Wall Street Unlocks Profits From Distress With Rental RevolutionHeather Perlberg and John Gittelsohn
On a rainy night in November, Mark Futral, wearing a red hooded sweatshirt, approached a white ranch house in Flowery Branch, a northeastern suburb of Atlanta, crowbar in hand.
He adjusted a headlamp and slid his fingers under a front window to lift it open. His dog Bella, a 40-pound Rhodesian Ridgeback mix, barreled through and Futral followed, squeezing into an empty room with tan carpet peeling from the floor. It was the sixth home he’d broken into that day.
Though he’s occasionally mistaken for a thief, Futral, 37, is working for Blackstone Group LP, one of the world’s most sophisticated investors. For the past 18 months, he’s picked locks, shimmied under garage doors and crawled through windows to get into foreclosed homes the company has bought.
The locksmith is a cog in a machine assembled by Blackstone to build a rental-home empire across the U.S. In less than two years, the New York-based firm has bought 41,000 properties, most out of foreclosure, in 14 metro areas to become the largest landlord of single-family residences in the country. It’s hired more than 10,000 plumbers, leasing agents and lawyers to transform a mom-and-pop business into one of Wall Street’s hottest investments.
“We call ourselves the first responders,” said Futral, a 6-foot-1-inch, Acworth, Georgia, native with close-cropped brown hair. “Some houses kind of get you teary-eyed because it looks like there’s still an imprint of a body in the bed. You know, there’s coffee in the pot on the counter, almost like people are still living there.”
Blackstone is at the vanguard of a historic move to centralize the business of renting single-family houses in the U.S. after the real-estate crash, which left in its wake more than 7 million foreclosed homes and families lacking the credit to buy again.
Investors from multibillion dollar hedge funds to individuals buying as few as 10 properties have acquired more than 1 million homes in the past three years. Most started out paying cash; now, as the bet on rental housing turns into an industry, big landlords are benefiting from access to financing at a time when banks remain reluctant to lend to homebuyers, putting ownership out of reach for many Americans, especially blacks, Hispanics and people under 40.
“Early buying by investors actually did serve a public purpose” by soaking up vacant foreclosed homes, said Thomas Lawler, a former Fannie Mae economist who in 2005 warned of a housing bubble fueled by easy credit and a shift toward treating homes as investments rather than shelter. “Now it’s just free-market capitalism and big money is coming in because they have an advantage. Is that good? Well, it’s gone from being good to being disturbing.”
The stakes are high for the more than 100 million Americans who live in rented homes. It’s yet to be seen to what extent national landlords, with easy access to capital and loans, can keep outbidding first-time homebuyers, depriving families of the opportunity to build wealth, and what their impact on rents will be. There is a potential for investors to keep driving up property prices and set the stage for another housing bust. More immediately, there’s limited evidence available showing distant owners can fix broken plumbing and keep the homes in good repair.
The new landlords are already making their impact felt. Bloomberg News reported in August that Blackstone and other corporate investors were turning away low-income tenants on government housing assistance. Blackstone called it a miscommunication at the call center. In October, Bloomberg reported that a hedge fund, Magnetar Capital LLC, had quietly bought 1 out of every 11 homes in the Ohio town of Huber Heights and then pushed for property-tax cuts that would have blown a hole in the school district’s budget.
Atlanta is the biggest feeding ground right now after home prices fell 40 percent during the crash and foreclosures were among the highest in the nation. Investors including Blackstone, American Homes 4 Rent and Colony Capital LLC bought almost one in three properties sold in the area in September.
That’s keeping Futral and his team at Final Hardware Installers busy. A fitness equipment company he runs has taken a backseat as he cruises Georgia’s suburbs in his gray Ford pickup, entering about 10 properties a day to change locks for Invitation Homes, Blackstone’s division responsible for buying, renovating and renting.
“Nowadays, I get more work orders than I can do every day,” said Futral. “I make over six figures a year just breaking into houses.”
For Futral, the most hectic time is the week after county foreclosure auctions, held on the steps of Georgia’s courthouses on what’s known as “Super Tuesday” each month. The biggest single-family landlords send teams bearing stacks of cashiers’ checks ready to outbid locals.
This month, on a chilly morning outside the Gwinnett County courthouse northeast of Atlanta, the influence of mammoth landlords was on display. A team from AZ Bidder LLC, a company hired by Blackstone to buy properties, erected a control center under a white tent as auctioneers spaced yards apart called for offers on foreclosed homes in neighborhoods from Sugar Hill to Snellville.
About 20 Blackstone representatives monitored smartphones and tablets to track properties that fell within price and location guidelines.
