In 1848, the discovery of gold in California proved to be one of the most significant events in U.S. history. The dream of striking it rich and reaping the benefits of copious finds held a strong allure for many adventurous risk takers. Today, investors armed with reams of data and metrics, and that same adventurous spirit, are looking at the foreclosure to rental property market with that same gleam in their eyes.
Currently, the GSE’s own more than 200,000 foreclosed single-family residential properties, with banking entities owning an additional 600,000, according to recent reports from RealtyTrac. The FHFA launched its pilot foreclosure to rental property offering with Fannie Mae opening the bidding of 2,500 foreclosure properties to investors.
Traditionally, this is the marketplace of midsize and smaller investors who are generally more knowledgeable on the nuances of their local real estate market. However, in this new environment, these smaller investors may be shoved out of their own playground as large investment firms are expected to come to the table in unprecedented numbers with the expectation of a strong yield on their investment.
In its current pilot program, Fannie Mae is putting an emphasis on the criteria of the potential candidates; they are looking closely at the financial capacity, the purchasing plans, and their experience, as well as the experience of their vendor partners who will be assisting in the management.
If the new FHFA program proves successful, larger banks may also adopt this auction type scenario. In a cascading effect, local and regional banks may try out this same tactic to lighten their distressed portfolios and the mid and smaller range investors may enjoy the hometown advantage.
Smaller investors and local banks that inhabit the same communities where these properties are located will have a vested interest in reviving the health of their towns.
Larger investors in the foreclosure to rental property market will face several challenges, including the need to outsource their repair, rehabilitation and property management responsibilities. A positive note for these investors is that there are companies very familiar with property tenant management who also understand rental and vacant property registration. The vendors that stand out have a well established database of contractors and local property management experts, including understanding market color in the areas that have a high concentration of REO’s.
Taking into account the enormous stockpile of REO properties currently held by the GSEs, the auction and bulk investment in REO to rental properties may indeed be the next gold rush. Much in the spirit of the 1848 gold rush, there will be risks and tough lessons learned; but, this private-sector imitative has the potential to be the catalyst for housing market recovery.
Diane Gozza is the Executive Vice President, Integrated Mortgage Solutions - Houston, TX
