Private Equity and the Crapification of Rental Housing: Questions from a Newbie

By Lambert Strether of Corrente.

I’m going to venture into a financial topic once again, by trying to imagine what would happen if Private Equity (PE) infested the housing market in my own small town. William R. Black explains PE’s modus operandi to Real News Network’s Jessica Desvarieux in this video:

Here are the key excerpts from my perspective as the smallest property owner* imaginable:

DESVARIEUX: So, Bill, can you just explain what’s happening here in the rental market? Have we actually ever seen this before?

BLACK: … One of the things that happens when you have private equity funds purchase large numbers of homes is about the first thing they’re going to do is go to the city or the county and demand a reassessment of those homes at a new, lower market value. And so one of the first effects of all of this tends to be, in the local community, a substantial reduction in tax revenues. …

DESVARIEUX: We should also note, Bill, about where they’re actually making these home purchases. The largest private equity firm in the world, Blackstone, their rental investments are really clustered in the areas hardest hit by the housing crisis. In states like Florida and California, investors account for about 33 percent of total home purchases respectively. …

BLACK: [W]eird things began happening, where people basically couldn’t buy homes. And they couldn’t buy homes because these professional investors were getting there first with all-cash deals. …

And so in the markets where, as you say, they’ve chosen to cluster–which, by the way, are also the markets which tended to have the biggest speculator frenzy** during the bubble phase. And this is not an accident, because often when they’re buying up the homes that were already constructed, what they’re doing is able to buy for a very low price from these professional speculators who were wiped out, rendered bankrupt when the housing bust occurred. So they can buy very low. They can use that low price, as I said, to then demand a reassessment of the property and a reduction of the taxes.

And then they can, you know, do some things that are constructive, after all. They can try sprucing up the place and actually providing rental housing.

From the 30,000-foot level, it looks to me like the FIRE guys are autocoprophagous — they make the crap they eat. (In another context, this pattern would be called a “self-licking ice cream cone.”) That is, the FIRE guys drove the prices up through speculation, sold the houses high, crashed the market, and bought the same damn houses*** low (extracting fees at every stage of the cycle). Sure, some individual FIRE guys got caught standing when the music stopped playing, but as a class, they did fine in the crash, just fine, so fine.

Also from the 30,000-foot level, it looks to me like the PE guys are using my own money to destroy my minuscule livelihood as a rentier. My profits, such as they are, are taxed as income; theirs aren’t. And even if the PE guys weren’t bailed out — readers, were they? — Flexian Treasury Secretary Geithner sure went easy on them. Easier than my town goes on me.

So, the questions I’d start asking:

1) Did the town or the State help bootstrap the cycle of crapification by allowing the speculators to get away with MERS-style (i.e., fraudulent) chain of title transfers, instead of working through the town office?

2) Does the town or the state help feed the cycle of crapification by providing PE rentals with services that they don’t provide local landlords? For example — this is a college town — police services? How about snow removal? How about utilities like sewerage and utilities?

3) If and when PE “spruces up” the properties, does the town feed the cycle of crapification by doing code enforcement on PE rentals with less diligence than they do with local landlord rentals?

and lastly:

4) If and when PE demands a lower tax assessment on the rentals it owns, what happens to the assessments of local landlord?

It’s the last question that’s the real Sophie’s Choice, and I don’t have an answer for it. In my own small town, we pay higher taxes for a “quality of life” that we enjoy, which mainly means a decent school system. So what do we do? Lower the assessments for PE, because some revenue is better than none, maybe — but knowing all the while that PE is going to crapify the units, so the assessment is likely to stay permanently low — leave the assessments the same, so PE takes a hike, or risk a tax revolt by raising the assessments on local landlords? Not an easy choice and I don’t envy the town Council.

Black has a way out of the Sophie’s Choice, but it’s not on the table:

The right way would be to take this away from the speculators and the vulture capitalists and have the government doing this and the community capturing any of the profits from the restoration.

Indeed. And the right way to have done it would have been for the localities to have retained control over the land title system, so as to prevent securitiztion in the first place. I’m not sure that issue can ever be put back on the table, however.

Readers, what questions would you suggest? And what would your policy recommendations be? Because right now — in the the hypothetical case — the town either loses its quality of life, or I get out of the rental business because I don’t want to crapify my house, or both!

NOTE * Tenants, no doubt, have their own issues with PE rentals.

There’s no escaping the stench of raw sewage in Mindy Culpepper’s Atlanta-area rental home. The odor greets her before she turns into her driveway each evening as she returns from work. It’s there when she prepares dinner, and only diminishes when she and her husband hunker down in their bedroom, where they now eat their meals.

For the $1,225 a month she pays for the three-bedroom house in the quiet suburb of Lilburn, Culpepper thinks it isn’t too much to expect that her landlord, Colony American Homes, make the necessary plumbing repairs to eliminate the smell. But her complaints have gone unanswered, she said. Short of buying a plane ticket to visit the company’s office in Scottsdale, Ariz., she is out of ideas.

