Slumlord Wannabe Blackstone Violates Local Housing Laws by Making Tenants Maintain Rentals

The yawning gap between private equity landlord sales talk and what they are delivering is finally being exposed.

One of the reasons many investors have been skeptical of the way private equity firms have gone full bore into buying distressed single family homes is that property management is a hands-on business even when it’s done it the most favorable possible setting, an apartment building. Individuals who have invested in single family home rentals almost without exception report that even when they found it to be an economically attractive proposition, it was still oversight-intensive. Admittedly, there are some private equity firms who have bought rental properties who actually do seem to be targeting markets and renters in such a way that they might be able to do a decent job of property management, for instance, by buying homes where they can rehab the kitchen and bath plumbing using the same fixtures, screening tenants in person, and then inspecting the properties monthly and giving the tenants points for passing that they can convert into credits against a purchase or take in cash.

But the biggest fish in this ocean, Blackstone, is clearly taking the opposite approach, of doing as little as they can to maintain the houses and trying to fob off the responsibility onto the tenant, even when local regulations clearly prohibit it. So managing dispersed homes is no problem if you never planned to do the job in the first place.

Blackstone tries to evade this duty formally, through lease terms, and informally, by making themselves inaccessible. And because Blackstone is the largest and highest profile player in this space, they may be hoping that if enough PE landlords follow their lead, communities will accept the new finance-dictate bad standards, just as they have with foreclosure abuses.

But the difference here is while stressed borrowers were the ones that were hurt in foreclosures, and foreclosures and bankruptcies are seen as shameful event, there’s no reason for a victim of a bad landlord to be seen as unsympathetic. Moreover, deliberately negligent PE landlords like Blackstone traditionally have hurt the value of neighboring properties. If this trend continues, abused tenants and their neighbors face a common threat.

Notice that contracts that violate local law are almost certain to fail a legal challenge. In New York, which has more extensive tenant protections than other cities, landlords sometimes try to include provisions that are impermissible, like prohibiting a tenant from having a roommate. Housing court judges exhibit a bit of zeal in smacking down landlords when challenges to those leases come before them.

NC readers got early warning that this strategy in a March 2012 post, via this comment, which we flagged in later posts, from someone clearly affiliated with a PE fund:

In many markets, the maintenance obligations fall to the tenant. Grab a sample set of local real estate board form leases and you’ll find this to be the case. Moreover, while these same form leases do place the burden of capital repairs on the landlord’s side (as is the case with multi-family properties), this is an identifiable risk that can be assessed just as it would be by a skilled operator acquiring larger-scale multi-family properties. Falling trees are non-discriminatory – they will crush the roof of a single-family home and a two or three story garden-style apartment building with equal vigor. The previous run of the “for sale” cycle has created legions of well-qualified providers of ownership related services, from inspectors to repair specialists, many of whom are thrilled to raise the tenor of their operations by contracting locally and regionally on a bulk basis with professional owners. At the risk of introducing cliche, don’t overlook how frictionless the management oversight of this type of service effort has become in this age of pervasive connectivity.

We’ve been to a couple of conferences where PE landlords keep saying they’ve found these great local guys to handle the maintenance. But this sounds an awful lot like those bank servicers who hire firms to secure vacant homes….that often wind up falling into disrepair and being stripped of appliances and copper.

Doug Terpstra took issue with this cheery view about making tenants maintain their rentals:

Your perception of being able to put all maintenance responsibility on plantation tenants only goes so far. Beyond neglect, a whole lot can go wrong in a hurry from a disgruntled or distressed tenant. And even in regressive red states like Arizona, there’s a lot of legal wiggle room for a put-upon tenant who might decide to get uppity:

“The landlord and tenant of a single family residence may agree in writing, supported by adequate consideration, that the tenant perform the landlord’s duties specified in subsection A, paragraphs 5 and 6 of this section, and also specified repairs, maintenance tasks, alterations and remodeling, but only if the transaction is entered into in good faith, not for the purpose of evading the obligations of the landlord and the work is not necessary to cure noncompliance with subsection A, paragraphs 1 and 2 of this section.” (Subsection A, BTW, is quite comprehensive and affords tenants considerable leverage, including damages for untimely compliance)

Now to the update on Blackstone’s latest escapades, via some original reporting at In These Times. The article, Game of Homes, makes for good one-stop shopping if you want to get friends and colleagues up to speed on this topic. For NC readers, the first two-thirds of the article covers familiar terrain. Here are the sections that discuss how Blackstone, which is using “Invitation Homes” as its brand for its single-family rentals, is trying to evade its duties as landlord:

Antonio Hernandez, 34, moved with his family into an Invitation Homes-owned property in Chicago’s Belmont Cragin neighborhood in February 2013. He says the company has tried to shift most of the responsibility for maintenance of the home onto him….

When Hernandez began renting from Invitation Homes, he was also perplexed by a section of his lease that says he must rent the property “as is.” He isn’t the only one. In These Times obtained a copy of Invitation Homes’ lease and presented it to Mark Swartz, legal director at the tenants’ rights organization Lawyers’ Committee for Better Housing, and Kelli Dudley, director of the nonprofit Resistance Legal Clinic. Both housing attorneys told In These Times that several sections of the lease violate Chicago’s Residential Landlord Tenant Ordinance (RLTO), a longstanding document that establishes the baseline of tenants’ rights and governs most residential agreements in the city.

In response to inquiries from In These Times about the legality of the lease given to Chicago tenants, Invitation Homes spokesperson Andrew Gallina wrote in an e-mail, “Invitation Homes complies with all fair housing laws and regulations. We use standardized leases adopted by state and local real estate associations, which comply with local statutes.”

