On February 1, 2012 The Federal Housing Finance Administration announced that it is opening for business on a new program to dispose of Fannie Mae and Freddie Mac-owned real estate, estimated at 200,000-plus residential properties.
“The REO Initiative will allow qualified investors to purchase pools of foreclosed properties with the requirement to rent the purchased properties for a specified number of years. This rental period could provide relief for local housing markets that continue to be depressed by the volume of foreclosed properties, and provide additional rental options to certain markets. “
“During the pilot phase, Fannie Mae will offer for sale pools of various types of assets including rental properties, vacant properties and non-performing loans with a focus on the hardest-hit areas. The first transaction will be announced in the near-term”
**** And here is a very interesting related story: “Foreclosures Draw Private Equity as U.S. Sells Homes: Mortgages”
Some big takeaways from that article:
- 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. Investors and the selling entity will both retain upside in the properties at the time of resale and bare risk of the downside.
- This marks the first time institutional investors are really getting involved in the single family rental sector on such a big scale
- About 7.5 million homes with a current market value of $1 trillion will be liquidated through foreclosures or other distressed sales by 2016
- Single-family rentals will become a new institutional asset class. Think about this. The single family rental market as an asset class dwarfs multi-family, industrial or office. But thus far, it’s been largely ignored by the big players in favor of multi-fam and other more scalable asset classes.
So what does this mean for us as the “mom-and-pop” investors? Here is my take. Leave me your opinions and comments at the bottom. I want to hear from you:
- Bulk Pool sales of REO properties by banks, Fannie and Freddie have been around for a long time. But often those pools would be sold to companies that would in turn resell or “wholesale” them to mom and pop investors that would then hold them as rentals or rehab and flip them. Now these pools will be in the hands of large institutional investors who will be required to hold them for 5 years or more. This is not a negative for the market as a whole but limits supply of good deals to smaller investors like you and me.
- A smaller investor can still get involved. From reading the Pre-Qualification Request Form, an individual investors needs to only have a $200k net worth or $300k income for the last 2 years. But I’m guessing that in the bigger metropolitan areas, you’ll find yourself competing on bids of some very large pools and competing, at that, against some large institutional investors with some very deep pockets. Again, the small guy loses.
- I am still not clear on whether some of these homes will be sold with the existing borrowers staying there as tenants. If that’s the case, count me out for a number of reasons.
- 1) People falling into foreclosure are obviously in some financial distress. They wouldn’t normally qualify for my rental properties. Nothing against them, but my renter profile is always someone financially stable. Not rich. But stable. Someone that always makes their payments, doesn’t overextend themselves, etc.
- 2) Buying a property with existing tenants doesn’t allow you to make the proper repairs on day 1 to take care of all the deferred maintenance. We renovate our properties extensively at acquisition in order to have maintenance-free and low-management assets going forward.
- I don’t trust any arrangement where Fannie or Freddie (or any government entity) will be my “equity partner”. I just don’t.
- I’ve never been big on buying pools of assets in general. It’s analogous to reaching your hand blindly into the Haloween bag of candy and grabbing a fistful. Sure you may get some Snickers or Kit-Cats but you’ll also probably get a whole lot of crap you wouldn’t even feed to your dog. I’ve always been a proponent of doing “less deals, but better deals” rather than more marginal deals. My business model for the last few years has been to cherry pick the cheapest deals in solid locations with the highest profit margins. Doing less deals means having less management headache and overhead while making the same amount from 10 good deals as I would from doing 20 marginal ones. But again, that’s just me. I know it sounds really sexy to have a private equity fund buying a thousand properties.
- BUT NEVERTHELESS:For all of the bashing of this initiative I’m doing, especially from the point of view of the smaller investor, I do think it carries some advantages for the housing market that will allow it to recover faster. Non-distressed or less-distressed homeowners will no longer have to compete with thed istressed, cheaper REO inventory on the market.
- This has been a vicious cycle: Johny Q starts to fall behind on his mortgage and lists his house on the market at close to market value. But his house is competing with a similar house 3 doors down listed by Fannie Mae for 30-40% less. Johny Q doesn’t get any offers and after a few months loses his house to foreclosure. Now his house is repossessed by the lender and is listed on the market at a lower distressed price. Now Mary B falls behind on her payments and lists her house on the market only to find herself competing with Johny B’s former house 30-40% cheaper. Vicious cycle that is driving the market down. Removing a large chunk of distressed inventory from the for-sale market will allow regular homeowners to sell quicker, reducing the overall for-sale inventory.
Final Thoughts: I see this initiative as having the potential to be a positive for the housing market overall, given that the investment entities buying up these assets are able to manage them effectively. But I also see this as limiting the supply of potential rental or rehab/flip projects for the smaller investors, specifically in the areas where the bulk asset sales will be concentrated.