Blackstone contractor Jamica Bell sat in a folding chair and munched on pizza as she eyed her phone and listened to the auctioneer reeling off addresses and prices. She raised a hand or nodded her head to signal offers, winning every time on more than a dozen properties with prices as high as $227,000 for a five-bedroom home in the town of Dacula.
“When we show up, the other bidders there say, ’Oh my gosh, I was hoping you were going to be sick today,’” Bell said after the auction.
The 43-year-old freelance writer, who also oversees home renovations, said she found the job through a friend who saw it on Craigslist. She had one training session and earns about $40 an hour. The first time working an auction, Bell said her team ran out of money after spending $6 million by 4 p.m. and needed another $6 million to pay for all the properties bought that day. She said it’s not uncommon for her to spend about $3.5 million of other people’s money, gathered by Blackstone from investors including pension funds, college endowments and wealthy individuals.
“I can’t believe that people earn a living doing this,” said Bell. “It’s easy, it’s fun, it’s one day a month.”
Robert Gilstrap, an Atlanta-area property investor for 21 years, said he’s shocked by the cash being thrown around. “It’s like Monopoly money,” he said. “You can’t compete.”
Here’s why. Blackstone is the world’s largest manager of alternative assets such as hedge funds and real estate, with $248 billion under its control. The business is so profitable it has made founder Stephen Schwarzman worth more than $10 billion. For his 60th-birthday party in February 2007 at the cavernous Park Avenue Armory in Manhattan, a guest list of 500 was entertained by rock star Rod Stewart. Four months later, Schwarzman sold shares in Blackstone to the public just before the stock market began its historic collapse triggered by the end of the housing boom.
Money managers have turned to single-family homes after prices fell 35 percent nationally from their 2006 peak and plunged more than 50 percent in markets including Phoenix, Las Vegas and Miami. The properties offer yields of about 10 percent a year from rental income and the opportunity to profit from rising real-estate prices when the homes are eventually sold. Funds set up by Blackstone and others are attracting money from investors seeking higher returns as short-term interest rates are close to zero.
With single-family rentals representing more than 10 percent of the housing market, “the investment and lending opportunities are immense and perhaps just beginning,” said Jade Rahmani, an analyst with investment bank Keefe Bruyette & Woods Inc.
Wall Street’s success depends on unprecedented demand for rentals from American families who lost homes and renters who want to buy but have been blocked from getting mortgages as banks restrict credit after lax lending contributed to the real-estate bust. The U.S. homeownership rate, which soared to a record 69.2 percent in 2004, is at 65.3 percent, almost back where it was two decades ago.
Minorities and young people have seen the sharpest declines. The homeownership rate for black Americans is about 43 percent, down from 50 percent before the crash. With investors racing to purchase properties, American families who typically need mortgages have had fewer opportunities to buy at the same sharply discounted prices.
“Homeownership remains the most important mechanism by which people build wealth in this country,” said Carolina Reid, an assistant professor who specializes in housing at the University of California at Berkeley. “Particularly for communities of color and low-income families, it’s basically the only way they build wealth.”
Most investors accumulating multiple homes are paying in cash, which means they can outbid and outmaneuver buyers like Rick Cartagena. The 36-year-old painter moved his family of five in 2010 from San Francisco, one of the most expensive markets in the country, to Phoenix, where he expected lower home prices to give him a shot at owning.
He wasn’t prepared for the competition. Phoenix, where property values dropped 56 percent from their 2006 peak, was one of the first cities to begin attracting Wall Street-backed investors, who found streets lined with cookie-cutter stucco homes, preserved by the dry desert climate.
The house Cartagena is now renting was bought by an investor for $52,000 in August 2011, public records show, down from the last sale of $194,336 in 2006. Of the 24 homes on his block, all built in 2006, only four still belong to the original owners and one was slated for auction last month, according to Maricopa County property records. The rest, adorned with tidy rock gardens sprouting cacti and succulents in front yards, were lost to foreclosure.
Investors, including Blackstone, Colony and Progress Residential LP, have bought half the homes on the block.
Cartagena is paying $950 a month to rent the three-bedroom house. He estimates it would cost him about $200 less a month -- including taxes, insurance and homeowner association dues -- to buy a place for $120,000, the going price for homes in his neighborhood. When he puts in bids, though, investors go higher.
He made offers on four homes in 2011 and 2012 and gave up trying this year after losing out to cash buyers who weren’t slowed by having to qualify for a mortgage. Cartagena said owning a house would allow him to control monthly payments and save for the future by building equity.
“I can’t compete with all the investors,” Cartagena said, standing in his driveway, his denim jeans speckled with white paint. “They jacked up all the prices.”