“You can not get in touch with them, you can’t get them on the phone, you can’t get them to respond to an email,” said Culpepper, whose family has lived with the problem since the day they moved in five months ago. “My certified letters, they don’t get answered.”

Most rental houses in the U.S. are owned by individuals, or small, local businesses. Culpepper’s landlord is part of a new breed: a Wall Street-backed investment company with billions of dollars at its disposal. Over the past two years, Colony American and its two biggest competitors, Invitation Homes and American Homes 4 Rent, have spent more than $12 billion buying and renovating at least 75,000 homes in order to rent them out.

Talk about crapification. At least when a landlord is local there’s some prospect of bringing shame to bear, even if you can’t get them on the phone.

NOTE ** I’m surprised Black uses the term “speculative frenzy,” which seems anoydyne compared to “accounting control fraud,” which is what the frenzy was.

NOTE *** Never mind that they’re crap houses. They’re an asset class, man! Anecdotal, but back in 2007:

I was looking for information on insulation when I ran onto these two real world quotes:

Can anyone weigh in on something I’ve taken recent notice of and am concerned about… Two townhouses undergoing renovation and one new multiple story apartment building in my neighborhood have used what looks like typical styrofoam (white, not blue, which I understand is construction grade) on the facades underneath the stucco. At one site I watched as a man cut the styrofoam into the decorative lintels, whacking off large parts and shaving down little bits to achieve the shape he wanted. Then the styrofoam was attached to the building and covered with stucco.

As Groucho Marx said: “You can even get stucco. Oh, boy, can you get stucco!”

The end result looks great, but I was shocked by the method and concerned on several fronts. Is styrofoam durable, or will these homes soon look shabby if the materials don’t hold up. Is this another example of cutting corners on materials and workmanship, decreasing property value in the long term? And finally, isn’t this an environmental no-no? I’ve heard styrofoam shouldn’t be cut or broken for environmental concerns, but I don’t have any info to back up that lore. Can anyone weigh in?

Styrofoam facades… Is that a great metaphor for what Our Betters have done to us with the mortgage meltdown, or what? And this:

A developer is constructing an out-of-context multifamily building nearby in Sunset Park. I’ve seen the plans which call for five space heaters and five water heater with a total load of 1 million Btu’s. This is for a 6,300 sq ft structure.
I took a look at the construction yesterday and apparently they are installing zero insulation in the walls. Is that legal, or smart? I thought R-13 was needed in walls in this clime?

Update: Yves here. Lambert ran this post without consulting me. I can answer his questions.

1. The towns have been decidedly unhappy about the loss of revenue due to MERS and many have sued. Save for the ones in states that have recording statutes like Oregon, they’ve lost most of these suits.

2. Almost certainly not. These properties are dispersed among privately-owned homes and municipalities are not able to discriminate for or against them.

3. Too early to say, but code enforcement pretty much doesn’t happen for existing single-family homes. Look how banks have in many locations done a terrible job of managing real estate that they own (due to them buying it in at the foreclosure sale). Homes have been stripped of copper and appliances, and have in some cases been used by squatters or drug dealers. Yet the local authorities have pretty much never acted against the banks, even when the neighbors complain. The PE firms are not going to let the properties be stripped. Their level of management would be comparable in the bad cases to a negligent owner, and unless you have clear evidence of a fire hazard, local authorities are content to let people wreck their own properties.

4. The only case where this has happened on a large scale is Magnetar with Huber Heights. The town was very unhappy with the request to lower assessments across their portfolio and gave them only about 20% of reassessments they’d requested:

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. Aaron Layman

    I believe the crapification extends into the rent-to-own space as well. I was reading about a new entrant into our market which wants to buy 60 homes for rent-to-own. I went to the company’s website and found it was formed by some “experienced private equity investors”. I credit Yves’ wonderful sight for being able to look behind the glossy veneer for reasons as to why deep-pocketed individuals might be so keen on helping credit challenged borrowers….

    1. PeonInChief

      There is not a single tenant activist in the land who wouldn’t say, if a tenant asked if rent-to-own was a good idea, “No, no. Don’t do it.” In the vast majority of cases, the tenant never exercises the option and loses all of the deposit money and additional rent paid to the landlord. During the crash, many owners tried to get tenants into these schemes, and then let their properties go into foreclosure. The tenants were screwed. I wrote about this at the time, and received an email from a tenant who had been offered the “opportunity” to rent a rent-to-own property. He checked out the property and discovered that the lender had already filed a Notice of Default.

      1. Aaron Layman

        I wonder if there’s a database somewhere with stats on how many times the option actually gets exercised on rent-to-own deals in the U.S.? That would be an interesting database.

        By the way, how does one go about “developing skills as a curmudgeon”? I suppose paying attention to anything going on in the world of finance these days will suffice. LOL!

        1. PeonInChief

          There’s no database, as these are private agreements, and if the tenant gets a mortgage, the option money is subtracted from the sale price. I would suspect, though, that few tenants exercise the option. Tenants who are likely to do this often have credit problems, and a couple of years won’t cure that. That’s probably the most common reason the tenant doesn’t purchase the property. The second major problem is that the tenant and landlord agree to a purchase price a couple of years in advance, and the property doesn’t appraise for that price.

