Some Smart Money is Already Exiting the Single Family Rental Landgrab

Reuters describes how one of the funds that was first to get on the “buy single family homes out of foreclosure and rent them” bandwagon has decided to exit. Ochs Ziff is selling its comparatively small (300 home) Northern California portfolio at a profit. This is an intriguing development given the widespread bullish beliefs about this opportunity (it was deemed to be the best opportunity over the next year at a mortgage/real estate conference I attended a few weeks ago) versus the fact that Ochs-Ziff is generally seen as a savvy operator. The talk has been that there are operators (and I saw one present) who can offer maintenance services on a regional basis to absentee landlords. So why did they exit? It appears the returns weren’t as juicy as they imagined. From Reuters (hat tip Scott):

Och-Ziff Capital Management Group LLC, the $31 billion hedge fund led by Daniel Och, recently told its investment partner, 643 Capital Management, that it wants to exit from the foreclosed homes business..

Earlier this year, proponents of investing in foreclosed homes were projecting a return of at least 8 percent a year from renting them out.

But the New York-based hedge fund is looking to sell now because the returns it is generating from rental income are less than expected and it is looking to take advantage of a recent rebound in home prices in northern California, the sources said. It’s not clear what kind of return Och-Ziff had expected to earn from renting out homes.

Other participants pooh-poohed the Ochs-Ziff exit as a sign of a someone lacking experience overestimating the potential returns and part of a natural weeding-out process. But the part I question (and so did some other seasoned investors I met at the conference) was not just the expense side, as in the cost and difficulty of managing dispersed homes, the exposure to property tax increases, but also the revenue side. Rental markets are hot right now precisely because people who were foreclosed upon still need housing, yet many of those houses have not been turned into rentals, creating a serious demand/supply imbalance. We have pressure on rentals being alleviated both by this conversion process, plus the recent uptick in home buying.

Gary Shilling is admittedly a famed bear; his housing price forecast is the most dire I’ve run across. But his argument about hidden housing inventories is directionally correct:

And as I have indicated before, it was striking at that recent housing conference to see that the servicers in attendance were also skeptical about the housing boom. It’s not hard to imagine that they have a good view of conditions on the ground and still don’t like what they see.

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  1. sleeper

    Conditions here –

    Great time for your couples to buy.

    But for evryone else terrible market in part driven by inability to get loans for fair market value.

    Some activity in the million dollar plus range especially those homes sold at auction.

    Unbelieveably many homes in the $200,000 – $300,000 are going for less than the cost to build of around $ 100 per sqft.
    Adn although some labor costs have fallen materials has not fallen much – this is unusual – in past recessions lumber prices have taken a big hit.

    And there is a missing piece in the employment picture many undocumented workers esp construction have headed back south.

    1. R Foreman

      That’s not unbelievable. If there is no lending then homes will fall to a natural price where people can pay cash for them. Also with so much inventory they become much more commoditized, like washing machines. Shouldn’t try to price things based on costs from the bubble years.

      1. Art Eclectic

        Exactly. If the loan numbers don’t work then the price is too high. Anytime someone whips out that “fair market value” trope I know it’s an industry insider. Fair market value is what a buyer who can close the deal is willing to pay. If there is no buyer at the listed price who can close, then the asset is overpriced.

    2. Moneta

      During your bubble, the Canadian dollar dropped to 63 cents… so you were getting wood products for cheap.

      With the CAD at par, wood is not so cheap anymore.

  2. Cheryl Rose

    People doubling up..going back home to live with their parents,,”cause Mom’s
    cookin is good…” Wow, so Mom is having to make outrageous rental or mortgage payments AND cook for everybody? What planet is this guy from?

  3. ac

    From my own experience and comments of others across the nation it seems the housing recovery is far from universal. It is mainly limited to class A and b residential spaces. The crappy neighborhoods still have problems and prices haven’t gone up much. This meshes with shillings argument about vacancys

    But I don’t see manhattan, south beach or SF prices dropping by 20%.. it ain’t gonna happen BC the well to do are not in trouble and there is little inventory in those areas.

    Location, location.

    1. Wendy

      In those markets (Manhattan, South Beach, etc) you also have the market pressure of not just the well to do, but the global rich buying here for a much cheaper dollar these days. Market forces are distorted by these additional players, but will also probably continue to be for some time.

