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Private Equity Bets Billions on Foreclosures

Investors buy foreclosed homes. Managing them is the tricky part
A worker gets ready to install sod at the Murrieta house
A worker gets ready to install sod at the Murrieta housePhotograph by Kirk Crippens for Bloomberg Businessweek

Carrington Capital Management paid $207,000 in May for a house at 36644 Ponderosa Court in Murrieta, Calif. Built in 2005, the four-bedroom home originally sold for $420,500 with 100 percent financing. The owner borrowed $100,000 more in 2007, increasing total debt on the property to $520,000, before losing the home to a bank in August 2011. The house looked almost new as workers replaced the kitchen stove and laid fresh sod on the front lawn during a July 23 visit. “When you think of foreclosed property, this isn’t the first thing that comes to mind,” says Carrington Vice President Rick Sharga. “I’m betting renters will be lining up when we put this on the market.”

Private equity firms including Colony Capital, Blackstone Group, KKR, and Och-Ziff Capital Management Group are rushing to make similar bets. They plan to spend at least $7.2 billion to snatch up undervalued single-family homes and then rent them out. The aim is to capitalize on U.S. home prices that are 34 percent below their 2006 peak, as well as on a broader shift toward renting. At 65 percent in the first quarter, U.S. homeownership is at its lowest level since 1997. Scott Simon, head of mortgage bonds at Pimco, says about 6 million borrowers will lose their homes in the next five years, creating demand for as many as 4 million new rental homes. “Our view is there’s tons to buy and tons to buy attractively,” says Justin Chang, acting president of Colony Capital’s American Homes unit.