Many investors are viewing the REO-to-Rental program as the second coming of the Resolution Trust Corp.—an opportunity to make big profits from a government-led fire sale.

But at least one nonprofit is eyeing the program as a solution to our nation’s affordable housing problem. Builders of Hope, a Raleigh, N.C.-based developer, has secured a $100 million fund as part of its “Upcycle” program to acquire and rehabilitate foreclosed or otherwise vacant houses into affordable rentals.

The company acts as a one-stop shop, acquiring assets, serving as its own General Contractor and ultimately managing the properties. Its vertical business model gives it a leg up in terms of bulk, scattered-site deals.

“It’s hard for people to really get the returns they’re looking for because there are so many pieces to the puzzle that need to come together, and it’s difficult to orchestrate” says Nancy Welsh, the organization’s founder. “Since we’re handling those pieces in house, it really gives us an advantage. You need slow, patient capital, which we’ve found. You also need to have expertise in rehabilitation and that’s all we do.”

Since it’s creation in 2006, Builders of Hope has acquired about 500 units and 80 percent are multifamily housing. The company has acted as co-developer on low-income housing tax credit deals and, in its brief history, has received about $12 million in Neighborhood Stabilization Program funding.

The organization, which bills itself as “social entrepreneurs,” hopes to acquire between 1,500 and 2,000 units this year—year one of a five-year agreement with its investors. If that $100 million is spent this year, it will be replenished next year, and so on—meaning the fund could end up totaling $500 million.

“As basic and simple as what we do is, there’s really nobody else out there doing it on scale,” says Welsh. “Everybody’s afraid of rehab, particularly the inventory that needs major rehab.”

Fannie Mae Auction
Builders of Hope was founded on a business model of acquiring assets at a very low basis from institutions tired of fishing for bids and ready to cut bait. The company began by working with banks looking to donate properties they couldn’t sell.

Now armed with a $100 million fund, the company is hoping to quickly scale up its portfolio, in part through the federal REO to Rental Initiative. A few weeks ago, Fannie Mae began the vetting process on investors looking to scoop up the 2,490 assets it put on the auction block. Builders of Hope is partnering with “a market buyer” in the auction, which takes place in April.

Though it’s focused on North Carolina, the nonprofit also has offices in Dallas/Fort Worth, where it owns 140 units, and New Orleans, where it owns 86 units. And just this year, it opened operations in Atlanta and Florida—two of the six markets in Fannie Mae’s initial REO-to-Rental auction.

“The market has created a particular dynamic that allows for the appropriate margins to be realized because of the devaluation of the real estate that we’re acquiring,” says Lew Schulman, president of Builders of Hope. “This is a great vehicle for us for entering new markets.”

While the company doesn’t engage in income-targeting, the areas in which it is active come with their own built-in Area Median Income demographics. But like many affordable housing organizations, it is focused on creating mixed-income “workforce housing” communities as a path toward neighborhood stabilization.

Lenders will sometimes donate REO properties and include a demolition budget—and some cities and states are looking for funds to demolish scores of old, vacant stock. To Welsh, that’s absurd. In her view, it’s a simple question of supply and demand. On one side sits hundreds of thousands of empty houses symbolizing the excess of the subprime mortgage industry. On the other side, there’s an overwhelming need for safe, decent affordable housing.

“There’s this really broad misconception out there that we don’t really need this housing inventory anymore: It’s vacant so lets just tear it down,” says Welsh. “That couldn’t be further from the truth. Half of the population is cost-burdened already when it comes to housing expenditures. Now is the time to take advantage of this inventory at a reduced cost and use it responsibly as a nation.”