  4. rjs

    you have a market here that is completely propped up by Fed policy, even moreso than the homebuyer tax credit was a artificial…

    unless you believe that interest rates will stay this low forever, this boomlet too will end eventually…

  5. Jim A

    Oh, I think that this is a good time to get into the landlord business as an owner of single family homes. Certainly in my neighborhood, you can get houses for a price where the rental returns are good enough for that to be moderately profitable. But it doesn’t really SCALE. Owning 5 rentals is pretty much 5 times as much work as owning one. So REITs buying large ammounts of property just doesn’t make any real sense to me.

    1. jake chase

      It depends on the prices the big outfits are paying. Chances are bulk buying from Fannie and Freddie offers terrific opportunities. Anybody know about this?

      1. Carla

        Near where I live, Fannie bought a 4-bedroom house at Sheriff’s sale for its minimum bid price of $40,000, then put it on the market without doing any repairs for $96,000.

        The house has a serious roof leak that has caused gaping holes in the living and dining room ceilings and damage to the hardwood floor under those holes. For 6 months, every time it rained, the water just poured in. Finally the realtor with the listing put a plastic tarp over the roof leak. The asking has been lowered to the 80s.

      2. Yves Smith Post author

        No, as we reported in our earlier post, the Fannie/Freddie bulk buying program seems to be a non-starter, even though the GSEs are still continuing with their pilot.

        None of the roughly 30 different investors I saw speak, including some of the really big funds, seemed interested, and all talked about other channels for buying. They think Fannie and Freddie are too hard to deal with, plus the properties are selling well enough in onesies, that the need for the bulk sales program seems a lot less pressing.

  6. Moneta

    These foreclosed homes will finally hit the market, increasing supply leading to a softening in prices. The writing is on the wall.

    Central bank monetary policy is still playing around with moral hazard…

    There is still lots of money to be made but it all revolves around shuffling paper and assets or making sure you have a greater fool to buy your flips.

    Everybody is hoping for something good to come from this easy money… but how could it? Trillions have been printed faster than ever without any kind of discipline. Moral hazard still abounds. IMO, not much good will come of it because one key piece is being eroded: trust.

    Then we have the growing movement coming from those who think government should just print money and forget about issuing treasuries… throwing the last remnants of checks and balances and market making out the window.

    The USSR managed to keep up the charade for 67 years. It’s scary to think that this show could still go on for decades.

    IMO, we’re in the calm the storm.

    1. KnotRP

      And the ability to short-sale without the IRS counting the writeoff as income ends this year….gonna make for a lot
      of rushed short sales up to the end of December.

    2. midcentmod

      as the banks kick their crap inventories to the fed balance sheet …no muni will get prop tax receipts, fed doesnt pay taxes or upkeep and will hold the ghost inventories for decades if needed to control supply.”if you want less of something let the govi burikrats take control”. will it work? dunno….

  7. Capo Regime


    You have changed your tune since your reportage on the conference. Ochs is indeed a savy operator. And as I noted in a post when you were excited about the concept–nobody yet has been able to effectively manage large swaths of dispersed homes. Very hard and expensive to do. The fellows you cited in your last post on this topic whoe were buying up to 500 or so around Atlanta will get get a surprise and it will not be pleasant. The way this play works is only if their is appreciation, most of the buyers have bought into the assumption that “values have to go up”. If the prices go up well then if may well make sense (depends on holding period right? Prices go up in two years great but if they stay flat for 5 good luck masters of the universe) but if prices do not go up then you are operating a rental company of assets not designed to be rentals and dispersed–very, very hard and certainly a losing proposition. It only makes sense as a flip.

    1. Doug Terpstra

      Yves has not changed her tune. IIRC, she’s always said the foreclosures-to-rentals scheme, extracting blood from turnips, was not likely to end well, especially because granular managment under difficult-to-capture local regulation would be a quagmire.

      The secret bulk (firesale) auctions to vulture capitalists was simply the Obama regime’s latest resort to doing everything it can to float the banksters and hedgehogs at the expense of everyone else (“Let them pay rent”). People often wonder whether to assign O’s actions to incompetence, cowardice, or malice. I’m increasingly convinced that it is not either/or but rather all of the above.