But Dudley notes, for example, that while commercial leases sometimes say that tenants have to rent a property “as is,” putting this stipulation in a residential lease “is a violation of the RLTO, which clearly places the greatest responsibility for repairs on the landlord. … [Invitation Homes] is definitely overreaching and trying to shift all the risk and the expense to the tenant,” she says. Swartz adds that the lease’s attempt to indemnify Invitation Homes for any damages, including those caused by its own negligence, violates Illinois’ Landlord and Tenant Act. He also points to several other sections of the lease that are illegal under the RLTO, including a stipulation that tenants must pay the associated fees in the event that Invitation Homes employs an attorney to enforce an eviction or collection of rent.

Keep in mind that unlike New York and San Francisco, which have strong protections for tenants, Chicago does not have a reputation of being a pinko, pro-tenant town. It’s not hard to imagine that its tenant-related laws are middle of the road. Thus Blackstone and any of the other PE players that are joining its race to the bottom in major cities are likely in violation of local ordinances. And Doug Terpstra’s Arizona example suggests that even low-density, supposedly conservative states aren’t necessarily any landlord-friendlier. I welcome comments from any readers who can give a reading as to whether their state or municipality would permit Blackstone “the tenant eats most problems” style leases.

Now this might not be as bad as it sounds if the rentals were in such super-duper shape when the tenant took occupancy that there really was no reason to expect the home to need any maintenance. But that’s not how this is playing out. Back to the article:

Hernandez also says that since moving in, he’s faced a slew of problems with the home. Most recently, he says, after Invitation Homes ignored multiple requests to fix a railing in the basement, his mother-in-law fell down the basement stairs and hit her head…

Hernandez’ experience resembles those of Invitation Homes renters in other cities who have complained that major plumbing and electrical problems have gone unaddressed for weeks or months on end, according to a report by Ben Hallman and Jillian Berman in the Huffington Post. Hallman and Berman also spoke to former Invitation Homes employees who told them that the high volume of complaints and the wide geographical distribution of rental properties amounted to a near-impossible feat for workers tasked with fielding maintenance requests. Tenants renting with Colony American Homes and American Homes 4 Rent, the two other major investors-turned-landlords, have reported similar complaints

So much for “frictionless management” and economies of scale.

And here’s how the managers evade their duties, by hiding from them:

Hernandez also says that it is difficult to reach personnel with complaints and that he has had six different property managers over the course of his yearlong tenancy. A forthcoming report from Occupy Our Homes Atlanta and the Right to the City Alliance also found that while some Invitation Homes tenants in Atlanta are given a specific point person to relay concerns to, most receive only a phone number and are asked to communicate requests via voicemail…

While labor activists have long bemoaned Blackstone’s strategy of buying out companies and then refusing to acknowledge responsibility for worsening conditions—a problem labor reporter Josh Eidelson refers to as, “Who’s the boss?”—Blackstone’s place at the head of a housing empire may now raise a new question: “Who’s the landlord?”

Here we have one instance, in which Blackstone is telling the press, and presumably investors, blatant falsehoods about its compliance with housing regulations. The piece presents evidence on another front, the lease-up rate, where Blackstone again looks to be making misrepresentations:

Indeed, an In These Times survey of a portion of the 2,500 Blackstone-owned homes in the greater Chicago area suggests high vacancy vates in homes purchased during the past year. Using data from the Cook County Recorder of Deeds, In These Times identified approximately 200 properties in the city’s northwest neighborhoods acquired by Invitation Homes during the past year. In February and March, In These Times surveyed 50 of these properties and discovered only 17 that were occupied. Invitation Homes indicated that it may take the company six to eight months to rehabilitate and rent out properties, but declined to comment on the record about its occupancy rates. However, 24 of the properties surveyed had been acquired by Invitation Homes at least eight months prior, and half of those were still unoccupied.

Blackstone’s exit strategy appears to be rental securitizations; it launched the first deal of this type, which was heavily oversubscribed, last October. Its prospectus forecast a credulity-straining 94% occupancy rate. Standard & Poors, in a rare show of integrity (or commercial good sense) refused to rate the bonds, saying the market was too young to be able to project rental payment streams.

Blackstone burned investors; Bloomberg reported that rent receipts had fallen a stunning 7.6% in a mere three months after its deal was sold. Yet more investors appear to want to go to slaughter and buy these dubious securities out of ZIRP and QE induced desperation for return.

The high vacancy rate raises another issue: Blackstone may be withholding properties to try to move rent levels higher. This would seem to make no sense (how can the loss on vacancies be compensated for by, say, 5% or 10% higher rents on the properties they do lease?) unless you understand the name of the game is keeping the strategy looking attractive as long as possible. Rising rents, even if they are created via market manipulation, creates a positive selling point (“look at the rent increases!”) that is critical to their exit strategy. And with interest rates low, the cost of keeping the homes empty may not be too terrible.

But the problem is this strategy works only if the giant landlords hold enough rental homes in particular markets to dictate prices. Blackstone, and presumably many of its competitors, are trying to goose prices to make up for economics that are more difficult than they naively anticipated:

And while Invitation Homes rents vary widely by neighborhood and city, some studies suggest that the heavy concentration of investor-owned housing is already having a detrimental impact on affordable housing. A report from DePaul University’s Institute for Housing Studies found that the rapid growth in investor-owned single-family housing may be one factor fueling a widening gap between the supply and demand for affordable rental housing in Chicago and the surrounding suburbs, given that the median rents in single-family-home rentals are 41 percent more expensive than those in other types of rental properties, once utilities are facored in.