          As for my developing skills as a curmudgeon, I barely have to work at it these days. I just read the newspaper and…

  2. Jim A

    Well big companies probably CAN do a good job of getting local governments to adjust their “sticky downward” assesments to align with the prices driven lower by the massive overbuilding of housing. But the business model of these PE firms looks likely to fail. The’re cr@p landlords with little knowledge or interest in how to maintain properties or identify and keep good tenants. The “get in and get out” mindset of these guys is antithetical to the qualities that one needs as a landlord. No matter what their current “game” their idea is ALWAYS to buy in cheap, do the minimum amount of cosmetic fixing necessary to disguise the problems and hide debt and then sell out. They have managed to buy RE cheap, but…They have concentrated in areas where the bust was most extreme, because that was where it looked like the “bargains” were. But unless they start bulldozing inventory, the bubble driven oversupply of housing will keep prices down for a decade or more in exactly the areas that they are concentrating in. “Much cheaper than it used to be” does NOT imply “much cheaper than it is going to be.” So those bargain prices that they paid are likely to prove to be an illusion. The current plan to “securitize” the rents from these houses is likely to prove unsuccessful in the long term because they’re such cr@p landlords. They simply DON’T have any real skills in running a business, just in “deals” and “turnarounds.” And that is the opposite of being a landlord.

    1. Jim A

      And to expand a bit, in the face of a credit contraction, their ability to pay cash DOES give them some advantage over owner occupiers. So they have probably purchased at reasonable prices. But poor landlords have high vacancy rates and deteriorating property. And I have seen NOTHING that makes me think that these guys are likely to be even minimally competent at managing property. Indeed, occasional blather about “economies of scale” indicate to me that they DON’T have any real understanding of the SFH market, where there are very few economies of scale to be had. The only real way for them to save money on maintenance is to do less of it. Which means that the value of the property will decline AND that they will have a difficult time keeping tenants in those houses. They got in at a good time and at a good price…But I’ve seen no real plan for getting out. I suppose that it’s POSSIBLE that after they securitize the rents, they can get an actual effective management company to run these rentals, but in their perpetual search for the lowest price, I just don’t see that happening. Usually, effective property management firms charge enough that there ISN’T much profit left over, so those aren’t the guys that they’ll hire, since they’ve already banked the profits based on impossibly optimistic vacancy rates and maintenance costs.

      1. Brooklin Bridge

        For the most part I agree with you, but I think these investors do have a distinct advantage of scale (if they choose to use it) for renovation and maintenance even on single family homes at least compared to the small rental owner who might have one, two or three homes to rent for instance.

        1) They can have their own electricians and plumbers (or dedicated contractors) which can give them up to a 50% savings over the little guy hiring the local independent each time he needs one. That adds up fast.
        2) Much the same logic, contractors they use will give them much better prices for volume if they know it means steady work.
        3)It can mean better prices for materials
        4) More control over code inspectors. This is a given if you own all or most of the properties that a given inspector covers for instance. The “control” does not have to involve corruption (the fat envelope as they call it) though I imagine the line would be pretty thin at times, but could simply result from the fact that your contractor or you would be better suited to have a dedicated professional available to be aware of and handle code requirements for all job sites. Code requirements have positively exploded over the last five years and I’m pretty sure there is more to it than simply an angelic desire to keep people safe. The small mom and pop landlords, not to mention small contractors, simply can’t keep up with it and this gives a huge advantage that translates to hard savings in time and do-overs for the big guy.

        Just to touch on a few.

        1. Jim A

          I’d bet that they get a slightly better bargain by having a deal to send all the plumbing jobs to one firm. In fact I’d be surprised if they didn’t, that sort of thing probably appeals to their “dealmaker” train of thought. But I can’t imagine them actually HIRING dedicated plumbers or really having any idea just how many plumbers and general contractors to hire per 100 houses. THAT strikes me as the sort of “running a business” that is anathema to these guys. But management companies already do that sort of thing, and the efficiencies of scale aren’t nearly as good as in multifamily housing.

          1. Jim

            Most contracting firms I know of (general, electrical, plumbing, etc.), at least in this part of the country, contingency hire, either by using subcontractors or via an “on-call staff”, who work a variable number of hours, and often for multiple companies, depending on how much work is available. Business has been so bad, for so long, nearly all of the fixed costs have been wrung out of these contractors’ operations. They’re going to want to charge time & material for everything, leaving close to zero opportunity for the PE guys to get “bulk discounts”.

          2. Yves Smith

            They absolutely do. That’s why they concentrate in regions (200 homes in one area) and they hire a contractor that they’ve vetted extensively to do the work. You can imagine that a builder/renovator might like to have 30-60% of his business be steady work rather than rely on building cycles and seasonality.