    2. Yves Smith Post author

      Please re-read the post conference post.

      The message was: these guys are all bullish, they say they’ve sorted all the problems out, particularly the operational stuff. I’m not so sure, let’s see.

      Put it another way: if I had drunk the Kool Aid, would I report on one buyer of 300 homes exiting? This would be mere noise.

  8. number cruncher

    SFH are awful investment vehicles unless you have an easy-money fueled asset bubble and/or lots of leverage.

    Cons: illiquid; high transaction costs, high carrying costs; tenant risk; etc, etc, etc.

    It’s easier to put the same amount of $$$$ into high-yield debt.

    trust me….i crunched the numbers.

    1. Capo Regime

      You are exactly correct. Only by believing prices (even nominal ) increase signficcantly in short term or by obtaining deep discounts in purchase can such a thing work.

  9. Jill

    In Toledo there are so many rentals remaining unfilled. This includes single family homes and apt. blocks. I believe this is because people cannot afford to rent, period. If you’ve lost your job, and plenty of people have, you don’t have rent money. It’s that simple. People are living with friends, in church basements, in shelters, on the streets and in their cars. (Article discussing this is linked below.)

    I see this as typical of how kleptocrats “think”. “Hey, if I buy a govt. that causes a bunch of people to lose their job or take a huge pay cut, it’s all gonna work out for me!” Except it won’t. Even a fascist like Ford knew people had to make enough to buy his products.

    So, no, buying rentals in an area where people don’t have jobs and can’t get one is not a savvy business strategy!

  10. Aaron

    Market is still very tight here in the Houston area with limited inventory for sale or for lease. That being said, I still don’t buy into the housing recovery meme. I’ve read too many fact-filled posts here on Naked Capitalism to be fooled by the “this time is different” play.

    Here in the Houston area we have been blessed with the economic boost from the oil and gas sector. As the global Ponzi scheme comes unglued, I don’t see how we avoid a fall in commodity prices. I think that will cool things down in the Bayou City. In West Texas things are still looking like the 80’s boom. Ignorance and easy money are running rampant, and the quality of life for those not working in the oil and gas sector is paying the price. It will be very interesting to see how the imbalances correct back to a sustainable equilibrium.

  11. Tom Stone

    As has been pointed out, SFR’s do not scale as rentals. Here in Sonoma County the low end along HWY 101 has seen prices rise significantly due to “Investor” activity to the point the numbers don’t work. Get above $400k and those investors thin out real quick. I have seen 4 income properties in western Sonoma County this year where the numbers do work (At about $600k) and there are SOME small infill developments where a contractor can do well.

    1. Yves Smith Post author

      I agree, but be warned, the PR is that there is scale when you get to 400+ homes, that 4 to 400 is a dead zone. Just telling you, you’ll hear/read stuff like this.

      There is enough money after this idea and enough supply being held back that the near term price appreciation will probably make this look like a good idea. The investors are claiming they are getting good yields, but 1. They would and 2. It’s too early to say anything definitive about stabilized yields.

  12. LeeAnne

    With inflation planned and announced by monetary policy, there’ll be another housing bubble. That’s their intention -helicopter Ben et al. The obvious opportunities for retail investors is the low end. Inflate to increase bank inventory prices, anyone?

    There’s been one false start with this rental scheme. They’ll be back another day with a few rewritten laws next time.

    Tell me I’m wrong. Because if I am, I haven’t learned a damned thing about US central planning. I’ll be happy to concede and spend more time reading up on antecedents to our growing Police State like support for atrocities and betrayal during the 30-year European war 1915-1945; particularly Vichy France and Nazi Germany.

    The silence you hear about the growing US Police State is the same complicity. Secured by a rising stock market we have the same complicity in the population that prevailed as the ovens were being prepared in Nazi Germany comparable atrocities in Vichy France.

    A sitting President of the United States, Jon Stewart’s acknowledged talent and audience notwithstanding, showing up on a comedy show to discuss the killing of one of our diplomats, an Arabist, not incidentally, is one such equivalent atrocity. ‘Arabist” is a huge detail being intentionally suppressed; a clue to why he was targeted. See Webster Tarpley for that perspective on Arabists serving in the Middle East.

