Capital Shortages Impact Foreclosure-to-Rent Market

Government entities, investors and lenders are embracing nationwide efforts to minimize real estate owned property related losses by keeping these properties occupied.

The jury is still out on whether the REO-to-Rent option is a too expensive endeavor and how much it may benefit the market at large.

Right now certain REO markets are incredibly hot, says Matt Martin, president and founder of Real Estate Management of Arlington, Va., “so hot that you’d think we’re back in 2004 when demand was not for one or two properties, but a lot of them.”  

High demand in states with large REO inventories like Arizona, which is now on a fast track to recovery, is helping shrink the inventory. In Phoenix, and some other areas sellers, are getting three to four offers for the same property, he said.

Other distressed markets, including Nevada and Florida, also are seeing a demand uptick in selected areas.

Even though certain local differences often follow well-known patterns of the mortgage market cycle, there also are new features to this recovery.

While local market characteristics remain key to the recovery in many states, macro economic factors also come into play. Uncertainty about the future makes this recovery a little different, Martin says.Even in some of the best performing markets there are not that many properties for sale right now because homeowners are not selling, he said. “Most of the activity consists of short sales and or REO disposition.”

There is renewed interest for REO-to-rental disposition options after the idea turned into a government-sponsored initiative that has not been fully implemented.

So far, according to Barclays, the REO to rental program that was announced at yearend 2011 by the Federal Housing Finance Agency aims to stimulate the sale of REO properties held by Fannie and Freddie to investors interested in renting them out to current tenants or renter-to-buyer prospects.

By the end of August, a pilot program for about 2,500 Fannie Mae REOs in Atlanta, Chicago, Las Vegas, Los Angeles, Phoenix and Florida was performing well as up to 85% of the properties were already occupied by tenants.

What worries these analysts is that “no details on government financing for investors or the equity stake that Fannie Mae will take in the program has been disclosed.”

They stated, however, that since foreclosed homes are all held by the GSEs, the program is likely to have “a limited effect on non-agencies,” or at best, an indirect effect “by helping to stabilize home prices in some distressed areas” where foreclosures represent a large portion of potential housing supply. In their view, the overall effect on the national housing market “will be minimal.”  

Despite these shortages, the program is generating sufficient interest. According to Martin, there has always been investor interest in making the REO-to-rental program work.

In his view, given the major financial and management differences between multifamily and one-to-four family buildings the biggest challenge has always been implementation.

“Multifamily unit properties are much harder to manage,” he says, but most importantly, they are much more expensive to renovate and maintain. “The challenge with multifamily deals is not property availability, but debt availability. There’s not enough capital and lack of debt matters.”

The Federal Housing Finance Agency is tempting investors. “All of a sudden it seems that debt is available, so investors can make it make sense from a return on investment perspective,” he says. “There definitely are some folks out there who have raised a significant amount of capital, in places like Florida.”

But he takes their enthusiasm with a grain of salt. He recalls how similarly in 2007 many investors started accumulating capital in the hope that 2008 would be a boom year when, “there were going to be all sorts of nonperforming loans being sold in bulk, that the market would crash and some people were going to make a fortune and other people were going to lose everything. It just did not happen.”

Raising capital and having one’s own special servicer seemed to be “a cool thing to do,” he recalls.
“Back then everybody wanted that. Right now, it’s probably ten folks out there who are buying nonperforming loans and are really good at servicing REOs. The special servicing space has shrunk.”

Matt Martin Real Estate Management, the company he founded in 2004, specializes in asset management and default services and has been recognized as one of the fastest-growing firms in the country based on revenue increases of 2,669% from 2008 to 2011.

According to Martin, judging from “all indicators” Matt Martin Real Estate Management, which focuses on in asset disposition, financial advisory, loss mitigation and acquisition services, will continue to expand.

What helped Matt Martin Real Estate Management succeed? The marketplace has changed so much that it is important to be creative when working with clients, finding new ways to communicate with them, listening to what lenders, servicers and borrowers need, he says. “Be positive, implement the yes attitude.”

“Obviously we are looking at a lot of different buckets right now, but we’ll buy them individually. The deal just has to make sense, we’re not just buying just to buy,” he says. “I see a lot of people buying in bulk as if it’s 2007 all over again. Some investors are buying properties at 110% of their value because they think there is value there just because there is a tenant in it. They expect these property values will increase, and that’s silly.”

Martin finds misconceptions about property values are part of the reason why some investors are rushing “to make a quick buck.” An attitude that can negatively affect the REO-to-Rent marketplace.

Other macro economic factors are at play.