    2. j gibbs

      It depends on what you consider success. For these guys, success is raising the dough to buy the houses, charging fat fees to investors on the gross and on the net, keeping the Ponzi scheme going for a few years and letting the investors wake up to a portfolio full of dreck.

      I wonder what grade of mo ron is investing in these deals. My bet would be municipal pension funds.

  3. ambrit

    In reply to Jim above; yes, some municipalities are bulldozing the more run down ‘excess’ housing capacity. All while ‘hobo jungles’ are making a big comeback in the out of the way places. Check up on the local homeless shelters’ occupancy rates, and the trend becomes clear. Some of the better shelters are dedicating space to entire families now. It’s not just the odd misfit or down and outer anymore.
    As for countermeasures; local politics is still our only real hope for push back. Local politicians are still liable to react to shaming and grass roots tactics. A perverse economy of (small) scale applies. “Throw the bums out” is viable at that level. Failing all else, the occasional murderous mob always gets their attention.
    Many local housing problems have been ameliorated by the judicious application of the local press. A local and quasi independent press is the best tool for Progressivism. Local elites are not all marching in lockstep. That is the real danger of the wave of consolidation sweeping Americas town and city newspapers and now, television stations. Remember, newspapers, when they were the only game in town, ( think “Comities of Correspondence,”) were the basis for real and vigourous debate about social questions. Each major faction had its’ own propaganda organ. Local papers, being local, can focus on issues that have an impact on the general public within said papers distribution area. With the internet era, locality is said to now be defined by the kind of media one uses. Well hello! I thought locality had some faint relation to ones’ actual physical place in time and space! The scene in “Being There” where Gardner tries to change the channel to eliminate the young toughs bothering him on the street comes to mind. Peter Sellars clicking the channel remote at the hoods is both hilariously funny and chillingly scary at the same time.
    Another major tool for good or evil at the local level is the Planning and Zoning Department. Yes, it has all of the drawbacks of a small scale local political institution: cronyism, corruption, parochiality. These attributes though, can be a plus as well. Imagine if you will, a zoning board meeting where a hundred vocally p—-d off locals show up to make their voices heard. Or, as has been done in places like Atlanta, a big crowd of citizen activists show up to demonstrate actual physical solidarity for someone being oppressed. These may be small scale actions by themselves, but when multiplied across the country, they become a movement. When the Powers notice this and react, the game is half won. The Occupy folks may have been suppressed with an efficiency the old Geheime Staatspolizei would have envied, but their legacy is alive and well. Anyone here think that much of the financial reporting surrounding things like MERS, predatory banking, or financial re-regulation would have occurred without the Occupation? If we do inhabit a world defined by publicity and notoriety, then those are the tools we use. All it takes is a few brave souls, and they are out there, they are always out there, to stand up and make a big noise at the local political level, and the ball gets rolling.
    Finally, the question of scale comes into play. Looking at the successes of the Far Right Religious in places like Texas, the main thing to learn is the necessity for planning and perseverance. Being insular and inward focused, religious groups tend to be easier to organize and ‘guide.’ Thus, the need for common ground for organizing disparate groups of people. Everyone is connected. Find the common thread that binds us together, and the job is almost done. (This calls up another strength of the Religious; their focus on having Mothers stay at home to raise children. As has been shown elsewhere, stay at home Moms have a disproportionately large effectiveness in organizing on the local level. Unemployed Moms and Dads, if properly coached, can have a similar effect.)
    It may be a Truism, but it is so for a reason: “All Politics Is Local.”

    1. A Real Black Person

      When was the last time the devoutly religious stood up to the Investor Class in recent history ? They’re more concerned with cultural issues, not economic ones and they often divide over ethnic lines. There is NO common thread that unites ALL of Americans that isn’t concerned with “making money” ,atm, otherwise our politics would not be so polarized

      1. ambrit

        Dear Real;
        Ah, but there’s the rub. We have been fooled into thinking that “Money” rules all of Known Space. This itself is a common unifying thread. Another is basic human nature, both good and bad. Just as greed and its’ sycophants are all inclusive and equal opportunity, so is compassion and the desire for justice. Not what they say, as the saying goes, but what they do. Being a child of the mid twentieth century, I have a sorely tried, but basic belief in the perfectibility of humankind. Teach that one thing alone, and you’ll have legions of fellow activists. Don’t give up. That’s what the elites of every age desire the most.

      2. Propertius

        There is NO common thread that unites ALL of Americans that isn’t concerned with “making money” ,atm, otherwise our politics would not be so polarized

        I don’t think you can adequately explain the polarization in American politics quite so simply. I think there’s been a (very successful) deliberate attempt on the part of the elites to use wedge issues, stereotyping, and caricature to fracture the population and prevent intelligent discussion.

        1. hunkerdown

          Indeed they have, but it’s also worth looking at the commonalities between them. In particular, both partisan myths specify peaceful supplication to one’s “betters” as the peons’ right and proper relationship to the means of production (including political production), which is a fine way of prejudicing the population against direct action (“if both sides believe it, it must be true”) and re-coalescence.

