliers were added throughout.

With so many houses, Colony can buy laminate tile that looks like wood and chandeliers in bulk, standardizing the homes’ interiors whether they’re a newer, two-story brick-and-stone house, or an older, smaller stucco one.

Many of Colony’s renters are former homeowners who are renting to repair credit. They intend to stay in their communities. That means that unlike more transient renters, they care for the houses that they’re living in, mowing the lawns and interacting with neighbors. The houses are three and four bedrooms, made for families with kids and dogs.

“They want to rent single-family homes because they’ve been in single-family homes,” Justin Chang said.

Though most buyers expect the investors to leave in six to 18 months, Justin Chang said it could be years before the buying stops.

Atlanta’s appeal to buyers, aside from an abundance of inexpensive homes, is its expected job growth and improving economy, said Mark Beisswanger, chief operations officer of Invitation Homes.

Invitation Homes, created by Blackstone, has spent $3 billion to purchase more than 17,000 homes in nine markets. Beisswanger would not say how many the fund owns in metro Atlanta, but said it is in the thousands.

“It’s a very competitive business,” he said. “It’s getting more competitive in certain marketplaces, including Atlanta.”

Justin Chang said he thinks the institutional ownership of single-family homes is going to become a “permanent part of the American landscape,” much like corporate ownership of apartment buildings.

As houses are branded and smaller investors get pushed out, Kurzner, with Fundamental REO, said big buyers are the best thing that could happen for the market.

“It’s not great for people losing their houses, but we don’t have any control over that,” he said. “I think this is a necessary and orderly way to recover the market. …The people that are not in the market are the homeowners. It’s helping to buoy the market so people who want to buy something else can.”

Because those who buy at foreclosure auctions are paying in cash, there is not a risk of foreclosure on the homes. But the end result of the buy-ups remains to be seen.

There is a good chance that institutional investors – with reputations to uphold, and investors to please – will do a better job of maintaining homes than small local investors, who may be close, but can still be unresponsive landlords, said Dan Immergluck, a professor in the school of city and regional planning at Georgia Tech.

Justin Chang said the results so far are promising.

“We and others are beginning to help stabilize neighborhoods,” he said. “Empty houses on the block are trouble for your house. If it’s filled up, whether it’s a renter or an owner doesn’t really matter.”