    Connects with the criticism on this blog by a commenter I don’t remember who questioned Chris Hedges’ veracity for explaining that he intentionally did not learn to speak Arabic because speaking Arabic was dangerous in his line of work in the MidEast as a war correspondent and reporter.

    You see, our traitors don’t want diplomats who can communicate with MidEast locals; it would slow down the narrative. Propaganda would be more difficult.

    1. citalopram

      What about all those military men and women who learned to speak Arabic in order to Win Hearts and Minds? Were they all killed too?

      This conspiracy stuff is a hoot.

  13. curlydan

    Too much sweeat equity and sweaty work involved in rentals, especially for investment companies, so it’s not surprising they’re starting to bail. Returns on rentals are kind of like getting dividends…it’s a slow, drip, drip process. The wife and I have had rental housing for 10 years, and it’s a grind watching the funds trickle in.

    I agree the revenue side is tricky and probably causing problems. Getting a good renter requires a face-to-face meetings, credit checks, and intuition. The investment company would likely farm this out to a situation where a third-party gets paid quickly to get someone in the house instead of having more “skin” in the game.

    1. Yves Smith Post author

      Some of the PE guys said they screen everyone in person. The economics support it because suburban renters tend to stay in place longer than people who rent apartments. But I can easily see them abandoning it to improve yields later.

  14. Tom

    You can’t squeeze blood from a stone. How on earth can you expect the vast majority of people to rent a home: pay for the value of a house, cost in maintenance, taxes, utilities and — the big AND – pay a profit in addition. considering high unemployment and a decreasing wage scale. Artificially driving prices up in the housing market will not work – period. It is disgusting to think that flipping properties (ie: driving up prices for the next sucker to come along) is somehow going to benefit anyone except those earning the interest against the re-financing and, is somehow desirable. I thought pyramid schemes were something that was despised, illegal, immoral in our business and culture — after all – the real estate bubble was nothing more than a pyramid scheme pioneered by the securitizations/financial services companies: they knew they would be the schemes sole benefactor. Just the fact that there are millions of houses standing open and millions without places to live ought to tell ya that something is wrong. – Maybe some reading of Progress and Poverty and a clearer understanding of the function of taxes ought be brought into relief.
    Seems that everybody was fraudulently induced by the big players to play the speculative game in real estate (must state that real estate is made of two separate and distinct things – Land and improvements). Land values increase only with the introduction of people and services (roads, schools, electricity, access to work, fire protection people pay taxes for/government), improvements always lose value with the passage of time.

    So what is obvious is that speculators can make money flipping only if they do not maintain improvements (or figure land values will go up fast enough to do some work on the improvements) and capture the community paid (taxed) services which increased the value of their land at a higher rate than taxes and maintenance consume.
    Its as if we are wanting to go directly back to the bubble days where leveraging out the increased value of our real-estate to supplement our declining wages while pushing up the cost of living is someplace we want to go again – crazy.
    In addition, people want to privatize our commons so that an additional toll of profit can be given to a few – nuts.
    Taxation ought to be looked at with intelligence: we want to convert taxation into profit for a few by giving away our already tax paid commons to the private sector so that they can loot more? – welcome to the machine all.
    Forgive me for my rant.

    1. Doug Terpstra

      It’s an eloquent rant, Tom. The insanity of the crony capitalists is self-evident and malicious. It cannot self-destruct soon enough.

  15. Doug Terpstra

    The foreclosure-rental scheme looks like a pump-and-dump op designed to inflate another bubble, and for now it seems to be working, but the smart money will get out early. At one point last summer in Phoenix, with strangely shrunken inventory, 47% of all sales were going to cash investors, freezing out most occupant-buyers who did not bid up. Albeit at much lower volumes, 47% investor-sales are higher than at any time during the peak bubble years. So you now have people bidding up offers again to the poiint where year-over-year prices have popped more than 20% again. Nicely timed for Obama’s reselection. Insane but true.

    Mike Whitney at CounterPunch has a good explanation for this weird state of rigged inventory, noting yet another category called “Phantom Inventory”, a large overhang of delinquent and/or derelict houses that are excluded from the metrics entirely, neither performing, nor in the foreclosure pipeline, or on the market. This looks like yet another desperate manifestation of extend-and-pretend while the “Fed” dumps another $40 billion a month into buying the banks trash MBS for zero-percent gambling loans. What a seamy racket.