Moreover, as the stock of vacant homes dwindles, investor-landlords may seek to raise rents in order to pass the increasing costs of acquiring homes onto tenants, notes a February 2014 report from the Center for American Progress. The report also predicts that Invitation Homes could raise rents if overall occupancy rates aren’t being met, in order to continue making monthly payments to bondholders. “Managing portfolios of tens of thousans of single-family rental homes across the country may be more expensive than most institutional investors have planned,” Sarah Edelman, the primary author of the report, tells In these Times. “These expenses, along with increases in home prices, could put upward pressure on rents as operators try to deliver the returns on investment they have promised.”

But these landlords aren’t the only game in town. As noted, some PE landlords were being much more disciplined about their buying, rehab and tenant screening strategies. The PE landlords that set out to be higher touch and mom and pop landlords will be able to cherry-pick the better tenants, for instance, by offering longer leases (say three year; note that move ins and out are the biggest source of wear and tear on a rental). And Invitation Homes’ reputation is also getting out, so over time, only the uninformed or those with no options will rent from them. That will likely mean lower credit quality, higher turnover tenants, putting Invitation Homes in the highest-cost corner of their market.

No wonder they want to securitize these properties and get out as fast as they can. We can only hope investors will wake up to why they should avoid these deals like the plague. But given the way investors merrily bought subprime bonds during the peak of the housing bubble, I have my doubts.

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  1. ArkansasAngie

    Speaking as a small landlord, property management is expensive.

    I can attest that “doing the right thing” has kept my units full.

    I’d like to say that it peeves me that since I’m not a private equity company and don’t have access to ZIRP and do have to pay income taxes as opposed to capital gains, it is the government and their picking of winners and losers (and not the market) which is at fault.

    I can prove anything with a pie in the sky excel sheet. Just go ahead and assume a high occupancy rate. Go ahead and assume high initial rents and progressively higher rent increases over time. Assume that there is minimum maintenance. And … what will you have at the end of the day? Blight.


    1. 12312399

      I’d add that as a landlord you, in many (most?) jurisdictions, can’t evict a tenant on-the-spot. often it requires court filings, paying the local sheriff to service the notice, etc. which is expensive. oh wait, those formalities didn’t really work for mortgage servicers did they? but at least landlord malfeasance is more local news-worthy and tangible for people to rally against.

      The whole idea of being a corporate SFH-landlord strikes me as a mark of incredible incompetence or knowing shyster-ism. On the corporate level, owning/investing in hotels beats SFH on nearly every reasonable criterion.

      1. 12312399

        i’d also imagine that even if the cramming-down of maintenance onto the tenant was legal in a particular jurisdiction (which itself is unlikely), i doubt that the landlord would escape legal liability for maintenance.

        so should a Blackstone tenant fail to maintain a water heater and the entire family dies of CO poisoning, or the tenant doesn’t shovel the walk and the next door neighbor slips and cracks her hip, I doubt Blackstone could shrug and say “not my fault.”

  2. William

    Great article. Just one tiny quibble–the belief that move-ins and outs are the biggest source of wear and tear is a myth that landlords like to quote because every move-out means having to invest back into the property. Think about it for a minute. Of course wear and tear is going to be found after a move-out. But the move-out didn’t cause the wear and tear! After a move-out, the entire apartment is cleaned and made presentable to the next tenant. How can this be “hard” on a property? In fact it is the opposite–it results in property improvement!

    1. hunkerdown

      Have you never once carried a large piece of furniture in or out of a dwelling? Even from a tenant’s objective, it doesn’t seem completely incredible that having others move bulky items around tight spaces, in a property for which one has less than complete ongoing responsibility, could result in minor gouges, scrapes and scuffs here and there above the usual and customary enjoyment of a rented residence.

      If you rearrange the furniture on a weekly basis, it may not be so.

  3. vlade

    “So much for “frictionless management” and economies of scale.”
    What people often don’t realise (or do, but don’t care) is that you get economies of scale only when dealing with commodities (i.e. all is the same). Scaling when most of the problems you have to deal with is idiosyncratic creates more costs than gains (as it imposes process that is equally unfit for everything, or too lose to be of any use except as a deadweight).

    I believe you could make quite a bit of money from foreclose-to-rent market, but you’d have to be relatively local, and *gasp* good to your tenants (which takes a non trivial amount of effort).

    1. hunkerdown

      “Cuckoo, cuckoo, there’s blood in your shoe!”

      “Ashpet” was a grimmer, grimier predecessor of the Cinderella myth, in which the women enamored of the prince would cut their feet down to fit in the royal slipper. (Refer to mathbabe’s recent Princeton rant for additional insight.)

      That said, customers treated as commodities do generally shape their behavior to match, and where it doesn’t, the law can serve to “standardize” them, Procrusteus-style.

  4. diptherio

    Here in Montana, LLs are responsible for making repairs to their rentals to maintain them in a safe and habitable condition. Lease agreements purporting to shift LL obligations onto the tenant are strictly prohibited and unenforceable. If a judge comes across a prohibited provision in a rental contract, he/she can order the LL to pay 3 month’s rent to the tenant (one of the few punitive fines for LLs in our state law).

