Oct. 17 (Bloomberg) -- Peter Horbulewicz started noticing investors from New York and California at Atlanta-area foreclosure auctions about four months ago. Working for private equity firms such as Colony Capital LLC and Blackstone Group LP, they’d clutch plastic folders crammed with cashiers’ checks and astonish locals with how much they were willing to pay.
“If you go head to head with them, they always win, because they always overbid,” Horbulewicz, a Polish immigrant turned American house flipper, said during a foreclosure auction outside the Gwinnett County courthouse, northeast of Atlanta.
Colony, Blackstone, Waypoint Real Estate Group LLC and American Homes 4 Rent have converged on Atlanta in search of low-priced properties to buy and rent out, after helping drive prices up 34 percent in Phoenix from a year ago. Their goal is to take advantage of the burgeoning U.S. housing recovery, earning annual returns of at least 6 percent on rents until home prices rise enough to make a lucrative exit.
Their arrival may set the stage for a real estate rebound in the Georgia state capital, where banks seized more homes in the last 12 months than any other U.S. metro area, according to CoreLogic Inc. Atlanta prices have risen 6.5 percent on a seasonally-adjusted basis since March, when they dipped to levels last seen in 1997, the S&P/Case-Shiller Index shows.
“Is Atlanta the next Phoenix?” said John Burns, an Irvine, California-based real estate consultant. “The answer is yes for these guys. The economy isn’t nearly as robust in Atlanta as Phoenix, but we’ll be talking about a robust economy there in a year. Clearly these guys are buying everything they can before the price appreciation kicks in.”
Private equity firms have raised as much as $8 billion to buy as many as 80,000 single-family homes to manage as rentals, according to a Sept. 21 report by Keefe Bruyette & Woods Inc. They’re seeking to buy properties before the recovery is in full swing. While housing starts in the U.S. surged 15 percent in September to the highest levels in four years, that remains below the pre-recession peak.
Opportunities to buy homes in bulk are few, forcing investors to buy one by one on the open market, at bank auctions and trustee sales. In Georgia, where the supply of distressed homes continues to grow as it shrinks elsewhere, trustee sales are held the first Tuesday of the month at county courthouses.
Hundreds crowded the steps of the Fulton County courthouse on a cloudy Oct. 2, or “Super Tuesday” as the monthly auction day is known. Clusters of investors circled auctioneers who recited boilerplate legal descriptions of properties and the opening price, following each bid with “Going once, going twice.”
“Everybody is in Atlanta right now -- they’re following the distressed market,” Tom Ruff, managing director of AZbidder.com, a Phoenix-based firm that buys foreclosed homes for investors that expanded to Georgia at the request of clients. “Some of the large investors have stepped back a ways in Phoenix.”
Colony, which participated in its first Atlanta-area auctions in July, spent about $15.5 million to purchase 230 houses on Oct. 2, almost as much as in the previous three auctions combined, said Paul Fuhrman of Colony American Homes, the Scottsdale, Arizona-based single-family rental unit of the real estate investment firm with $25 billion of assets under management.
At the Gwinnett County courthouse, northeast of Atlanta, Colony’s bidders temporarily ran out of money, ordering $1 million more in cashiers’ checks to keep buying. Sales at the auction must be paid for on the spot.
“We spent all our money,” Arik Prawer, senior executive at Colony American Homes, said after a phone call to a colleague who was rushing back with the checks. “There were just a lot more properties than last month.”
Colony staff scouted 2,000 properties in nine counties before the auctions, bringing back field reports, photographs and observations about the likelihood the property is occupied. The company came up with maximum bids for about 1,500 houses after completing sales comparisons and yield analyses.
The company projects an average net yield, or cash flow after all expenses and management costs, of about 8.5 percent for purchases this month, Fuhrman said. It can finish renovations in an average of 15 days for about $15,000 per house and get a tenant in a property in at most 21 days after it’s available for lease, he said.
“We would never ever bid more than what today’s market value is for a home and usually we are able to win at these auctions for significantly less,” Fuhrman said.
Horbulewicz, who managed to pick up three properties this month, said his strategy was to look out for sales where large bidders were absent. While funds have teams of bidders available, the 39-year-old investor must stay vigilant because multiple public outcry auctions occur at the same time and lawyers for trustee firms can pop up anytime and anywhere on the courthouse square, sometimes speaking at a conversational volume. Properties that don’t sell are taken back by the bank and can be sold on the multiple listing service.
