$1 trillion opportunity, or a failed housing scheme?

Relinquis's picture
Rank: Neanderthal | 2,123

The US government is auctioning off 100s of thousands of foreclosed homes and some see this as the tip of a $1 trillion iceberg of foreclosed asset sales... several PE firms & hedge funds are getting ready

The buyers might also get help from the government to finance their acquisitions... kinda reminds me of P-PIP. From the article...

The Federal Housing Administration, which also will participate in the rental program, had 32,170 real-estate owned homes seized from borrowers, also known as REOs, as of Dec. 31, according to spokesman Lemar Wooley.
Possible aspects of the program include public-private partnerships to share the risk and profits, "seller financing" guaranteed by the government and rent-to-own opportunities for tenants, according to a November memo.

Thoughts? Are you guys ready to go long residential again? Should the gov't just auction this stuff without fancy structures and subsidised financing?

A bit of history.. listed REITs really took off as an investment vehicle from 1992 onwards, a few years after the 1989 real estate/housing crash.

Comments (21)

Feb 1, 2012

The government is going directly to private money because they will actually pay what these things are worth. Auctions will, at this point, just attract speculators and create another bubble. The upside is having the private sector value the assets correctly. The details of this work are fascinating, and I'm reading up on it now, so, good timing on the post...

The downside is that I can't finance a cheap home off of this project.

Feb 1, 2012
UFOinsider:

The government is going directly to private money because they will actually pay what these things are worth. Auctions will, at this point, just attract speculators and create another bubble. The upside is having the private sector value the assets correctly. The details of this work are fascinating, and I'm reading up on it now, so, good timing on the post...

The downside is that I can't finance a cheap home off of this project.

This is half of the reason, the amount of time that would be put into auctioning off each property individually would create a huge amount of work. Also it gives politicitans more gas to pour on the "we hate the banks" fire by letting firms buy peoples houses at a reduced rate.

Also if they auctioned the houses individually the majority of them wouldn't sell. Sitting abandoned for years pretty much will ruin a house, so the only way to get the assets off the book they have to be bundled.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

Feb 1, 2012
heister:
UFOinsider:

The government is going directly to private money because they will actually pay what these things are worth. Auctions will, at this point, just attract speculators and create another bubble. The upside is having the private sector value the assets correctly. The details of this work are fascinating, and I'm reading up on it now, so, good timing on the post...

The downside is that I can't finance a cheap home off of this project.

This is half of the reason, the amount of time that would be put into auctioning off each property individually would create a huge amount of work. Also it gives politicitans more gas to pour on the "we hate the banks" fire by letting firms buy peoples houses at a reduced rate.

Also if they auctioned the houses individually the majority of them wouldn't sell. Sitting abandoned for years pretty much will ruin a house, so the only way to get the assets off the book they have to be bundled.

True, I'm giving the gov't too much credit.

Feb 1, 2012

I'm fairly certain properties are legally required to be auctioned off individually. Bank owned properties, are just properties that went to auction and where not sold.

Eliminating the auction process would require a change in law.

Feb 1, 2012
ke18sb:

I'm fairly certain properties are legally required to be auctioned off individually. Bank owned properties, are just properties that went to auction and where not sold.

Eliminating the auction process would require a change in law.

Do you not have any idea what has been going on for the last 4 years? The government owns the assets, they bought them off the books of the banks.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

Feb 1, 2012
heister:
ke18sb:

I'm fairly certain properties are legally required to be auctioned off individually. Bank owned properties, are just properties that went to auction and where not sold.

Eliminating the auction process would require a change in law.

Do you not have any idea what has been going on for the last 4 years? The government owns the assets, they bought them off the books of the banks.

Irrespective of who owns the note the foreclosure process is bound by state legislation. Please correct me if I am wrong, however it is my understanding that regardless of who owns the note, the property must be sold at auction. Those properties not sold at auction then go back to the bank and become bank owned. However, auction is the first step.

Feb 1, 2012

The reason the FHA is going to be offering buyer assistance is because these properties are so cheap and crappy that a buyer won't be able to get a traditional mortgage loan. Our bank, which does the lion's share of its work in Kansas and Missouri, 2 of the most affordable markets in the nation, won't issue mortgage loans under $45,000, and most loan officers won't touch loans at the minimum because it's a waste of their time. Many of these HUD houses will be auctioned off for well under $50,000. And the quality of purchaser under $50,000 is, well, poor to say it nicely. Poor income, degraded credit, virtually no assets.