  4. cnchal

    Crapification – What an apt epithet for our times.

    Question 1 – yes

    Question 2 – yes, in a roundabout way. PE gets some of it’s money from the pension funds of municipal and state employees. Your taxes pay for those pensions. You are being charged for the crapification of your own neighborhood. Has the local police pension fund knocked on your door asking to invest in your rental property?

    Question 3 – yes. Strict code enforcement on properties that the code enforcers have a financial interest in would be like shooting yourself in the ass.

    Question 4 – Your assessment will go up. Crapification is profitable for PE firms, so they crapify everything they touch.

    Look at the background of your local politicians. If they are not a lawyer, there is a significant percentage of them that are in the real estate business, or have close ties to it.

    Stucco over styrofoam – total crapification that added $50K if not more to the price of the place.

    Crapification – an excellent description of the political and financial system.

      1. cnchal

        I know. As soon as you read or hear it, instinctively one knows what it means.
        Crapification or crapify, it just rolls off the tongue, fun to say.

        I can just hear the Blackfart bigwigs in their offices. “Hey we are gonna steal them houses cheap, and crapify the hell out of them and sell our crapified investment toilet paper to the dumbest schlubs around”.

        Crapification – spread it around.

        Thank you Yves for this great new way of framing reality.

      2. McMike

        Not to take away from Yves’ excellent rant, but Google says that people have been kicking that word around since at least 2006.

        1. Robert Frances

          The term crapification has been used on SF chatboards for a number of years, usually associated with the hundreds of slap-and-dash $1 million condos with boring exteriors going up in a city otherwise noted for interesting architecture and refined building materials. The term is especially prevalent in the comments section on the website linked below.

          The map in the linked article may indicate what will happen to many of these housing units when it’s time to flip them for the “exit strategy.” Homeowners usually pay more for a vacant building that has been cosmetically updated, which means many of the tenants in these investment units will be displaced one day.

    1. Brooklin Bridge

      Good summary. Mere common sense and what’s been going on suggests this is accurate if not dead on.

    2. fajensen

      Styrofoam will add value to the upcoming FIRE! Build the house with flammable materials, cash in on the fire insurance – maybe the lease includes a life insurance on the tenants that covers the rent too?

  5. A Real Black Person

    ” cutting corners on materials and workmanship” In MOST sectors, that’s probably a necessity because that is how workers typically improve their productivity. Without constantly improving productivity, most workers and businesses face a future of being unemployed and being out of business in our fast paced financialized and industrial economy.

    Productivity and quality control I feel are at odds. How much can output increase before quality takes a hit…and is that more acceptable in a financialized economy concerned with j increasing output (keeping their jobs or businesses afloat)?

    To be productive these days its seems like workers and employers have to “cut corners” Sometimes, they get caught. Subway stopped adding azodicarbonamide as a filler for the bread in its sub sandwiches. Azodicarbonamide, a polymer ( another oil-derived plastic), really, has been linked to to “respiratory issues, allergies and asthma” for individuals at workplaces where azodicarbonamide is manufactured or handled in raw form, by the Word Health Organization according to Wikipedia. The science is interpreted in a fuzzy manner. Some places are lenient with its use, in food, like the U.S., and some places have banned it. Michelle Obama had recently praised Subway for its healthy diet…without knowing much about the chemical engineering behind its mass-produced products. I wonder if Subway’s productivity will slide as a result of this or will they substitute Azodicarbonamide with another polymer.

    Getting back to the main content of this article, why do investors think that investors-led renting will create better results than McMansion mortgages if the investors make the same mistakes of failing to look closely at local market conditions? Low prices may indicate low wages, high unemployment, etc.

  6. Benedict@Large

    In south Florida, Styrofoam is mainly used for ornamental trim on luxury homes. (See those beautiful Greco-Roman columns framing the front entry? Except for load-bearing, Styrofoam & stucco.) As far as I’ve seen, it holds up quite well. As for construction grade, that should be verified via inspection (although who inspects the inspectors?) As for its use on walls, my only first-hand experience with that is my brother’s house (Phoenix), which is well over 20 years old, and I’ve never seen any damage to the exterior finish. That said, I infinitely prefer concrete all the way through. I just can’t see Styrofoam handling wind-blown projectiles in a major storm.

    1. vlade

      It won’t (handle wind-blown projectiles), but it’s damn cheap to replace the damage..
      Styro with some sort of plaster is ok, if it’s done well – it is actually quite a good insulator. Not what I’d chose as an ideal solution (although styro into wall cavities is ok, and reasonably widely used in Europe), but not horrible either.

  7. Brooklin Bridge

    Conditiond space or thermal envelope code requirements -insulation- are getting very complicated. In Maine, you are most likely in a zone 6 climate which means a minimum of about R25 for exterior walls for new residential frame construction. Note that the state and then each town can impose it’s own variations on thermal envelope codes (IECC) though I’m not sure towns can go below state standards. The tendency is to tighten up on “renovation” codes so I don’t think R13 (old code for cavity exterior walls) is accepted any longer as replacement for large sections of a wall. I’m not sure whether it is now R19 or the same as for new construction, but it is usually something you can accomplish with existing materials (foam/rigid foam + bat) without having to sheath the exterior (which would be a major renovation). You need to keep your electrician in the loop or in any event avoid screwing yourself from being able to run new electrical wires or other utilities (such as filling up cavities entirely with foam).

