Empty houses that once pock- marked middle class neighborhoods in Jacksonville during the recession are being snapped up.
But not all of the new owners are families or small-time landlords — some are Wall Street executives.
Jacksonville has been hit with one of the nation’s hottest financial sector trends — REO-to-rental investors, where hedge funds, private equity firms and banks raise millions in capital to buy foreclosed or distressed homes in bulk at bargain prices, rehab them and turn them into rentals.
The properties earn cash flow for the owners as prices appreciate.
It’s a new investment model that has filled a financing void left by banks, hobbled by tightened lending standards.
“This is the last chapter in the healing process,” said Daniel Blanchard, executive vice president at Ewing Real Estate, a Jacksonville investment bank involved in REO-to-rental deals. “Banks are finally getting rid of trashed properties and are coming to grips with houses they have been slow to take back and which have sat empty for years.”
It’s a solution that can reap benefits for other local businesses, as well. Builders can perform rehab work on the properties investors purchase.
And, when previously vacant homes become occupied, real estate firms benefit from stabilized neighborhoods and recovering markets.
New way to invest
The institutional investors took Jacksonville by storm in 2013.
Sales figures show investor purchases of single-family homes jumped to roughly 19.25 percent in July 2013 of all that category’s sales, up from just under 4 percent in January 2011.
The trend may flatten a bit this year, with January numbers dipping to 16.93 percent.
One national investor, Blackstone Group LP, has said it will dial back its home acquisitions by 70 percent in 2014.
Blanchard thinks the cycle for others isn’t over.
“I think we’ve got maybe two years left,” he said. “Blackstone bought up the cream of the crop — the country-club homes. There are plenty of others.”
Institutional investors in Jacksonville’s market today include national leaders Blackstone, under its subsidiary, Invitation Homes, which is based in Dallas; and American Homes 4 Rent of Malibu, Calif.
Other national players active in the local market are New York-based Fundamental REO and Morningside Funding LLC of Houston.
Homegrown investors have also emerged, including JWB Real Estate Capital LLC and SunCoast Property Management LLC, both of which purchase real estate directly or through affiliate companies.
Mom-and-pop landlords become major players
SunCoast owner Chris Funk said his company’s assets today include more than 900 properties, worth about $60 million.
“It caught on because prices became so depressed, you could buy properties and renovate them for significantly less than the replacement cost of building new,” he said. “You’d be in them at a low enough basis, you’re getting a nice return on your money from the rent.”
Funk’s company started as a mom-and-pop landlord, buying distressed properties to renovate and rent.
When he and his partner and father, Carter, couldn’t find a suitable property manager, they formed joint ventures with other investors to finance purchases and manage the properties themselves.
In 2013, they sold a portion of their homes to Blackstone. Today, Invitation Homes is preparing to raise an additional $15 million in private equity for another round of home buying.
It may seem like the kind of competition that could squeeze traditional landlords or owner-occupants out of the market. But, Funk doesn’t think so.
“There’s so much property on the market because of the recession, I’m not sure that there would have been enough mom and pops to make a dent in it,” he said. “The addition of private equity funds and large institutions into this market, I think, has really helped to start the recovery.”
Dan Immergluck agrees. He is a professor at Georgia Institute of Technology’s School of City and Regional Planning and a national research expert on how foreclosed properties affect neighborhoods.
“There’s evidence in markets where they’ve moved in quickly, prices turned around,” Immergluck said. “They were falling, and they either stabilized or they started going up. I think they’ve helped put a floor under properties in some places, and I think that has some positive impacts.”
Why it works here
Jacksonville seems to be tracking with that trend.
In 2013, when the REO-to-rental investors bought heavily in Jacksonville, overall home sales increased 21.7 percent to 21,883 and the median home price increased 15.3 percent to $153,400.
Institutional investors first began aggressively buying single family homes nationally in 2011 after a paper put out by the Federal Reserve lent credibility to the idea.
The paper said banks were having trouble repurposing REOs and called for innovation to get large-scale private investment in the properties. Investment mogul Warren Buffett also endorsed the idea.
Within six months investors were buying heavily in Phoenix, Las Vegas and Oakland. As markets tapped out, they moved east, to places like Atlanta, Tampa, Charlotte and eventually, Jacksonville.
REO-to-rental investors aren’t in every city, Immergluck said. They target places that have certain common characteristics.
Older cities like Cincinnati and Cleveland haven’t seen much activity, he said. Also, investors have steered clear where market confidence is weak, or where home prices are still going down.
The big investors save money over the mom-and-pop operators by doing very standardized, cookie cutter renovations, Immergluck said.
“That’s not a bad thing. It’s is the way multifamily grew,” he said. “They developed standard apartments and they put the same fixtures and the same bathrooms in them and they bought refrigerators in large quantities.
Similarly, hiring a contractor to do a standard type of renovation for 100 houses would probably net a lower price, he said.
What’s next for investors?
What the investors will eventually do with REO-to-rental homes is not yet clear.
Last fall, Blackstone took a group of its assets and securitized them.
“They basically took the cash flow from the houses and they issued a bond, and they raised money on that bond to buy more houses that they retained ownership in,” Immergluck said.
Some companies have said they plan to earn their money on operations, meaning rents, while others have said they will be more speculative, meaning they intend to earn more of their money on the sale of the properties.
For now, Blackstone seems content to earn rental income for its investors. Its acquisitions phase, though, is winding down.
Rising home prices have diminished returns to the point where it no longer fits the company’s investment criteria, said Andrew Gallina, spokesman for Blackstone’s Invitation Homes.
“We think Jacksonville is a great market and it’s one we believe in,” Gallina said. “But, this opportunity has moved on, and we are at the very tail end of this process.”
In Jacksonville, the company expects to buy 70 to 90 percent less property in 2014 than it did in 2013, he said.
The company, he said, has followed the same business model with its residential portfolio as it has used with other investments, which historically have been large-scale commercial projects.
“We’ve seen this as an opportunity to build a single-family-home platform that never existed before, in a market that has up until now been dominated by mom-and-pop buyers,” he said. “It’s been a tremendous opportunity for us to professionalize the single-family rental market on a national level.”
By contrast, Funk still sees plenty of property he wants to buy.
“Our properties tend to be older and need more renovation,” he said.
Checking Invitation Homes’ web-site, an interactive map of houses for rent shows the company has targeted newer properties on the “doughnut” part of Jacksonville – the ring just outside the beltway.
It’s a focus that has given companies like Funk’s plenty of room to steer clear of the competition.
SunCoast buys 1,200- to 1,250- square-foot properties, Funk said, with rents averaging $850.
The price point yields profits that are still attractive, when compared to other investments.
“The beauty of this model is you earn money while the properties are appreciating,” Funk said. “The yields are good enough that people are going to want to get the houses for years to come. They won’t be selling them any time soon.”
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