“We are outnumbered,” said Horbulewicz, who had help from two business partners. “You have to run from one place to another.”
As more investors buy properties at auction, banks are listing fewer foreclosed homes on the open market, helping to drive up prices and competition for the diminishing pool of distressed homes, said Les and Cindy Crane, Realtors in Alpharetta, Georgia, who offer a bus tour of local foreclosed properties. One bank-owned home listed for $52,000 in Gwinnett County had 38 offers, they said.
The Cranes noticed a huge drop off in the number of listings banks provided to them in June. They now have listings for about 40 bank-owned properties, a quarter of what they used to carry, Cindy Crane said.
“It’s a feeding frenzy really,” Cindy Crane said. “Prices are low and interest rates are low so owner occupants are in line too.”
While investors may help home prices rise in the short-term, neighborhoods may be damaged over time by having too many renters, said John O’Callaghan, chief executive officer of the Atlanta Neighborhood Development Partnership, a nonprofit organization that works to stabilize blighted neighborhoods primarily by putting owner-occupants in houses it buys and renovates.
“I worry that we’re going to have significant portions of neighborhoods owned by outside capital,” O’Callaghan said. “When the local business community is involved, they’re there. They have reputational risk. Folks we don’t know, don’t have a local presence and they don’t have that risk.”
Renting a house was 57 percent more expensive than owning in Atlanta in August, the same as a year earlier, according to Trulia Inc.
Higher rents make it more profitable for private equity firms to buy and lease properties to tenants, many of whom don’t have the necessary credit score or downpayment to finance a purchase.
In Phoenix, owning is 49 percent cheaper than renting, narrowing from 55 percent cheaper a year earlier. The gap narrowed even as 30-year mortgage rates fell by an average 1 percentage point to 3.5 percent, according to Trulia economist Jed Kolko.
“Rising Phoenix prices outweighed falling mortgage rates,” Kolko said in an e-mail.
Phoenix-area median single-family home prices jumped 34 percent in August from a year earlier to $150,000, according to an Oct. 2 report by Michael Orr, director of real estate research at Arizona State University’s W.P. Carey School of Business. The supply of all homes for sale in September fell 28 percent from a year earlier while distressed listings --bank-owned properties and short sales -- were 63 percent below year-earlier totals, Orr reported.
Investors accounted for 39 percent of August transactions in Maricopa County, which includes Phoenix, Orr said. More than half of all homes below $150,000 were purchased with cash, he said. Rising prices are persuading investors to look elsewhere.
“We’ve seen some big players move away and others replace them,” Orr said in a telephone interview from Phoenix. “The new players are happy with 6 percent cash-on-cash return. Last year they would scoff at that. They wanted 12 percent to 15 percent last year, but that’s not possible here anymore.”
Phoenix entered the recession and came out of it before Atlanta, Orr said. Phoenix hit a post-bubble trough last September, according to the Case-Shiller index.
Lenders completed 37,055 foreclosures in Atlanta in the 12 months through August, the most of any U.S. metro area, according to an Oct. 4 report by CoreLogic. Phoenix came in second, at 31,059 homes, followed by Southern California’s Riverside-San Bernardino counties, Chicago and Los Angeles, according to the real estate information service based in Santa Ana, California.
Housing prices in Phoenix and Atlanta crashed because over-building created a supply glut followed by rising unemployment, especially in construction jobs, and tighter credit that killed demand, Orr said. Rents began climbing as homeowners who lost properties to foreclosures relocated to other single-family homes at a time falling prices and interest rates made home buying more affordable.
Phoenix investors Chris Hanson, 29, and Ofir Levy, 35, slowed purchases of houses in Arizona in June because prices were too high and yields too low. They flew to Atlanta this month with the goal of buying about 100 homes, which they hoped to flip to the large investors within the next year. They were looking largely in fringe areas where the funds are less active.
Hanson and Levy fell short of their goal for their $5 million Atlanta fund this month, picking up just 17 properties because of heavy competition from large investors. Colony, in particular, “ruined everybody’s day,” Hanson said.
Their reason for entering the Atlanta market has nothing to do with local demographics or the job market.
“All of that is irrelevant,” said Hanson, who owns investAZhouses.com, which bids in Arizona and Atlanta on behalf of investors.