    1. armchair

      In Washington state the landlord-tenant statutes can’t be bargained away in a lease, similar to Montana. Washington’s statute does not offer the 3 month fine for prohibited provisions, which is too bad. It appears that Blackrock’s main goal is to rip off investors. Using commercial leases in a residential setting is something that no attorney with housing experience would sanction. In other words, Blackrock simply didn’t think about this or spend a dime to take a hard look at this investment idea. Another toxic creation from Wallstreet maniacs.

      On another point, the grandma who faills down the stairs, because of a loose railing is a perfect example of a tort liability. If there was any written request, and the injuries are serious enough, there will be plenty of hungry lawyers to take that case on a contingency. Yet another hidden risk in Blackrock’s neglectful maintenance strategy.

      1. diptherio

        There are only two violations for which MT law assess punitive damages against landlords: prohibited provisions in a lease agreement and retaliatory conduct(evicting a tenant who insists on repairs, for instance). MT judges, in my experience, look pretty harshly on both of those violations which is why most LLs are smart enough to avoid them. I bet Blackstone wouldn’t be so smart.

        1. armchair

          Blackstone is evil enough to be a slum lord, but they are too dumb to be competent slum lords. Hilarious in the abstract, and tragic in reality.

          1. NotTimothyGeithner

            Evil and incompetence go hand in hand. Empathy is almost prerequisite to doing a good job or finding people who will. Blackrock wasn’t interested in a career or lifestyle in the same way a person opens a restaurant or becomes a good doctor. They never did diligence because they have no interest except cashing out, and they never once considered what they would do if they had to deal with the renters in five years. They didn’t approach this with the idea they could do it better.

  5. Jim A

    Part of a pattern, If the MERS/forclosure fiasco has taught us anything, it’s that to these guys, local regulations are for peons and do not apply to them.

  6. Jim Davey

    If I recall correctly the business model for requiring tenants to maintain their rented property was developed in Germany; and the enforcement mechanism was the tenant had to sign some automatic deduction from their pay agreement if they failed to please the master. Any one recall that company/capitalistic genius plan? Did Mozilo say once he intended to recreate that model here?

    We left the US after loosing everything in the housing bubble, and five years of unemployment. We saw the handwriting was on the wall, including an article on this very subject. I know it was written about.

    Best of luck back there in a dysfunctional democracy; a rigged collapsing economy; and a society that rewards elites for thwarting laws, morality; and having greed as their God.

    Jim in Chiang Mai, Thailand

    1. guest

      Close, but not quite. There is maintenance relative to normal wear and tear that is the responsibility of the tenant, and large (typically structural) repairs that the landlord must take care of (but which can justify a rent increase if they add value to the apartment or building). It is not up to the tenant to take over costs of maintaining and repairing the roof or the piping, for instance.

      In Germany (and Switzerland) there are two typical arrangements in the standard rent contract templates:

      1) Tenants must return the flat in the same state as they took it from the landlord. Tenants must pay a deposit (typically three or more months of rent) that is returned when they move out. All this means a formal inspection before moving in (where one has the chance to notice every defect that was already present), a renovation before moving out (e.g. repainting walls and ceilings, changing the carpets, etc), and a final inspection. If defects are detected before returning the flat to the owner, then the landlord is entitled to retain a part of the deposit to correct the defects.

      2) Tenants take over the apartment in the state left by their predecessors, i.e. cleaned up, but with wear and tear, and must renovate it at their own cost after carrying out an entry inspection with the landlord. If there are repairs that go well beyond compensation of normal wear and tear, then the landlord retains money from the deposit of the previous tenants (after an exit inspection where wear and tear is assessed); there are legally binding tables for assessing wear and tear (e.g. parquet floor lasts 25 years, and wear is assessed accordingly). New tenants leave a deposit upon moving in.

      Rental properties in Germany and Switzerland are generally very well maintained.

    2. bmeisen

      “… business model for requiring tenants to maintain their rental property was developed in Germany.”

      Like Zyklon B and other genocidal technologies?

      As a long-time renter in various German cities I can confirm that tenants are generally required to pay for repairs that cost modest amounts, generally specified in the lease, circa €50. Everything else is the landlord’s responsibility. Maybe Jim in Chiang Mai is also refering to the fact that tenants in Germany rarely find their rental homes equiped with kitchens. In some cases tenants can buy the kitchen from the departing tenant and we once moved in to an apartment with a kitchen but more often we have provided our own. There are advantages.

      German housing law is notoriously pro-tenant – and not because landlords are such evil greedy people. The consensus is that society can not support home ownership levels much beyond about 40% without inviting speculative forces to do their destructive work. The Ownership Society is a fairy tale, with which the Germans have sufficient experience.

  7. superduperdave

    uh, yves, at one point it says blackstone and another blackrock. i think you should choose one or the other…

  8. Jim A

    No surprise here. One of the lessons of the MERS/foreclosure follies is that to these guys, local laws are for peons. Dealmakers can ignore them.

  9. Jose

    It’s only in the third paragraph that Blackstone becomes “Blackrock” so it’s clear that the piece is about the PE firm and not the (20 times larger) investment management company.

  10. Debt serf

    Rents for PE SFH on the NW side of Chicago are really expensive. Even more expensive than other home in the neighborhood. I saw a 1,000 sq ft raised ranch listed for $2,800 a month. For a working class neighborhood. For $2,800 bucks I could rent a nice 2 bd condo in a desirable trendy area. Nobody is going to pay $2,800 for a used 1960’s home on the nw side in an area with a crappy local public school. And guess what – it’s still vacant!