Home values in Phoenix have increased 43 percent since hitting bottom in September 2011, one of the biggest gains in the country, according to S&P/Case-Shiller data.
David Schweikert, an Arizona Congressman, said investors have done a service to local neighborhoods, beautifying properties and providing more housing opportunities to residents. Not everyone should own, said the 51-year-old Republican. He started investing in homes to rent in 2008 and at one point had a stake in almost 1,000 properties before running for the U.S. House of Representatives in 2011, he said.
“One of the things that created the collapse in 2008 was the arrogance of saying, ‘Everyone should be a homeowner,’” Schweikert said. “People move jobs and residences. It was a 1950s, 1960s mindset being pushed through policy in a population that was living differently.”
Republicans largely blame the U.S.-backed mortgage finance firms Fannie Mae and Freddie Mac and government policies for inflating the bubble, while Democrats emphasize Wall Street’s role creating exotic investments that funneled risky loans such as subprime mortgages to people.
Schweikert said frustrated potential buyers aren’t being blocked from owning, just from the “screaming” deals.
“The person who offers the best price gets it,” he said. “That’s actually how a market is supposed to work.”
President Barack Obama in August also praised institutional investors for helping to stabilize real-estate values. Investors, or those with at least 10 properties, have bought
1.18 million homes in the past three years, according to RealtyTrac. While that’s a fraction of the 14 million-home rental market, the biggest landlords are targeting houses that have similar characteristics in many of the same neighborhoods, hundreds of miles from their corporate headquarters.
Purchases by the same companies that bought on Cartagena’s street in Phoenix are reverberating in Rosebud Park, a Snellville, Georgia, neighborhood where thin grassy patches separate two-story dwellings covered in brick and vinyl siding.
A haven for first-time homebuyers when construction started in 2005, Rosebud Park has become a magnet for investors creating expansive leasing businesses. About one in four houses is now a rental, including at least 15 newly-built properties owned by Colony.
Anique Toussaint was driving out of the neighborhood to get her son from school one afternoon in late October, past the new homes clustered on stretches of land. She was hoping more families would buy in the subdivision, which was left unfinished when a builder went bankrupt. Instead, she was shocked to see “For Rent” signs on lawn after lawn.
Investors including Blackstone and Progress, also based in New York, own about 20 other homes in the neighborhood that they’ve begun renting out.
“We’ve seen the shift from the time we first moved in here from 2009 to now,” said Toussaint, 30, a stay-at-home mom from Brooklyn, New York. “The neighborhood is already declining.”
Many of the renters in Rosebud Park don’t comply with association rules, said Toussaint, a member of the homeowners’ board. They park in the narrow streets, blocking school buses and garbage trucks. Her neighbors complain they hear teenagers outside in the middle of the night, and trash from fast food restaurants is left on the ground.
Homeowners are more likely than renters to do neighborhood maintenance, get involved with community groups and vote with greater frequency, according to a September research paper by Edward Coulson, an economics professor at Pennsylvania State University.
By pouring money into properties that would have otherwise been left vacant, firms including Blackstone and Colony say they’re improving communities, and helping families rent quality houses in neighborhoods with good public schools.
In their buying binge, the largest landlords are leaving the most depressed areas virtually untouched. About 30 miles from Rosebud Park, the community of Pittsburgh in Atlanta is riddled with dilapidated properties partially hidden behind grass growing wild. About 40 percent of the homes are vacant, sealed off with wooden boards on windows.
Neighborhoods attracting the greatest investment in Atlanta’s northern suburbs are home to more moderate- to higher-income families, where there’s a greater opportunity to make money quickly, said LaShawn Hoffman, CEO of the Pittsburgh Community Improvement Association.
“They have to make good business decisions,” Hoffman said. “But part of what we need are patient investors, so for my neighborhood, their model doesn’t necessarily work.”
The central figure in Wall Street’s move into owning American homes is Jonathan Gray, Blackstone’s head of real estate. The 43-year-old is already a billionaire, thanks to his success in building Blackstone into a real-estate powerhouse. In 2007, he masterminded the $26 billion purchase of Hilton Hotels Corp. The investment was massive even for a private-equity firm, which buys businesses using money raised from investors, debt offerings and bank loans.
Gray, who said Blackstone’s model is “buy it, fix it, sell it,” sold shares of Hilton to the public this month, generating a paper profit of $8.5 billion, one of the largest in history for a buyout firm.
He began examining the U.S. housing landscape in 2011, when prices and sales were still falling three years after the financial crash.