Also, another reason they are looking to auctions is because it's extraordinarily difficult to find a competent real estate agent who will work on selling a $30,000 house for 3% commission. HUD is just going to auction these units off to investors, hopefully in bulk, and they'll be turned in to slum lord rentals with a lot of Section 8 tenants.

Feb 1, 2012

I agree that it makes sense to sell in bulk to some extent... interesting perspective VirginiaTech. great to see a ground level/granular view of what these assets are actually like.

My view:
- If the FHFA provides selling financing in the form similar to the Treasury's PPIP for toxic assets, then it only make sense for the investment managers when the seller financing/subsidy is so favourable that it allows them to overpay... The benefit doesn't really get to the renters / occupiers... Should be interesting to see what form this takes
- I still like the idea of going after the debt during/prior to the foreclosure process rather than after it has been resolved (i.e. before it become REO)
- This looks like RTC part 2 (kinda...)

A couple of questions:
1. Do you see merit in a dedicated fund to go after these assets with a REIT IPO as an exit? Is this a good business to be in during the long term 10 years+ or just as soon as you can flip it to the IPO market?
2. Do you think these bulk deals make sense without the seller / gov't financing?

Feb 1, 2012

I wouldn't touch this crap with a 10-foot pole personally--not with my own money or my company's money. I don't know this for a fact but I'm just guessing--the investor model will be something like:

1) A percentage of people will buy these houses with traditional mortgages.

2) A smaller percentage will buy them with cash.

3) A healthy portion of the houses will be sold to medium-sized investment companies that will buy the units for, say, $25,000, put $25,000 in work into them and sell them for $75,000.

4) A healthy portion will be bought in bulk, say for $25,000 and re-sold for, say, $35,000.

5) A healthy portion will be bought by property management firms and by individual investors to rent, largely to Section 8 tenants for a safe, consistent cash flow.

I don't see many legit companies taking on these assets.

Feb 4, 2012
Virginia Tech 4ever:

I wouldn't touch this crap with a 10-foot pole personally--not with my own money or my company's money. I don't know this for a fact but I'm just guessing--the investor model will be something like:

1) A percentage of people will buy these houses with traditional mortgages.

2) A smaller percentage will buy them with cash.

3) A healthy portion of the houses will be sold to medium-sized investment companies that will buy the units for, say, $25,000, put $25,000 in work into them and sell them for $75,000.

4) A healthy portion will be bought in bulk, say for $25,000 and re-sold for, say, $35,000.

5) A healthy portion will be bought by property management firms and by individual investors to rent, largely to Section 8 tenants for a safe, consistent cash flow.

I don't see many legit companies taking on these assets.

False. Did you even read the article? The guys running GI Partners aren't going to lob $1B at the sector if it's a waste of time. The plan isn't to snap up cheap crap, put a minimum amount of capex in, and flip as the market improves. The play is to pick up portfolios of assets that remain in decent shape, are located in high demand markets (CA, TX, etc.), and can be rented to former homeowners over the long haul. The cash flow inherent in the strategy is what will be attractive to institutional investors.

A good example would be a $150k REO home in L.A. that was worth twice its current value before the subprime crisis. If home ownership falls nationwide from 67-68% to the mid-sixties (or even lower, as many projections show), millions of people will never purchase units in this range again, and will instead rent. Assuming this is all Section 8 stuff owned by a local slumlord is missing the point. Wait until these PE funds dive in -- these guys will make money.

Feb 4, 2012
dpb2012:
Virginia Tech 4ever:

I wouldn't touch this crap with a 10-foot pole personally--not with my own money or my company's money. I don't know this for a fact but I'm just guessing--the investor model will be something like:

1) A percentage of people will buy these houses with traditional mortgages.

2) A smaller percentage will buy them with cash.

3) A healthy portion of the houses will be sold to medium-sized investment companies that will buy the units for, say, $25,000, put $25,000 in work into them and sell them for $75,000.

4) A healthy portion will be bought in bulk, say for $25,000 and re-sold for, say, $35,000.

5) A healthy portion will be bought by property management firms and by individual investors to rent, largely to Section 8 tenants for a safe, consistent cash flow.

I don't see many legit companies taking on these assets.

False. Did you even read the article? The guys running GI Partners aren't going to lob $1B at the sector if it's a waste of time. The plan isn't to snap up cheap crap, put a minimum amount of capex in, and flip as the market improves. The play is to pick up portfolios of assets that remain in decent shape, are located in high demand markets (CA, TX, etc.), and can be rented to former homeowners over the long haul. The cash flow inherent in the strategy is what will be attractive to institutional investors.