    Leaving zero insulation in exterior walls is simply illegal and you can make an anonymous call to the building department of the town (I’m not sure how to make an anonymous call now-a-days) maybe just speak clearly into your wrist watch or tablet or something and ask that the information be passed on.

    I’ve heard that Styrofoam and stucco can actually be a reasonably long lasting material if done right though the description above doesn’t sound right or safe for neighbors. I believe it degrades (half life?) fairly quickly which is a good thing. You can call OSHA for that if there is a professional crew involved and they will swoop down like avenging angels since outrageous fines are how they make a lot of their money. Personally, there would have to be a pretty big cloud of the stuff before I would call OSHA, particularly if it only involves small amounts. I would be more concerned with sloppy removal of lead paint if there are young children under 7 around, or even more with asbestos.

    Insulation requirements. This PDF is helpful and suggests (but I’m not sure) that the table is for additions and alterations as well as for new construction of residential frame and mass buildings.

    For a map of US Climate zones see,

    1. Brooklin Bridge

      I was thinking of Lambert when I chose Maine for the climate zone and didn’t pay attention to where this was taking place in the video.

  8. jsn

    If the Sunset Park quote refers to that neighborhood in Brooklyn, all that is needed is a complaint to the Building Department. New York City, despite having one of the lowest per capita carbon footprints in the US also has amongst the most onerous energy codes. None of what is described is legal and enforcement has been reasonable lately as DOB sees builders as revenue so its incentivized to go find things to fine.

    Of course every ten years or so half of DOB does the perp walk so maybe what you are seeing is the result of aspirational felons.

  9. Brooklin Bridge

    It’s not clear to me that these investor rentals will be all that much worse than the current crop of slum landlords that congregate wherever there are enough vulnerable people to fleece. Still, it goes without saying to me that having government handle the issue would be vastly better than vulture capitalists..

  10. diptherio

    No-eye-deer on the tax situation. But while reading the story of the GA tenant with the sewer smell, a rather simple set of policies occurred to me.

    1) Put the URLTA (Uniform Residential Landlord Tenant Agreement) in place, assuming GA hasn’t already adopted it, which includes:

    1.404. [Separation of Rents and Obligations to Maintain Property Forbidden]
    A rental agreement, assignment, conveyance, trust deed, or security instrument may not permit the receipt of rent free of the obligation to comply with Section 2.104(a). {landlord’s obligation to maintain premises in a safe and habitable condition}

    As well as a provision allowing tenants to repair-and-deduct from their rent payment, so long as the repairs do not exceed some portion of the rent (50% in the URLTA, 100% in the version my state adopted).

    2) Provide public assistance to tenants in enforcing their rights against large property owners. A Tenant/Landlord information hotline would be the minimum, and ideally a handful of public defenders represent tenants and harass the PE companies into, at the very least, maintaining their properties.

    More of a band-aid than a solution, but it would be something. I used to run the T/LL hotline in MT and Mindy Culpepper’s story is one I’ve heard many times. PE companies aren’t the only a–hole landlords out there, unfortunately. It’s a far from perfect solution, but the existence of legal remedies for tenants has been of great help to plenty of us. If you live in a state that hasn’t adopted some form of T/LL law, I think it’s something worth pushing for.

      1. The Infamous Oregon Lawhobbit

        Ditto with ORLTA – Oregon’s same thing, found in Chapter 90 of the Oregon Statutes.* Of course, you need to have tenants who know their rights and courts willing to enforce them (which we do here).

        On a different note, but related, I would have two words for anyone thinking that State ownership is the “solution.” Those would be “Cabrini Green.” The State is just as good a slumlord as any other, when the tenants don’t have – or don’t/can’t exercise – their rights.

        *yeah, Oregon landlord/tenant law is a frequent area for me. ;-)

  11. PeonInChief

    Having been a tenant for all of my adult life, I can say with a certain assurance that, so far as being a tenant is concerned, it doesn’t really matter whether it’s a corporate landlord or a small landlord. All of them will, at various points, avoid making necessary repairs. All of them will go before the state and local law-making bodies and speak at length on their virtuousness as persons and providers of housing. All of them rattle on about the lack of virtue among tenants and the importance of supporting their role in keeping the barbarians from the gates. All of them will receive the benefits of the contributions of the real estate industry to elected officials. It just doesn’t matter who or what the landlord is–they all have the same economic interests.

    My biggest problem with the PE operations is that they aren’t planning to stay in it for more than a couple more years, and, particularly if something goes wrong, there will be mass displacement of tenants in the areas where the PE properties are located. (PE does not buy property in the few areas in the country with rent control and just cause eviction. California is unusual in that some cities have rent control and/or just cause eviction, but tenants in single-family homes cannot be protected by rent control.)