    1. Ed S.

      $2,800 / month is a great deal of money. Here’s one way to look at it:

      $33,600 after tax per year
      At a 30% effective tax rate (Fed, State, Soc. Sec) — that $48,000 per year.
      If you’re willing to pay half of your pre-tax for rent, it means you’re making $96,000 per year (and that’s probably 1% of the residents in the listed neighborhood)

      Another way: $2,800 / month pays PITI + PMI on a $400k mortgage. Not counting the tax advantage.

      It will be a) empty forever or b) turned into a boarding house (or a grow house).

    2. PeonInChief

      If they’re charging that much in rent, they’re probably assuming that more than one family will share the rent. That creates problems for the families, since leases require that each signer is responsible for all of the rent. If one family can’t pay, the remaining families have to come up with the full rent or everyone will be evicted. Lots of lower income people have ended up in a mess because the roommates couldn’t pay.

  11. weinerdog43

    Great article. A couple of points from the ‘boots on the ground’ here in Chicagoland.
    1.) A vacant home is not only a thief’s delight, it is most likely uninsured. Virtually all homeowner insurers REQUIRE that the home be occupied before affording coverage for vandalism, etc…
    2.) An ‘as is’ lease is worth zilch. Does it mean that because there was no grass in January, the tenant does not need to mow in July, because he/she leased it ‘as is’? Who is going to clean the gutters? Etc…
    3.) Good luck finding much sympathy from the neighbors and HOAs when the grass isn’t mowed, or the house starts looking trashy. Good luck, Blackstone, collecting those fines from your tenants.
    4.) Folks have discovered “Yelp”. Woe to the landlord who mistreats his tenants. The only tenants Blackstone will attract will be Section 8. There are other choices out there.

    1. 12312399

      speaking of yelp:

      an excerpt from a review:

      “…. I thought wow that’s pretty nice until they informed us of that our lease would be going up by 7% the next year and if we locked in their “wonderful” 3-year deal, we would only get a 5% increase the first year, and a 7% increase on years 2-3. What a deal right???? I’m like WTF??? You should be paying us for all the maintenance crap we have had to deal with. The leasing agent said that is pretty standard….”

    2. Michael Donley

      F.Y.I.- Blackstone and other PE investors are not interested in renting to low income families. i e., Section 8 voucher holders. They are the most discriminated tenants in America. But, It would be a way to have the government fund their bottom line with rents secure and paid for by HUD. The downside especially in Chicago is that the homes are renting for twice the maximum allowed subsidy ($1,222.00) the maximum rent allotment allowed by HUD; which makes it extremely difficult for a family to rent, manage, and maintain utilities for a Blackstone home. Renting for $2,100-$2,800 per month.

  12. human

    You’ve neglected to mention that real estate tax law greatly favors the property owner. Unproductive property is an income loss equal to the fair market value of the property as set by…the landlord. Just another reason to keep properties empty as they require minimal maintenance!

  13. chitownrdh

    Well all I can say as a two-flat owner in Chicago, this winter’s gas bill just about killed me, and there is talk of raising property taxes yet again! It is very expensive, and getting more so daily it seems, to live and own property in the city.

  14. Mel

    ” It appears that Blackrock’s main goal is to rip off investors. Using commercial leases in a residential setting is something that no attorney with housing experience would sanction. In other words, Blackrock simply didn’t think about this or spend a dime to take a hard look at this investment idea. Another toxic creation from Wallstreet maniacs.”

    Yeah. This is actually pretty natural: it only makes sense to rip-off people who have money. Just as in the securitized mortgage meltdown, the essence of the scheme, what makes it a rip-off in the first place, is that the renters aren’t going to be able to pay the rents that the owners are claiming. I’m sort of bemused by the statement that the scheme only works if the operator is big enough to set rents generally in the market; the rents claimed are only window dressing. But if an investor applied a scrap of diligence, and saw competing rents in the market that were much lower than claimed, they could start to question the deal. I suppose that would be it.

    1. McMike

      When you think about what pots of money are left that have not yet been plundered, razed, commoditized, and left for dead, you realize they can be counted on one hand.

      1. Matt

        Yet, we continue to be amazed at the new schemes. If the schemers spent as much time and effort tackling problems, we would live in paradise.

  15. McMike

    I have a hard time accepting the framing of PE landlords as “naive.”

    They surely anticipated that land-lording is difficult and time consuming (which is why no one had gone into it on a mass scale before), so we must assume that:

    – They crunched their numbers and figured they could flip and get out before the costs and complexities came home to roost. Thus leveraging their free money and tax preferences while shuttling the downside off on pension funds. Heck, they are probably already setting up short bets against their own investments. The pension funds, meanwhile, seem perfectly willing to buy whatever they are told to buy.

    – They figure they can find a way to turn the renters into powerless commodities and steamroll local laws and local sensibilities with impunity, a Gresham dynamic that will lead to them creating new market realities that become the de facto norm. Mortgage origination and servicing industries proved this works. The PE firms have nothing to fear, within a few short years, renters will be every bit as cowed and powerless as any other consumer or peon that Wall Street has set its sights on. I’d be watching for binding arbitration clauses with loser-covers-fees provisions that send any disputes to a crony cabal of “independent” arbitrators and removes them from the courts. Local landlord-tenant laws will prove as optional as mortgage servicing rules.

    1. Ulysses

      The vampire squid of late-stage capitalism has already collected all the golden eggs. Now it has roasted all the geese who laid them, and is preparing to have goose for lunch. Tomorrow it will belch, gaze around at this sad planet made barren by its insane greed, and slowly the realization of its own impending demise will begin to fill its tiny brain.

      1. McMike

        I have wondered about the aftermath.

