JAN 3, 2013 1:39pm ET

A Rental Intelligence Gap?

JAN 3, 2013 1:39pm ET
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Savvy investors rushing to take advantage of current and long-term foreclosure-to-rental market opportunities may stumble upon an unexpected barrier: data.

Despite variations in lender and investor interest in the foreclosure-to-rent and the traditional multifamily rentals demand is likely to turn into the Gold Rush of this decade.

The key to making it happen, says Walter Charnoff, CEO and founder of RentRange, is information.

He is one of many market insiders who agree lenders and investors are becoming more and more involved in the rental market creating an unprecedented need for access to accurate information on REO-to-rent and multifamily rentals in specific geographical locations.

What they are learning the hard way is that consistent rental market data “has been in short supply,” he says. “Which is surprising, given the extraordinary amount of data that is available to the mortgage industry.” It is the reason why RentRange started to provide both address level rent value estimates and geography based data and analytics at the MSA, city and ZIP-code level on a national basis.

As a rule, lender-servicers, investors and government agencies conduct benchmark data testing to ensure the information is current and accurate, he said. Key metrics that have to be evaluated when purchasing an REO for rental purposes include potential rent, vacancy rate, historical rental trends, rental market saturation, rent to income ratio, and local foreclosure activity. It means, “The rental intelligence is extremely important.”

RentRange data contain variables such as the cap rate, cash flow, cash on cash, and gross yield calculations, which are employed “to evaluate single family rental class assets and markets," he explained.

Demand for rental intelligence is evolving along with the marketplace. According to Charnoff, the need more analytical and complex datasets keeps growing. Investors and lenders now require much more than basic market metrics.

Following that need RentRange included an address level rent valuation model tied to a confidence score, as well as geographic rent data that include rent to income ratios. Over the next few months the residential rental intelligence provider plans to release Next Generation Solutions, a tool that includes ZIP-code level gross rent multiplier factors and monthly rent price indices.

"This is a critical time for us," Charnoff says, mortgage lenders and property asset managers need feedback from national rental automated valuation models and rental macro data support. He expects renters will dominate the market in the near future.

Green River Capital, West Valley City, Utah, (http://greenrivercap.com) established a component servicing division that responds to “demand for customized services” from institutional investors and lenders that operate in the REO-to-rental market.

GRC executives expect demand for individualized multiple services will continue to increase in 2013.

The new division of the distressed property management and loss mitigation services provider already is managing more than 4,000 properties each month. It specializes in a wide range of REO-to-rental management needs before and after property acquisitions such as collateral underwriting, property and market data research. Transaction management services include title searches, title curative activities, escrow administration and repair oversight.

In the past few years “investor and lender interest in REO-to-rental programs has grown significantly,” says the firm’s COO, Lorenz Schwarz. Component servicing has to adjust to the “ever-changing needs” of a new and expanding marketplace.

But how big is REO-to-rental demand and is there a risk for it to cool off in favor of more manageable and equally in demand multifamily rentals?

The answer to those questions again depends on rental intelligence.

Rick Sharga, EVP, Carrington Holding Co., also sees potential for growth in demand for single-family home rentals.

“What most people fail to see is that currently anywhere between 10%-12% of all rental units are single-family homes managed by local property management companies and investors,” he said. “Institutional investors are really interested in taking advantage of this market, so it is safe to say that demand will grow for at least a few years.”

Reasons are well known, he argues: the number of households will continue to grow, some qualified buyers will enter the market, others will wait due to lack of downpayment or may postpone purchases until their job situation is more stable. And as a result the occupancy rate of rental units around the country will remain very high.

“There is new opportunity for the next few years,” he says. “Keep in mind that rental units across the country are occupied at a 97% rate right now and more people are looking to rent.”

But, Sharga agrees, it does not mean it is an easy market to get into due to a number of issues.

He too sees a void in rental market intelligence. “Unfortunately the industry does not have enough reliable data about foreclosure-to-rent units, and I don’t think we can use apartment rentals as a proxy for single-family rentals.”

The other problem, he argues, is that many of the investors who have expressed interest in the REO-to-rental market do not have the needed experience to manage these properties. “What we’re getting is inexperienced investors getting into a market for which there’s not enough data. It is a bad match that can lead to potential issues.”

For example, some investors pulled out of a few markets in Northern California because they were not getting the yields they anticipated they would get from the REO rentals, he recalled.

Sharga expects to see some of the earlier investors pull out of this market, “simply because REO rentals cannot perform the way they have hoped.”

Similarly, some investors who continue to accumulate REO-to-rental properties will eventually find out their management is much more complicated and expensive than they anticipated. And that can turn into “the other big challenge facing investors in this market,” he said.

Nonetheless, his anticipation is “very bullish” on this market opportunity.

“It is a long-term investment that will become a new and distinctive asset class—for anyone who’s looking at large scale single family rental opportunities, but also keeps things into perspective,” he says. “There’s about $8billion in capital made available by various investors interested in these properties, but compared to about $1.4 trillion in mortgages written by the market in 2012, so it is not much, there’s room to grow.”

Even though “oddly enough a huge challenge for investors is lack of inventory,” he says, there are advantages to buying REO inventories compared to buying other types of properties.

But as investors try to diversify their portfolios the success of a program like REO-to-rental depends on the local market.

The example of Northern California shows that due to variations in local prices it is very difficult for investors to get the yields they are looking for “simply because you cannot charge enough rent to justify the purchase price,” Sharga argues.

All of the above, he adds, reaffirms that local market intelligence remains key to all residential real estate investors large and small.