A good example would be a $150k REO home in L.A. that was worth twice its current value before the subprime crisis. If home ownership falls nationwide from 67-68% to the mid-sixties (or even lower, as many projections show), millions of people will never purchase units in this range again, and will instead rent. Assuming this is all Section 8 stuff owned by a local slumlord is missing the point. Wait until these PE funds dive in -- these guys will make money.

Also false, you are working under the the assumption that every forclosed house will be for sale. This will only involve assets that the banks transfered to the government under TARP. The assets that sold under auction will not be in this. Shockingly the majority of the assets that sold under forclosure auction were ones that were in decent shape and not completely shit.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

Feb 4, 2012
dpb2012:
Virginia Tech 4ever:

I wouldn't touch this crap with a 10-foot pole personally--not with my own money or my company's money. I don't know this for a fact but I'm just guessing--the investor model will be something like:

1) A percentage of people will buy these houses with traditional mortgages.

2) A smaller percentage will buy them with cash.

3) A healthy portion of the houses will be sold to medium-sized investment companies that will buy the units for, say, $25,000, put $25,000 in work into them and sell them for $75,000.

4) A healthy portion will be bought in bulk, say for $25,000 and re-sold for, say, $35,000.

5) A healthy portion will be bought by property management firms and by individual investors to rent, largely to Section 8 tenants for a safe, consistent cash flow.

I don't see many legit companies taking on these assets.

False. Did you even read the article? The guys running GI Partners aren't going to lob $1B at the sector if it's a waste of time. The plan isn't to snap up cheap crap, put a minimum amount of capex in, and flip as the market improves. The play is to pick up portfolios of assets that remain in decent shape, are located in high demand markets (CA, TX, etc.), and can be rented to former homeowners over the long haul. The cash flow inherent in the strategy is what will be attractive to institutional investors.

A good example would be a $150k REO home in L.A. that was worth twice its current value before the subprime crisis. If home ownership falls nationwide from 67-68% to the mid-sixties (or even lower, as many projections show), millions of people will never purchase units in this range again, and will instead rent. Assuming this is all Section 8 stuff owned by a local slumlord is missing the point. Wait until these PE funds dive in -- these guys will make money.

Dude, did you read a single word I said? I said I'm sure some big players will get involved, but $1 billion is 0.1% of $1 trillion. You think there are a lot of desirable "portfolios" (LOL at the term) just sitting around the nation's best markets in decent neighborhoods? Your statement is a classic example of some completely disconnected person sitting in an ivory tower in NYC making unrealistic assessments. The overwhelming majority of HUD houses are absolute and utter shit in the shittiest submarkets.

There is absolutely money to be made in the business and I'm sure some PE firms will swoop in and try, but they'd better be damn careful--I work with every day real estate professionals who have mastered the art of buying garbage houses in the nation's most undesirable locations and it s a very risky business--most people fail, including the experts. In fact, generally every market will have about 1 or 2 successful players and the rest are losers in the business. The idea that some Harvard grad with no tangible real estate skills or property management experience is going to swoop in to Baltimore and make a killing is somewhat of a dubious thought, if not laughable. It is NOT easy to make money in that business. Section 8 tenants provide stable cash flow but they also destroy units. It's hard for me to imagine respectable firms getting involved in slumlording it. That's all a HUD house would be. The diamonds in the rough aren't going to be in some poisonous portfolio--they are long gone.

Feb 1, 2012

While I can't speak to the inherent difficulties of deploying a billion dollars in the space as well and the property management head aches of such a large portfolio, in terms of numbers and geographic reach, I do have significant experience in this industry and know that the returns are massive. Its a great market right now and its surprising that institutional money has taken this long to enter.

Prices are so low, often below replacement cost, and rents have been pushed up (all this is target market specific) that you are cash flowing day one creating a healthy return (15-20%). As long as you get in at a purchase price that is generating a solid annual return based on cash flow you can ride out the markets until appreciation eventually occurs.

It is too difficult to make blanket statements about the investment thesis in general. Each geographic market must be looked at independently. There are markets where you can make significant returns and probably markets where you can't.

Even just thinking about it on a purely high level qualitative perspective (although quantitatively its solid too) tons of people, and more specifically families, have been displaced from homes they owned, they clearly need to live somewhere and if that can't buy they will rent. There will be a huge demand in the renter space and some savvy investors flush with cash are going to become very wealthy.

