By Michelle Conlin
When Vena Jones-Cox entered the foyer of the once-grand Colonial-style home in downtown Columbus, Ohio, she stepped onto a wood floor that was so moldy and mushy that it actually wiggled. As Cox proceeded down the basement stairs, they disappeared from underneath her.
“I found myself lying on the floor,” says Jones-Cox, 45. “Staring at a dead rat, by the way.”
The house tour from hell didn’t stop her from making an offer on the place. While she was at it, she bid on some other houses, too. Forty nine houses, actually.
She’s paying $3,000 for each, a bit more than the cost of an Apple Mac Pro. “We’re at a bottom,” says Jones-Cox. “I mean, where else is there to go but up?”
As the greatest real-estate fire sale in the history of the United States rages on, the bulk buy is the dead hot deal of the moment. In some of the most foreclosure-ravaged parts of the country, it is almost as if the housing market has become the new big box store, with investors wiping out whole shelves at a time.
The idea is to arbitrage other people’s misery. With the ranks of the rental class expected to swell, investors can buy houses at clearance sale prices, pour some money into repairs and then take advantage of the difference between their low cost of capital and the rent they receive. Often, they bank cash from day one.
Hedge funds and private equity shops like McKinley Capital Partners started to quietly become landlords by buying up inventory last year. Now Main Street investors are following suit.
“They aren’t just buying one rental property,” says Oak Park, Illinois realtor Kyra Pych. “This is a frenzy. They are loading up.”
Pych has five clients who are in the process of buying more than one condo in Forest Park. Illinois. Units that sold for $180,000 during the boom are now going for as little as $13,500. So instead of putting that money into a retirement account, her customers are putting the cash into homes and renting them out.
In Detroit, the Midwest’s aspiring Donald Trumps are buying bungalows for $500 each. In Atlanta, a group of Florida investors are in the process of buying the remaining 322 units in downtown Atlanta’s swank, Art Deco Atlantic Residences, with room service and maids, near Atlantic Station. The prices start at $180,000.
In California, Waypoint Homes, which has already purchased 1,000 single-family homes, got $250 million in funding in January from Menlo Park private equity firm GI Partners for more bulk buys.
“The floodgates are starting to open,” says John Burns, the founder of Irvine, California-based John Burns Real Estate Consulting. “There’s billions of dollars of capital, of my clients alone, (looking) to invest in single-family rentals.”
Easier to buy
Up to now, the business of buying foreclosed homes was often an old-fashioned affair. They were usually one off deals, and often involved an auction on the courthouse steps.
But the recent news of Fannie Mae’s pilot auction of a bulk sale of 2,500 homes was a signal to many housing experts that bulk buying is about to undergo a quantum change. The coming auctions will not only put mammoth amounts of inventory up for bid; they will also streamline and automate current procedures.
Amherst Securities managing director Laurie Goodman, a major housing bear who expects further declines in home prices, believes such bulk sales are the key to cleaning out the foreclosure pipeline before any kind of housing recovery gains traction.
It is not hard to see why U.S. housing is turning into the new value asset class of the moment. In an analysis of the 325 major metropolitan real estate markets across the globe, the U.S. was home to the top 24 most affordable markets, according to Demographia’s 2012 International Housing Affordability Survey.
No one can argue with the landlord’s seductive math. There are bank accounts and bonds and annuities with their less-than-one-percent returns, and then, west of Boca Raton, there’s the string of newly-renovated two-bedrooms overlooking the golf course, pool and cabana, along with all the people who have been foreclosed on who are now looking to rent.
For $19,000 in cash, investors can pocket $300 a month, after taxes and homeowner association dues, on each, a 19 percent annual return that compares to the zombie yields from most savings accounts.
In Charlotte, North Carolina, Cheryl and Bob Littlefield, who have five children, are already making the bulk buy work.
Two years ago, the Littlefields inherited $200,000. They considered all of their investment options. Like a lot of people, they found the stock market to be a scary, bi-polar nerve frayer. Bonds and bank accounts offered nothing.
Then there was the lovely little house for $16,000. After putting in a few grand, they cleared $600 a month, after taxes. It went so well they bought another house. And then another. Now they own eight and are in the midst of exploring financing to do a bulk deal for several more.
“I know houses, I don’t know stocks,” says Cheryl Littlefield, who estimates rental income covers 40 percent of the family’s expenses, the rest being covered by her husband’s work as a contractor. “I don’t know what to do if something goes wrong with Exxon Mobil. I know what to do if something goes wrong with a house.”
Can’t buy, better rent
The cruel irony known to every aspiring homeowner is that there has never been a better time to buy a house. It is cheaper to own – based on the monthly payments at the current interest rates of under four percent – than it is to rent in just about every market across the United States. In Phoenix, for example, it is 21 percent cheaper to own than it is to rent. In Minneapolis, it is 28 percent, according to Burns.
But most who aspire to the property ladder are shut out of the homebuying opportunity. They have no access to credit. They are crushed by record-levels of student debt. A greater share than ever of their paycheck is already going to housing costs, according to Harvard University’s Joint Center for Housing Studies.
That’s where bulk buying comes in to play.
Often, the buyers use the cash they would have otherwise put in a retirement account and put it in houses. People can also use their individual retirement account funds to invest in real estate for use as rental properties.
There are no official statistics on the growth of the bulk buy. But no less than Warren Buffett recently said in a CNBC interview that he would like to “load up” on a couple of hundred thousand single-family homes because it is a “very attractive asset class now.”
Buffett said what held him back was that the business of being a landlord, of managing the homes, was “enormous.”
As it turns out, one no longer even needs to be handy thanks to a new cottage industry of companies that has grown up to manage virtually everything for a landlord, down to the art of hectoring the renter for the rent.
Property management outfits have popped up all over the place, from the high-end down to online companies like gorenter.com, which charges as little as $25 a month.
Bubble off the bubble?
That is not to say buying houses in bulk does not pose steep risks. Morgan Stanley analyst Oliver Chang christened 2012 as the year of the landlord. But other analysts, like Bank of America’s Michelle Meyer, expect house prices to fall another 7 percent through 2013.
And if the European debt situation deteriorates, or some other economic variable jolts the economy into another recession, all these aspiring property moguls will find themselves with too many vacancies and too much leverage, especially if they have borrowed heavily to refurbish. In other words: another bubble in the making.
That’s not to mention the deals that, no matter how bullet proof they may seem at the time, can still blow up in your face. Just ask all those guys from Orange County, California, who bought in bulk during the boom. Instead of turning into real estate barons, they went bankrupt.
Jones-Cox, she of the 50 homes, has been involved in real estate in Ohio since the late 1980s. She had never looked at bulk buying until last year.
Before she bought her latest homes, she toured each one. She says the condition went from “bad” to “dreadful.” “Some of them had no walls, no windows, no furnace, no wiring, no sink,” she says.
Her plan is to rehab each house for about $20,000 a piece.
She has studied the housing stock in the neighborhood. She says most of it would fit right in with the Third World. She has also studied the demographics and how much people are currently paying for rent. All the math works in her favor, she says.
She doesn’t see how the play could go wrong.
Then again, Jones-Cox concedes, she never thought she would ever be able to buy a house for $3,000, either.