Government efforts to help homeowners with delinquent mortgages failed to stem the tide of foreclosures. Banks seized an average 101,500 homes a month from delinquent borrowers in 2010 and 77,000 a month the next year, according to Lender Processing Services Inc. The disaster for banks and neighborhoods spoiled by abandoned homes seemed like an opportunity for Blackstone.
“‘We were looking across all these markets and just seeing all the distressed housing inventory and the complete lack of new construction,’’ Gray said.
He wasn’t the only real-estate titan eyeing the opportunity to profit from the collapse.
Across the continent in Malibu, California, where Hollywood celebrities and corporate tycoons have beachfront retreats, B. Wayne Hughes was trying to figure out his next move. The son of a sharecropper, Hughes had become a billionaire selling storage space in warehouses to Americans. After 40 years, he’d stepped down from running his company, Public Storage, and was spending more time on his stud farm in Kentucky.
Another Malibu resident, Thomas Barrack Jr., the founder of Colony, also was looking at housing.
The two talked on the phone and met for lunch.
Hughes ‘‘had tremendous conviction and put a tremendous amount of his own money into his business,” said Barrack, whose $20 billion investment firm owns Neverland Ranch, the former home of late pop star Michael Jackson and a stake in film company Miramax. “That gave me conviction we were on the right path.”
Hughes created American Homes 4 Rent and Barrack set up Colony American Homes, now the second- and third-biggest single-family landlords in the country.
Blackstone’s Gray was equally confident that single-family rental housing was an opportunity worth pursuing. He just hadn’t figured out how to manage homes scattered across the country.
That’s where Englishmen Nick and Peter Gould came into the picture. The brothers had started buying houses to rent in London in the early 1990s after a housing-market crash. They went on to become one of the biggest landlords in the U.K., and started a U.S. company to manage apartments.
In December 2011, Nick Gould stumbled on an opportunity that reminded him of London -- only bigger. He was in California driving to inspect a building southeast of Los Angeles when his car had a flat tire. He stopped in the middle of a housing tract in Riverside County, ground zero for America’s foreclosure crisis. Instead of boarded-up homes and streets strewn with tumbleweed, he found freshly mowed lawns where children played outside houses that were nearly new.
A man dashed out of a house and shouted “You’re too late,” Gould recalled. The man told him that a home near his car once worth $270,000 had just sold at auction for $90,000. Other properties were coming up for auction at similar prices.
“There was just crazy value here,” Gould, 55, said. “I could see how the market was going to progress. It was like watching a remake of a movie. You know the story. You’re just watching a different version, the 2011 version of a 1990 film.”
Weeks later, Gould flew to Manhattan and found a willing accomplice in Gray -- a man with the largest checkbook in real estate seeking a partner with experience in the home-rental business.
Blackstone and the Goulds got going at the beginning of 2012, around the same time as Hughes and Barrack. Starting in Southern California, Phoenix and Las Vegas, the firms helped alter the course of the U.S. housing market, putting a floor under prices and sparking a feverish race to buy properties.
Blackstone was spending as much as $150 million a week buying homes, Gould said, even as the company was still figuring out how to handle the properties, some of which had families or squatters in them and others that were deteriorating.
To build a single-family rental business, Blackstone applied the same techniques as when it takes over a corporation. It bought in bulk, getting construction materials from Home Depot Inc. and appliances from General Electric Co. At one point, the firm was probably the largest contractor in the U.S., Gould said.
Blackstone and other large landlords have clustered their purchases in many of the same zip codes. Still, organizing renovations and repairs is a logistical challenge. It takes two months on average to fix houses after purchase and another two months to fill them with tenants, according to Gray.
Once people move in, toilets get clogged, air conditioners break, tenants miss payments.
Some residents complain the service is poor. Alexandria Anderson, a Blackstone renter in the Atlanta suburb of Lawrenceville, said the company couldn’t repair a broken refrigerator for a week. A pipe burst a few weeks after Ida Bolt rented a Blackstone house in Atlanta’s Grant Park neighborhood, spawning mildew on the walls that she feared would sicken her 3-year-old daughter. It took a couple of weeks for crews to install new drywall and carpeting and suck out the moisture with dehumidifiers. Bolt, whose rent is $1,500 a month, said she has put in about 20 work orders for other problems that haven’t been addressed.
“I don’t think they have the staff or the networks yet to manage all the houses,” she said.
Gould attributed those difficulties to the growing pains of a new company that has so far spent $7.8 billion buying homes. In October, Blackstone hired Gary DeLapp, the former head of the Extended Stay hotel chain, to be president of Dallas-based Invitation Homes. They’ve now leased about 72 percent of the properties, and 95 percent are occupied within two months of renovation, according to Blackstone.