        Many of the elite will be fine, having amassed huge amounts of wealth and wisely sunk it in prime real estate, prime assets, hard assets, commodities, and Tbills. When the music finally stops, they’ll walk away and live in gated communities or friendly Caribbean islands and do fine.

        I have wondered where the pain line will be. Who will wake up to find themselves with worthless assets and their face pressed unexpectedly from the outside of the gate? With everything in the nation of value plundered and rendered, who among the former enablers will find themselves disposable, wondering what happened to the school system and the medical system. Wondering why the bankruptcy laws are so cruel.

        1. Nathanael

          The line was passed several years ago. Those of the elite who had exit strategies have *already exited* — many of them in 2007. The ones who are left are *only* the suckers and crazies.

    2. Yves Smith Post author

      Housing is a much more politicized asset class than companies and the plebs have decent rights. This strategy was naive.

      Remember, this is the same Blackstone that bought Equities Office Trust from Sam Zell at the peak of the last cycle. And remember that the PE smartypants got their heads handed to them in the Stuyvestant Town deal, where their spreadsheet assumptions didn’t pan out so well.

      1. McMike

        Ok. Yet they’re still around, still getting other peoples’ money to gamble.

        If you had asked me six years ago (if the question had even occurred to be asked), I would have said that mortgage debt recording/transfer laws were inviolate, and the states and counties would never stand to be systematically ripped off and defrauded in the way they eventually were. But they went down with barely a peep and a pittance. Rental market is one of the last great pots of money to get pilfered (crapified if you will), and so pilfered is what it will get. if there is one thing history has shown us; nothing is sacred, and in the end, everything succumbs.

        I have a pet theory that only comes out after a couple drinks. It’s a dystopian conspiracy theory really. I call it: “No One Really Ever Loses.” I look around in the wake of the great meltdown, and it seems to me that (aside from name changes) everyone is still standing, and still in the game. Trillions lost, but nothing changes at the top.

        Where does all the lost money go? It’s like losing socks in the dryer. It just goes poof. The player are all still around, the banks still around, the deals still being done. The alleged feedback mechanism for poor performance is broken, no one gets wiped out.

        My theory is that all that money – it’s virtual money anyway since the actual skins in the game are pennies on the dollar – evaporates, and leave behind only suffering for ordinary people. Fake money turned into real pain. That’s what keeps the balance at the quantum physics level.

        Anyway, that’s how I picture it. The real answer from an accounting perspective is I suppose it disappears into the bottomless pit of taxpayer bailouts, Fed balance sheets, accounting gimmackery, virtual off balance sheet entities are virtually bankrupted, tax write-offs taken, and the rest broken down and laundered onto pensions and retail mutual funds.

        “What did the deep sea say?
        Tell me, what did the deep sea say?
        It moaned and groaned
        And it splashed and it foamed
        And it rolled on its weary way. “

        1. Nathanael

          Actually, Massachusetts invalidated all the illegal land transfers in one fell swoop. So did a couple of other states. Yes, they’re getting away with it in Florida and in the “deed of trust” states.

      2. McMike

        PS. Stuyvestant actually proves my point. Tishman is still out there doing deals. Blackrock is still out there doing deals. Metlife is still out there. The lenders are presumably still out there.

        $3.5 billion in losses just evaporated.

        Well, not entirely: “Debt holders include the government of Singapore, the mammoth California pension fund CALPERS, as well as beleaguered mortgage giants Fannie Mae and Freddie Mac, which collectively hold as much as $2 billion of Stuy Town’s debt. Stuy Town’s investors are looking at staggering losses, and some are furious about it. ”

        In other words, the losses are being eaten by retirees and the taxpayers.

    3. JerseyJeffersonian

      The pension funds, meanwhile, seem perfectly willing to buy whatever they are told to buy.

      All of this skullduggery from the PE undead, all of those marks set up looking for someplace to get a promised high rate of return on monies invested.

      All the more reason to keep up the battle on getting CalPers to hand over the information, so that the PE double-shuffle, and the CalPers complicity don’t wind up injuring the pension fund’s beneficiaries.

      Go get ’em.

  16. Cal

    If I were a tenant in one of these places I would call for repairs to be made and deduct the cost from my rent *after* creating a paper and audio trail of attempting to get the landlord to do the repairs first.

    The repairman always has the option of placing a mechanic’s lien on the property and thus clouding the title if not paid. If I were a repairman I might consider this as an interesting investment opportunity: do some plumbing or emergency repair work, submit a bill to the owners, fail to get paid and then go to the courthouse and file some papers for a slice of the ownership pie, with compounding interest, when the property is next sold.

    1. McMike

      Clever. I would suggest a bold contractor could just go around filing liens without doing any actual work. PE firms would be stuck relying on long-gone hostile tenants to testify what work was ordered and performed. Might collect 10% or 20% in settlements without lifting a finger.

    2. Yves Smith Post author

      You need to escrow the deducted rent for this strategy to be airtight. Hard to find attorneys who will do escrow for cheap unless you have one in the family.

      1. armchair

        What Yves said, but in all caps. Seriously, the repair and deduct remedy sounds great when the tenants’ union tells you about it, but in practice it is very difficult to do in compliance with the statute, at least in Washington. Also, who needs an eviction on their record?

      2. Nathanael

        Pretty much any bank will open an escrow account, right? The legalities have to be relatively simple… this is a contract you can probably write without a lawyer.

        Oh, right. “Any bank”. You have to find a reputable local bank. Sounds like a problem..

