The Once in a Lifetime REO-to-Rent Opportunity Deal
The foreclosure-to-rent movement is an opportunity bound to keep servicers, investors and the Federal Housing Finance Administration busy in the near future. It also is a game changer in the nation’s housing culture because while following the path of homeownership preservation it also embraces renting.
“Renting will become more acceptable,” says Paul Hayman, CEO of PropertyAccess, Austin, Texas, who is a believer in housing about home living, not homeownership.
“The unprecedented volume of potential inventory is creating an economic opportunity that hasn’t been available before in residential rental housing,” Hayman said. It is an opportunity that brings with it “dramatic social and economic benefits” that can positively impact families and neighborhoods while providing economic returns for investors.
According to Hayman, so far roughly 70% of the foreclosed properties in the nation are owner occupied and 30% tenant occupied. Capital is available, he says, noting at least 25 funds he knows of that have from $100,00 to $1 billion in disposable capital are looking into the REO-to-rental market as of now. “It is a matter of pooling these assets” and then managing them.
He sees single-family rentals as “a new asset class” emerging in the United States marketplace that is garnering interest from the capital markets due to its profit potential. These opportunities are bringing about strategic partnerships such as the one between PropertyAccess and Cashel USA Property of Dallas whose stated goal is to enable Australian capital partners to invest in the single-family home foreclosure and REO property market within the U.S. Cashel will provide up to $500 million to purchase assets that will be converted into rental properties. As part of the agreement, PropertyAccess will initially provide property assessment and acquisition evaluations. After the sale PropertyAccess will manage “the entire lifecycle of the purchased properties from renovation, maintenance, rental management and future resale.
Cashel decided to invest in the U.S. distressed housing market to convert foreclosed and REO properties into rental opportunities because of its potential for meaningful return on investment, said Stuart Morton, joint managing director with Cashel USA Property Partners, who represents potential investors based in Australia. It is a “once in a lifetime opportunity…at yields not previously seen in this asset class,” he said.
Cashel will purchase “well below replacement costs,” high-yielding properties it plans to hold for five to seven years until the housing market recovers. This kind of investment provides an excellent opportunity for private capital to enter this space and in the process help stabilize neighborhoods, Morton said.
His future prospect is quite optimistic.
Morton expects to see “a significant amount of capital” enter the U.S. distressed housing market despite underlying challenges. The partnership with ProperytAccess will ensure Australian investors are protected from “the vast majority” of U.S. market risks and compliance challenges, he said.
The PropertyAccess solution addresses the entire lifecycle of property management including assessment, evaluation, renovation, management, maintenance and future disposition. It provides investors access to a single-sourced, national network of over 500 local property managers, 13,000 contractors and 7,000 professional inspectors.
It is a good sign that at least so far politicians and the mortgage banking industry seem to agree on the overall benefits of releasing the excess of REO properties from government-owned enterprises through bulk sales to investors.
Recently 33 senators sent a letter to the administration urging it to adopt new programs to alleviate the housing crisis, while the FHFA received over 4,000 responses to their RFI supporting a national rental program and numerous reports “proving REO-to-rental is a sound strategy,” Morton said.
Hayman agrees that many well-capitalized investors “are eager to jump into the game” this year. Their only challenge is “access to larger pools of assets” as competition grows suggesting REO-to-rental market investors and REO management service providers need to begin preparing sooner rather than later.
According to financial filings, at the close of the third quarter of 2011, there were over 220,000 foreclosed and REO properties being held by HUD, Fannie Mae and Freddie Mac combined, in addition to “the shadow inventory” that is estimated at 1.6 million to 2 million properties.
“The opportunity is real,” Hayman says, because the convergence of high REO inventory levels and depressed housing prices, along with an increased demand for rentals, is creating a perfect storm for investors. “The time for investors to get their feet wet is now!”