    1. Jim

      Yes, in fact, there’s only one thing worse in this world than being a tenant…being an owner.

      There’s one thing worse than having a landlord not make a necessary repair…digging into what little you have left over at the end of the month to pay for another lousy, but very necessary repair (and still having many more that you’ve had to skip).

      The point is, I’d love to able to walk away.

      1. Propertius

        I dunno, Jim, having a tenant blow town after doing $17,000 in damage to a property (and neglecting to pay rent for two months, but that’s scarcely worth mentioning) ranks right up there, too.

      2. PeonInChief

        You don’t have to be a landlord. If it costs too much money, is too much of a hassle, or whatever, you can quit. Sell the building and be done with it. Your tenant, on the other hand, has to have a place to live and is paying you market rent for it. And yes, if the roof leaks or a water pipe bursts or the 40-year-old oven stops working, you have to pay to get it fixed. That’s what you sign up for in exchange for getting people to pay to live in your building.

    2. Yves Smith

      In NYC, tenants are treated MUCH better because we have pro-tenant legislation and a bloody-minded housing court. My landlord has actually been accommodating when they didn’t have to be.

  12. McMike

    This got me wondering… there’s a trend among broke municipalities to devolve costs of sidewalks and road/sewer repairs back the the neighborhood homeowners. I wonder how PE forms would push back on this.

    Also of concern: PE firms taking over homeowners’ associations.

    Also of interest: PE firms owning enough property to try and get it rezoned.

  13. KFritz


    A great deal of raised stucco “detailing” today is done with synthetic materials of some sort, rather than “corner metal” infilled w/ wire & backing. A friend recently rebuilt a porch with intricate detailing done the old fashioned way (which included no raised detailing of the sort described by Lambert). Installing the corner metal was hugely labor intensive and expensive. The synthetic raised detailing is a labor and cost saving measure. Given the rates of water penetration issues I’ve seen w/ stucco over the years, the synthetic underlayment can’t be too much worse than ‘old school’ methods for non-structural details.

  14. Pearl

    I almost always agree with Bill Black, but I am far more pessimistic than he is about this “new” trend, and I think we need to question the “spin” we’re getting on how many of these homes are truly being rented.

    There is a brilliant analyst at Seeking Alpha (Paulo Santos) who has been digging deeply into the numbers that are being reported by Ocwen’s plans for their MAJOR foray into this biz–(RESI) and (AAMC), and these two Ocwiterations’ reported earnings and cash flow have a lot of people scratching their heads. TONS of money–but, like, only a few dozen (if that) of their rentals have been actually rented. Very bizarre.

    Here are the three links to Mr. Santos’ three articles on (RESI) and (AAMC) as well as two other analysts over there who seem to have hit the nail on the head as well. My take-away is that the number of folks “flocking” to rent these homes is a complete myth.

    And has anyone Zillowed lately? I think our “shadow inventory” of homes is beginning to seep through the cracks. Look at the “blue arrows” on Zillow. (And see how few yellow arrows–which represent sold homes–when you filter for homes sold in 2014.) This is not pretty, folks.

    Paulo Santos (AAMC) December 6, 2013

    Paulo Santos (RESI) December 11, 2013

    “Weighing Machine” (RESI) December 13, 2013

    Paulo Santos (RESI) January 16, 2014

    Joel Lawson (RESI) January 24, 2014

    1. Pearl

      Sorry those articles are being pay-wall blocked after a few paragraphs.

      I wish I could get Mr. Santos to post them here. They’re technically over my head, but they are excellent. Mr. Santos is a no-nonsense kind of guy with a crazy-high IQ like Yves. Maybe we should introduce the two of them. ;-)

  15. Oregoncharles

    I certainly empathize, since we’re also small-time landlords, as are several other local Greens.

    it seems to me that most of this should be taken up with your local governments, where you have the most clout (and the PE firms may not, since they aren’t local voters).

    For instance, about the property taxes: at least in Oregon, assessors don’t have to accept a revaluation that resulted from a “distress” sale – I know this from our own negotiations with Marion County, after we bought a property in a short sale. They didn’t budge; according to them, we made a big profit the day we closed the deal – even considering the renovation costs. Nice to know – assuming their assessment is correct.

    The same goes for MERS and chain-of-title considerations: they affect your county. It should be suing for the lost fees, and local judges, clerks, and sheriffs should be demanding full proof of clear title for foreclosure. And most local governments belong to national associations, which should be pushing for national action on those points.

    The same goes for “crapification”, such as Mindy Culpepper’s problem. Her best recourse is her LOCAL government, where she is a voter. My own city, at least, has a rental code that is fairly strong. They can order landlords to fix problems – and if not, they should be able to.

    those are just a couple of examples; I think the same logic applies to most of his issues. At this point, rental property is really the only investment that offers a decent return and reasonable safety, ESPECIALLY for small investors. It also carries a workload that huge PE firms are unlikely to be able to manage, though there are local companies that do it – at a price.