Feb 2, 2012
ke18sb:

While I can't speak to the inherent difficulties of deploying a billion dollars in the space as well and the property management head aches of such a large portfolio, in terms of numbers and geographic reach, I do have significant experience in this industry and know that the returns are massive. Its a great market right now and its surprising that institutional money has taken this long to enter.

Prices are so low, often below replacement cost, and rents have been pushed up (all this is target market specific) that you are cash flowing day one creating a healthy return (15-20%). As long as you get in at a purchase price that is generating a solid annual return based on cash flow you can ride out the markets until appreciation eventually occurs.

It is too difficult to make blanket statements about the investment thesis in general. Each geographic market must be looked at independently. There are markets where you can make significant returns and probably markets where you can't.

Even just thinking about it on a purely high level qualitative perspective (although quantitatively its solid too) tons of people, and more specifically families, have been displaced from homes they owned, they clearly need to live somewhere and if that can't buy they will rent. There will be a huge demand in the renter space and some savvy investors flush with cash are going to become very wealthy.

Instutional money has kept out for a reason. No bottom as of yet. You might generate cash flow, but many instutional firms have restrictions on the percentage of principal loss they can take.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

Feb 2, 2012

ke18sb, I would submit to you that getting into Section 8 property management is probably out of the realm of expertise of the guys in ivory towers in Manhattan, North Chicago, Manhattan Beach, and Key Biscayne. It's one of the first rules of business--you don't take on big projects that you know little about. Maybe some big players will get involved, but I don't see many legitimate REITs or big-time investment companies wading into the HUD housing garbage of Oakland, St. Louis, Newark, SE DC, Baltimore, Atlanta, Houston, KCMO, etc.

Feb 2, 2012
Virginia Tech 4ever:

ke18sb, I would submit to you that getting into Section 8 property management is probably out of the realm of expertise of the guys in ivory towers in Manhattan, North Chicago, Manhattan Beach, and Key Biscayne. It's one of the first rules of business--you don't take on big projects that you know little about. Maybe some big players will get involved, but I don't see many legitimate REITs or big-time investment companies wading into the HUD housing garbage of Oakland, St. Louis, Newark, SE DC, Baltimore, Atlanta, Houston, KCMO, etc.

AIMCO? MMA Financial/Boston Financial Investment Management? I'm just talking out of my ass here but isn't there already institutional money focused on HUD housing garbage in places like that? You know the affordable housing market better than anyone here, aren't there some very large, established players in the business?

Feb 2, 2012

Project-based Section 8 housing isn't garbage. Those are pretty quality projects and are good investments. Foreclosed houses in inner city St. Louis converted into rentals that accept Section 8 vouchers is garbage. JMHO. I'm sure some major player will get involved if there is enough money to make.

Mar 19, 2012

Wall Street Keys On Landlord Business
By NICK TIMIRAOS, ROBBIE WHELAN and MATT PHILLIPS
Some of the biggest names on Wall Street are lining up to become landlords to cash-strapped Americans by bidding on pools of foreclosed properties being sold by Fannie Mae.
The idea is that the new owners would rent out the homes at first rather than reselling--potentially aiding a housing-market recovery by reducing the number of properties clogging the market. The fact that big-name investors are interested also suggests they anticipate sizable future profits in housing.
... http://online.wsj.com/article/SB100014240527023038...

May 21, 2012

http://blogs.wsj.com/developments/2012/05/16/singl...
Single-Family Rentals Keep Pulling In Investors

By Robbie Whelan

Bloomberg News
Colony Capital, headed by Tom Barrack, has formed a single-family rental REIT.
The push is on to turn single-family rental homes into an asset class that can be bought and sold on Wall Street.

Last week, the Journal reported that publicly traded home-builder Beazer Homes had teamed up with buyout firm KKR & Co. to launch a real-estate investment trust to manage its small portfolio of single-family homes as rentals. Beazer's REIT is still private, for the moment, but has plans for an IPO to take the company public in the coming years.

Others are jumping in as well. Los Angeles-based Colony Capital, led by distressed debt investor Tom Barrack, has also formed a single-family rental REIT, based in Phoenix, with plans to ramp up acquisitions and expand to new markets in the coming months. Since dozens of prominent investors have signaled that they plan to make big bets on the single-family rentals, it's useful to look at how these ventures are structured.

"From the very beginning, we've thought of this as eventually becoming a public company," says Justin Chang, a principal with Colony and acting CEO of Colony American Homes, the private-equity firm's new rental REIT. "This is a big opportunity, the beginning of an asset class."

May 21, 2012
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