  17. josap

    As a long time (30+yrs) property manager, I can tell you the last thing you want is tenants doing repairs or being required to pay for repairs.

    Most tenants don’t have the skills to make repairs and the cost to fix their fixes can be quite high. If the tenant has to pay for repairs, or even a portion of the repair, they will not report a maintenance need. They will let the leak under the sink drip until the entire cabinet is damaged. They will disconnect the smoke alarms rather than replace the batteries.

    In Arizona the total security deposit, pet deposit etc can be no higher than one and a half times the rent. With any major repair, or a long list of small items, the deposit will never cover the cost. Suing a past tenant for repairs is a long, costly, losing battle.

    1. McMike

      And if loss of the entire security deposit is a foregone conclusion…. I would expect to see an uptick in trashed units on turnover.

      I suspect the PE firms will attempt to create a new class of debt, so that the maintenance charges roll into a consumer type debt, with is strong-arm collections, high rates, and fees.

      Getting the security deposit rules changed will be a hassle, but I’d watch for ALEC style model legislation to start making its way through the states.

      1. josap

        From what I understand, the PE firms report late rents to the credit agencies. As they have in house attorneys suing the tenants for damages may be a matter of course, the judgment will show on a credit report. The PE firms are dealing in numbers, without any consideration of people involved. A smaller landlord knows the properties, tenants, local issues, state / city laws.

        My guess is the PE firms, when they decide to sell, will try doing lease options with the existing tenants. This may be done with an in house lender, applying a portion of rent paid over a period of years to the down payment and closing costs. Easy sell and preapproved buyers – they know the income, payment history etc. Using the management staff to broker the properties means no sales commission or very low flat rates paid. A deal with a title firm for bulk business means lower cost of sale.

        1. McMike

          Yes, they can bring to bear the bulk collection resources/tactics, compounding fees and default interest rates, etc. That is what I meant.

          As far as rent-to-own, I suppose they could do that, but parceling it back out one property at a time seems not their style. Perhaps they sell it off as a lump to payday lender companies that are willing to bother with that. What’s most likely is they do rent to own seller-carry schemes that the “buyers” inevitably default on, then the lender takes it back.

          Besides, someone has to carry and service all that subprime debt, I suppose they could repackage that as CDOs as well.

        2. Jim A

          It is not clear to me how they intend to get OUT of the LL business. The “securitization of rental income” bonds makes it clear to me that they DO intend to get out. But after they’ve sold those bonds SOMEBODY has to collect the checks, evict deadbeat tenants and re-rent the properties, slap the occasional coat of paint over the moldy walls and the rest. These dealmakers are uninterested and after all the potential profits of doing these tasks efficiently have been sold to bondholders who will the spin off the actual property management? Keep in mind that the impossibly optimistic numbers that the put into the spreadsheets that the based the bonds on mean that there is almost NO chance of making a profit on the management end. Who do they think will buy THAT business? I’m guessing that hidden in the fine print of the paperwork for those rental bonds is a way to price the rump management business in such a way as to cause the losses to fall on the people that they’ve already sold bonds to. You would think that persuading new customers that you’re only ever going to screw past customers would get more difficult over time. After all, tomorrow, all of todays customers are past customers. But the Donald is still in business/

  18. PeonInChief

    Many states have an “implied warranty of habitability” that requires landlords to maintain properties at some minimal standard. Georgia, where many of the investor groups operate, does not. This means that tenants are stuck for the full term of the lease even if they can’t live at the property or living there is a health and safety hazard. In states with the implied warranty,a tenant can break the lease if the conditions are really egregious, but they need to document not only the condition but also their attempts to get the condition corrected. That means that they need to send letters, document phone calls etc. For low-income tenants, of course, moving out is a big expense, and many tenants want the problem fixed for the simple reason that they can’t afford to move.

    As a practical matter, rent withholding and “repair and deduct” are worthless. The tenant who withholds rent or deducts the cost of a repair from the rent will most likely face an unlawful detainer. If the tenant loses the case, the tenant will often be barred from renting anything for a long time, a very long time. A better strategy, in states where it’s permitted, is to make the repair and then sue the landlord in Small Claims Court for the money.

  19. Peter Steckel

    Georgia does have an implied warranty of habitability, but it is limited to the LL’s statutory duty to keep the property repaired. However, if the tenant knows of the problem and still gets hurt, the tenant can be SOL in terms of going after the LL for liability.

  20. allcoppedout

    Back here in the UK part of USUK we now greatly regret not voting in the last political leader of any substance we had – Screaming Lord Such of the Raving Loony Party. His great policy was to sell the country to the Arabs, share the money out and let us disperse to better climates with cheaper housing. Instead we went for Thatcher, Son of a Trapeze Artist, Thatcher In Drag, A Mad Guy Who Sold Our Gold and, currently PR Man. They implemented Lord Such’s policy without the good bits where we got the cash and retired to the sun.
    The very idea that property is worth anything is largely nonsense. Housing a population is clearly a cost in both build and maintenance. One would expect Country PLC to keep such to a minimum in order to maintain competitive advantage. Sadly, Thatcher’s plan to have us all living in cardboard cities was not pushed to its logical limits after the Iron Lady was infected by terrorist rust and the idea to make productive use of our mines as worker housing was written off when the damn things flooded when she killed off the miners. The much vaunted Tent City Plan was dismissed as worker feather-bedding once it was established several generations could be housed in single rooms in existing housing stock, previously outrageously under-occupied.