  16. Jim in SC

    I think there is a lot of mis-information being tossed about here. Here are some thoughts.

    1). They haven’t gotten really great prices on these properties they’ve bought., at least not in the Charlotte area.
    2). I haven’t heard anything about them trying to challenge valuations. Maybe they’re doing it somewhere.
    3). What is really motivating them, in my opinion, is something simple. In most of America, rents haven’t kept up with inflation for twenty years. Maybe this isn’t true in California or Mahattan, but in most places, rents have lagged. We have houses renting in my hometown for the same nominal price they rented for fifteen years ago. Rents are actually down since the mid-2000s. I think the PE guys are looking for reversion to the mean with rents. They can finance at a low interest rate and sit things out. Even if they don’t rent anything, eventually things they’ll make money, given that their financing costs are so low.

    1. porge

      Rents really don’t have anything to do with cpi inflation.
      The application process is pegged to incomes.
      Incomes have not gone up in 20 plus years for the bottom 80% of the population who make up the vast majority of renters.
      Incomes will not increase in this large demographic therefore rents will not increase.
      If the landlords try to push rents all they will accomplish is driving people to move to sharing rental arrangements.

  17. Lune

    The only place you’re wrong here, Lambert, is in labelling this autocoprophagus. If PE guys just ate their own crap, I could care less. But as evidenced by numerous e-mails / phone calls that have been subpoenaed, they’re fully aware of when their products are crap. And rather than eat it themselves, they sell it back to us and our pension funds, retirement accounts, etc.

    If you think a PE guy in Connecticut has any intention of holding onto some dump in Riverside, CA for longer than it takes to flip it to some stupid muni pension fund manager somewhere else, well, they also probably have a bridge they could sell you too :-)

  18. NotoriousJ

    I’ve read recently that the PE models are assuming 4% of annual income for maintenance – pulled straight out of the Commercial RE playbook. I can’t substantiate this, but it true, it is far less than the +30% typically assumed by SFH investors, and the drive to stick to budget would explain the initial corner-cutting as well as support the idea that these properties will crapify, as needed maintenance is deferred. And the PE guys don’t care, because they will be long gone.

    At least a slumlord understands their longer term interest in maintaining the property’s structure and systems.

    Ultimately, might this crapification, along with tear-downs of “excess housing” and the lack of housing starts produce a housing shortage if household formation ever resumes at a normal clip? You know, in an alternative universe in which a real world economic recovery were permitted?

  19. Rational

    1) people can’t buy houses because p/e cash investors are buying them. Wrong. Cash is a big component because people can’t get mortgages not because of P/E. Those investors represent about 11-13% of all purchases.
    2) how come nobody every mentions the tens of thousands of underwater homeowners who benefit from higher prices in their neighborhood
    3) the prior owners of the homes were evil speculators. Well if this is true, then Yves Smith can stop worrying about the horrid servicers who foreclosed on them! Actually the owners of the MORTGAGES were taking financial risks far greater than they understood. The intermediaries in selling those mortgages bear the most blame. And yes, they are some of the same people doing REO-to-Rental
    4) Mutil-family housing is owned by private money and largely financed in the CMBS market and has been for years. This has not resulted in the end of the world to date.
    5) The government? Government housing? aka “The Projects?” Those who advocate this should move into one and let us know how it goes.

  20. localinoakland

    Interesting that Oakland was one of the target locations for this process. Rent control, eviction regulation, an active tenants bar and local government hungry for fines and fees could combine to make Oakland properties cost these corps more than some. Was there any due diligence done re different markets?

    1. PeonInChief

      Only tenants in multi-family properties are protected by rent control laws in California. State legislation forbids rent control for single-family homes. All tenants in Oakland are protected by the just cause eviction ordinance, but it has no teeth without rent control.

  21. Obvious

    One thing that has been missed is that the PE guys have a 15-20% premium over market rates for their rentals. Check Craigslist for that. I was shocked and most pleased to see that. This will drive the Good renters to anyone who can under cut the PE guys. So all the PE guys will get are the OK and Bad renters.

    1. Danny

      The homes are marked up higher then the individual owners who rent. After getting divorced last year I declined the McMansion my wife and kids where living in, and let my wife keep it(and the payments). I then looked for a small 3bed house. Being in a hurry to GTFO, I did not do my homework as I should of. The property I rented seemed like a fair price, only to find out that it was in a high robbery zone. I found this out by being burglarized three times in six months. On the upside, all repairs(Windows, busted doors) from the management company(Waypoint), were repaired quickly. I attempted to break the lease with Waypoint, but they would have nothing to do with that. They did offer that I could move to one of their other properties, with the caveat that I give them $1K, and pay the normal fees for moving to the new location. After viewing their other properties, I did find that all their properties are way overpriced. I then decided to turn my place into a fortress, and wait out the six months that remain on my lease to pass. In addition to having you put down a deposit, they also require you to purchase a insurance policy($400) through them, that kicks in once your normal deposit is exhausted for repairs after move out.

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