the For-sale housing crisis was a boon to the apartment world, as many owners saw their occupancy rates rise in the wake of the single-family meltdown.
But to some companies, the troubled for-sale market wasn’t just another demand driver in a general sense—it was a very specific opportunity, as well. A new breed of investor is challenging conventional wisdom by buying up scores of unsold single-family homes and renting them out.
These firms, which include Waypoint Homes, Builders of Hope, and American Residential Properties (ARP), have been busy over the past year buying up pools of foreclosed homes from lenders and turning them into rental properties with unique leasing structures.
Sometimes, it’s a two-year lease with an option to own, and sometimes it’s accomplished with custom structures, but the aim is to minimize turnover in these empty homes, which are bought at a steep discount.
How feasible is this market, and what are the chances of the business model lasting through the next housing cycle? Longevity isn’t exactly the point, according to Doug Brien, co-founder of Oakland, Calif.–based Waypoint, which has acquired 1,800 homes since 2008.
“We can just sell the homes and still make a profit if homeownership does start to go back up and Renter Nation collapses,” he says. Brien acknowledges that there are challenges unique to this asset class, particularly the scattered-site nature of such a portfolio.
“You need technology to pull off the high-speed cherry-picking required to manage these kinds of assets,” says Brien. “Without a strong technology component, it wouldn’t be a feasible business for us.”
To make sure things run smoothly, Waypoint uses revenue management software at each site and gives employees mobile devices to track metrics at each property, allowing Brien and his team to stay connected and organized.
There are other critical factors, too. Laurie Hawkes, president of Scottsdale, Ariz.–based ARP, says no two properties are the same and that, often, each needs to be treated individually.
“Family circumstance plays the biggest role in our business,” says Hawkes. “You can expect to see 20 to 25 percent turnover on these properties. It’s very important that you have an intimate knowledge of each market.” ARP is very bullish on the business model and plans to take the company public next year.
As for the REO-to-rental market’s long-term potential, it’s still a wait-and-see process. But the opportunity will likely expand in 2013, as Fannie Mae, Freddie Mac, and the FHA look to unload vast portfolios on the market.