    We are now selling all mansions and 75% of new build in London to foreigners. Our society has, literally, never been closer – with parents, children, grandparents and grandchildren occupying the same living space. It is heartening to see you colonials following our model with such alacrity. Soon you will know the bliss of commonwealth fellowship and bow and curtsy to our great Queen, She owns the private equity company now owning and maintaining America to the luxurious standards Yves reports.

  21. Dan H

    IH had bought 3300 properties in chicagoland according to a celebratory email sent to all workers around the end of last year.

    1. Rebecca

      Hi Dan H,
      Interesting — the data available from the website RealtyTrac turned up 2,500 IH properties in Chicagoland, which has also been reported elsewhere. I worked on the In These Times piece cited here and will be continuing reporting on this issue. Were you/ are you an IH employee? If you’re interested in speaking, you can reach me at

      1. Dan H

        I was, yes. There were several different corporation names going on the transfer paperwork, that may be why some are slipping through. I was also told by a few village clerks that IH had flipped properties in their areas… though thats a large number difference to have all been quickly flipped.

  22. scraping_by

    Though I’m not a lawyer, and don’t even play one on TV, I’ve always thought of pushing the cost of repair onto the tenant as a hidden fee, one not negotiated in the business contract (lease). While the document might have some anodyne clause about ‘customary fees’ this still comes out as falsely representing the tenant’s obligation.

    The vocabulary of fraud grows ever apace.

  23. McWatt

    I have said from the get go that Private Equity invading the single family rental property
    market is a disaster waiting to happen. For everyone. For PE, renters, investors, neighbors and communities.

    There is not a shred of good in any of this. Thus the hubris is exposed.

    Ironically, local laws governing Landlords and Housing may come to the rescue while the Federal Government has not.

    “Catch-22 says they can do anything we can’t stop them from doing.” Heller

  24. Katniss Everdeen

    Uh oh.

    ““Prices have gotten to the stage where we cannot buy a house, renovate it, rent it and still make a reasonable return,” said Peter Rose, a spokesman for Blackstone, which owns roughly 41,000 rental houses nationwide. “There was a moment in time where it made sense.”


    “On Wednesday, some of the bigger players launched a trade group, the National Rental Home Council, to advocate for their interests in Washington.”

    When in doubt, LOBBY, errr “ADVOCATE.” It’s FREE SPEECH, ya’ know.

    1. JerseyJeffersonian

      A national level lobbying group…

      Here comes a fix to get rid of all of that antiquated local and state landlord-tenant law that gets in the way of the Invisible Hand inappropriately touching renters. Maybe something can be cobbled together using the Interstate Commerce Clause that will be apt for the purpose. And then the Department of “Justice” will studiously avoid enforcement of what remains of tenant rights.

  25. kristin

    Those two Invitation Homes Yelp reviews from Chicago were great (and hilariously contrasting). I noticed a link to “not recommended” reviews at the very bottom… boy do I wish I could see the review that was “Removed for Violating our Content Guidelines or Terms of Service” …. >:]

    From the review page:

    “[IH] were great to show us properties, take our application etc, but once they had our money that changed. The Portfolio Managers have changed so many times the turn over makes you wonder. Anytime we have questions we wait too long for a response. Our house has a high rental price and all the flaws are coming out. Poor painting, doors painted with cheap paint, driveways cracked, cheap carpeting and padding, new windows with no insulation and the list goes on. “


    And if you really want your stomach to turn, click on the South Florida/Miami market at the IH website:

    Zoom out and watch all the blue dots fall. There are only two areas in South Florida where they don’t have their grubby mitts: the ghetto and the Ritz.

    You too can rent this 1908 sq.ft. Pergo palace just a jog from the Everglades for $2675.

    Did a little sleuthing for sh*ts and grins, and this property’s unjust value” is $245,520 per the Broward County Property Appraiser. A 30-year mortgage at $245,520 with 5 percent fixed, a 2.5 percent property tax and mortgage insurance at 0.5 percent is……….. $1,829.50 (granted, this is from some automated mortgage calculator, and does not include property insurance, but assumes mortgage insurance).

    It’s owned by IH3 Property Florida LP. And they paid….. $335,000 for it! HAHAHAHAHAHAHAAH

    Looks like some investors from the Dominican Republic scooped it up and flipped for a small profit, and now Invitation Homes invites you to move on in to help them recover their losses. Thank you to Florida’s public record laws, may you always remain in the sunshine…


    1. weinerdog43

      Very nice takedown. Thanks Kristin. I think IH is going to discover they are not beloved by us lumpen masses.

      1. kristin

        just checked today, and the rental price on the aforementioned Pergo Palace dropped from $2675 to $2500 a month. Let’s see where it’s at in another week’s time….

        I know someone who has signed a lease with IH for a home in Miami. Was supposed to get the keys from the rental office, but hasn’t heard a thing from them. Same situation with the rent, too; price kept dropping online. Plus they’re throwing in a month for free. Simultaneously displaying a sort of desperation and fecklessness. Apparently a property inspector made it clear to the future tenants that they may have the opportunity to purchase the house at a later time. I’m sure that’s where this is heading (for the non-mold-infested properties, anyway).

  26. Bobito

    All this means is that Blackstone’s next step will be to push behind the scenes to weaken landlord-tenant laws. If experience in other areas is any indicator, there’s no reason to suppose they won’t be successful.

  27. Rationall

    The “stunning” drop in cashflow in the first deal was due to the fact that the properties were 100% leased at deal closing – something you typically don’t see in a multifamily rental deal. When some of the leases expired the cashflow naturally fell – to a level well within expectations.

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