The business depends on people like Marcus Oliver and his sister, who have been renting a three-bedroom house from Invitation Homes since March. The Olivers lost their previous home in Alpharetta, Georgia, bought for $144,800 in 2005, after falling behind on the mortgage when Marcus Oliver’s work in construction dried up.
Blackstone bought the home in February on the Gwinnett County courthouse steps for $110,300, about $33,300 less than the Olivers’ debt on the house, after JPMorgan Chase & Co. foreclosed.
Oliver, leaning over the banister of his porch, spoke softly about a visit by a woman from Invitation Homes, who knocked on the door of his old house about nine months earlier. She gave him a choice: Rent the home back, for $1,295 a month -- or move in 30 days.
“They wanted to charge rent from the day they bought the house, without renovating or anything,” he said. He decided to move.
Blackstone spokeswoman Christine Anderson said Invitation Homes tries to offer former owners rental opportunities. The company has leased to 5,000 occupants of homes they’ve purchased and evicted 2 percent, she said.
The Olivers relocated in March and now pay Invitation Homes $1,150 a month to live in a three-bedroom ranch house with a grassy backyard in Snellville, 25 miles from their old place.
After everything he went through, Oliver said he’d still like to own again, and maybe even buy the house he’s currently leasing -- if he can ever qualify for a mortgage.
Getting a loan hasn’t been a problem for Blackstone. Even before buying its first rental home, the investment firm opened talks with Deutsche Bank AG to raise money for its purchases. The Frankfurt-based lender gave Blackstone a $600 million credit line last year and then rounded up other lenders to add more than $3 billion.
Blackstone is already tapping investors for a major new source of funds for its single-family home empire. In October, the company held a presentation at the Waldorf Astoria hotel in New York to sell $479 million of bonds. To meet the interest payments on the debt, Blackstone will collect monthly payments from 3,207 homes, including the one leased by the Olivers. According to deal documents, the firm bought the properties for $444.7 million and after renovations and other costs spent a total of $542.8 million. Those homes are already valued at $638.8 million, 18 percent higher than their outlay.
The bonds Blackstone is selling equal 75 percent of the properties’ current value, allowing the firm to recoup its initial investment and repay part of the bank credit line.
Investors can buy six versions of the debt with different interest rates depending on the level of risk and the priority the bonds are repaid.
Moody’s Investors Service gave the largest portion of the bond its Aaa rating, signaling it considers the debt as creditworthy as the U.S. government. The blessing opened up the investment to insurance companies, pension and mutual funds with trillions of dollars to invest. It also helped Blackstone borrow more cheaply with the combined interest rate of about 1.9 percent. A homeowner taking out a 30-year mortgage that week would have gotten a 4.1 percent rate.
The financing technique goes back more than three decades, when investment bankers started to package, slice, and sell home loans, a process known as securitization.
The creation of a rental home bond has triggered concern that Wall Street is re-inventing the same tactics that crippled the financial system five years ago.
“We understand there’s a lot of sensitivity because of Wall Street’s hand in the housing collapse,” Gray said during an interview. “But this is very different.”
Within weeks of Blackstone’s bond sale, Colony and American Homes 4 Rent announced plans to create their own securities backed by rental payments from properties they’ve bought.
Now the biggest landlords are seeing yet another way to make money from single-family home rentals. The same firms that have dominated buying of homes to rent, including Blackstone and Colony, are pitching a new line of business -- offering loans to smaller landlords with as few as five houses.
Danny Kattan said Colony and Blackstone this month proposed giving him loans on 450 rental homes his company has bought in South Florida over the past four years. That was a big turn from just six months earlier, when Kattan said nobody wanted to finance him because managing so many scattered properties was seen as too risky.
Lending to smaller landlords opens up the potential for millions of rental homes to be financed and then packaged into bonds. The market for the securities may grow to $920 billion over the next six years, according to Keefe Bruyette & Woods.
Economists at the Federal Reserve already are flagging the potential for danger. While financing for rental homes is still in its infancy, the growth needs to be monitored for signs it could damage financial markets, Raven Molloy and Rebecca Zarutskie said in a report this month.
Regardless of the broader financial impact, homeownership is moving out of reach for less affluent borrowers, whose lack of savings for down payments keep them out of the mortgage market, said Roberto Quercia, professor and chair of the city and regional planning department of the University of North Carolina at Chapel Hill.
“The American dream of owning a home has impacted the national character since the time of the founding of this country,” Quercia said. “Traditionally, homes have been, for low-income families, the one and only source of wealth to transfer to kids. And that’s really at risk.”
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