“Wall Street has got billions and billions of dollars they need to place and it has been determined they want to come into this segment. There are only handful of markets that that’s going to go into. This is one of them that has not seen the appreciation. If I had another chance to go back to Phoenix and wind the clock back 12 months, that’s what I think this is.”
Colony has acquired 4,500 homes, with the goal of spending $1 billion to $1.5 billion to buy 10,000 properties by mid-2013, said Justin Chang, president of Colony American Homes, the division of the investment fund headed by Tom Barrack.
Similar homes that sell for $100,000 in Phoenix are available in Atlanta for $65,000 to $75,000, Chang said. Colony tries to buy homes in both markets that are less than 20 years old, near good schools and job centers, he said.
“Whereas Phoenix has clearly bottomed and started to recover, I think Atlanta is close to bottoming,” Chang said in a telephone interview. “Ultimately I think it’s a city with good long-term prospects.”
Even if Atlanta prices fall a little more, investors are positioned to make money on both cash flow from rents and eventual resale of the properties, he said. While Phoenix houses are selling for about 40 percent less than the cost of new construction, those in Atlanta sell for as much as 60 percent below replacement cost, Chang said.
“We think Atlanta is a longer-term recovery,” Gary Beasley, managing director of Waypoint Homes, an Oakland, California-based single-family housing investment firm that started buying in Georgia in July. “The rental yields are good and there’s a lot of new-home product.”
In a sign of growing institutional support for single-family rentals, Citigroup Inc. extended a $245 million revolving line of credit to Waypoint, supplementing an initial capital raising of $150 million from GI Partners, a Menlo Park, California-based private equity fund, according to an Oct. 3 press release. Waypoint expects to invest almost $400 million to bring its total inventory to 4,000 homes from the current 2,400 by the end of this year, focusing on Atlanta, Phoenix, Chicago, Southern California and Northern California, Beasley said.
“Investors are looking for a way to play the housing recovery,” he said. “It’s the biggest asset class in the U.S. and there’s no institutional way to own it.”
Peter Rose, a spokesman for Blackstone, the biggest buyer of U.S. commercial real estate since prices bottomed, said the firm has been “active buyers in the Atlanta market” and that there are good opportunities to invest in single-family housing.
Jack Corrigan, chief operating officer at American Homes 4 Rent, a Malibu, California-based company founded by Wayne Hughes, the former chairman of Public Storage, didn’t reply to phone messages seeking comment. American Homes 4 Rent has properties in Arizona, Georgia, Nevada, Texas and Illinois, according to its website.
Charlotte, North Carolina; Orlando and Tampa, Florida, and Detroit are among other metro areas attracting investors seeking to aggregate single-family rentals, said Jon Grabowski, president of Precise Associates Inc., a Detroit-based single-family rental operator that has been buying in Atlanta for more than two years. A common theme is these cities have a lot of low-cost homes built over the last decade and prospects for population growth, he said.
“In growth, when people are moving to a new city, they’re also more transient,” Grabowski, whose company has $250 million to spend on single-family rentals by mid-2013 in a joint venture with San Francisco-based Landsmith LP, said in a telephone interview. “They may be willing to rent for the first year or two before they settle in.”
Arizona and Georgia are both non-judicial foreclosure states, which means it takes less time for lenders to repossess homes from delinquent borrowers than states that require judicial review.
Homeowners in Arizona were delinquent for an average of 500 days before banks seized their properties, while in Georgia it took about 461 days, compared with a U.S. average of 688 days, according to Lender Processing Services Inc. The average was 1,037 days in Florida, a judicial state which has the largest foreclosure backlog as a share of mortgaged homes, and 1,014 days in New York.
“They put out the word: They want to buy, buy, buy,” Dan Forsman, president of Prudential Georgia Realty, who oversees 18 offices with 1,000 agents in the Atlanta area, said of investors. “They’re just hungry for inventory. I’d expect a good uptick in prices over the next year.”
At Atlanta’s Fulton County courthouse auction, Victor Warren, 60, who has been investing in real estate for 27 years, lunged up steps, three at a time, to assign addresses to a worker bidding for him. His three bidders at the auction held pages that provided the maximum they should pay for each house.
Warren, whose family-owned business buys about five properties a month, said he had been one of the area’s top buyers. While the competition is heating up, he wonders how long the out-of-state buyers will stick around.
“They have to pay their investors and themselves and they have higher overhead being from out of town,” Warren said. “At some point in time, all of this is going to come down to profits and I can do this cheaper than they can.”