    1. Yves Smith Post author

      There are no good #s on this, , there appear to be several ways this goes:

      1. Bank keeps people in home in limbo land. They aren’t paying the mortgage but still owe the property taxes

      2. The bank goes through all the steps to foreclose except actually taking title. In the overwhelming majority of cases, owners leave before a sheriff shows up to evict them. So owners leave, thinking the eviction is imminent, and learn way down the road the bank didn’t take title till much later, they could have stayed in place (per 1) and are still on the hook for property taxes

      3. The bank completes the FC and maintains the house (supposedly, this is a big fiction) and pays the property taxes. But if the loan is not owned by the bank, as in it’s securitized, the property taxes are an advance and are recouped when the home is sold to a new buyer (the bank reimburses itself for all sorts of expenses, then remits proceeds to the trust).

  16. ep3

    yves, don’t forget the “get in/get out” attitude that investors have in today’s markets. no one invests for the long term. it’s all short term. make your money then leave.

  17. dirtbagger

    A bit off topic, but Mr Shillings comments regarding the shadow inventory issue is a tad late as the issue began receiving media attention over 3 years ago. Our business is joined at the hip with the health of the housing market and after slicing and dicing housing data for over a decade, it is very likely that, ON AVERAGE, housing has bottomed. The quick pop in prices many regions are currently experiencing is not surprising.
    We subscribe to the theory that at current prices, there remains an attractive arbitrage opportunity between the price of distressed properties and the cost of new construction. As long as this spread exists(factored in with the dirth of alternative investment opportunities), shadow inventory homes will likely be purchased by individuals or investors as they become available to the market. Absent forward Black Swan economic events, the arbitrage factor will act as the brake for any significant SFR price declines.
    Regarding the low ROI on managed pools of SFR rentals, the only suitable response is – Duh! It only takes a few moments of thought to come up with a multitude of reasons why ongoing management of a SFR rental pool could be very problematic.

  18. Sunny

    Without M to M accounting standards, reports from or comments on the FIRE industry, by the vested interests is always suspect. Pricing model and pricing of risk remain distorted. It is well known that 20% Companies ‘cook’ their eartnings!

  19. BrianSierk

    The property management field, both for REO’s and large portfolio rentals is in a bind, and creating a bottleneck for the entire industry. The large investors are trying to buy services in bulk, with concomitant discounts, but the field is at a point where the craftspeople whoa re capable of the work and volume are not willing to work at the minimum wage prices, and the people willing to work at rock bottom prices are not able to do the work. I was trying to do project management for one of these outfits, and kept turning down work requisitions that we would lose money on, or turning down work that we didn’t have a license for, and these guys would get apoplectic, scream, and fire us, and call back the next week, because they couldn’t get anyone else to do it. Doing it rigth erases the margins demanded by the spreadsheet, and doing it wrong costs you in terms of vacancies. I am not surprised at this development at all.

  20. ambrit

    I got an unhappy robot when I tried to view the Schilling video! “Sorry, but this video is no longer available.” Any alternative links?
    Thanks in advance.

  21. PeonInChief

    What I see, as a mere tenant is this: They bought properties they thought were very cheap and, in many cases, they were. They then discovered that the properties were in somewhat dicey neighborhoods and needed lots of work. Some did the work, some tried to rent them without doing the work. Then they tried to rent them, and could only find tenants by allowing tenants to spend scary-large percentages of their incomes for housing. (One of them allows 41% of gross income.) This means that you have tenants who are precarious from the beginning, and the least bump in their personal economies will put them into rent default. Then come the expenses of evicting the tenant and finding a new one.

  22. Seth Phillips

    The numbers do indeed work. But only in certain locations. We are the guys on the street doing the work for the big funds in Los Angeles. These are the real life, right now, numbers in LA. Yeilds of 6%-8%, purchse price 88%-93% of now market value, rent up time 30 days or less, market appreciating at 3%.

    This is all being accomplished buying houses one at a time. Anyone can do it with the only caveat being the buyer must buy cash to compete.

    The key to success is market knowledge.

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