Wolf Richter: How Private Equity Firms Manipulate the Buy-to-Rent Housing Racket

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By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Testosterone Pit.

Private equity firms are the ultimate smart money on Wall Street; they know how to wring out the last dime from their own clients, such as pension funds and rich individuals, through hidden fees, obscure expenses, elaborate expense shifting, lackadaisical disclosure, and “zombie advisers,” to the point where SEC Inspection Chief Andrew Bowden singled them out in a speech in May. Now the lawyers are circling.

And these private equity firms invented a whole new business: buying vacant homes out of foreclosure and from banks and renting them out. Flush with the Fed’s nearly free money, Blackstone Group ended up spending $8.6 billion in two years on 45,000 homes, spread helter-skelter across 14 cities. Another PE product, American Homes 4 Rent, which went public last summer as a highly leveraged REIT, bought 25,000 homes. Firms sprouted like mushrooms, spending $50 billion to acquire 386,000 homes.

And home prices soared. Year-over-year increases of over 20% suddenly appeared in the data. Housing Bubble 2 was born. That’s how the Fed “healed” the housing market. Yet numerous economists claimed that buying 386,000 homes over two years in a market where about 5 million existing homes change owners every year could not possibly have had much impact on price. Turns out, that meme is awfully close to propaganda.

The Smart Money on Wall Street – Private Equity Firms – Had a Goal

And a system – aided and abetted by the banks. Homebuyers today are, literally, paying the price. The goal was to progressively drive up home prices to book near-instant paper profits on the units they had already bought. According to a source at one of the GSEs (Government Sponsored Enterprise), whose work is focused on residential real estate, they did it by constantly laddering their purchases. And in some markets, like Las Vegas, they achieved price increases of 100%. The multiplier effect. He explains:

A multiplier of roughly 60 times is placed on one sale in a market. In other words, one sale affects the value of 60 homes. So the 386,000 homes adjusted the price on roughly 23 million homes. There are 78 million homes in America with 35 million first-lien mortgages. This happened in about 8-12 markets nationwide. The West Coast was leading the charge back up.

Last fall, two investment houses announced they were going to sell out of their inventory and today three others announced the same. Reason: prices have more than met their goal. Since real estate is a commodity, the rule of price elasticity applies. A very small number of sales can have extreme consequences in price for the rest.

The problem with that strategy? It drove up prices so far and so fast that the business model of buying these homes, fixing them up, and renting them out at a profit has hit a wall. So the dynamics of the market are changing. From gobbling up and finding renters to…

Selling, Securitizing, and Consolidating

But selling them to first-time buyers at these prices – well, forget it. So Waypoint Real Estate Group is trying to “quietly” unload half its inventory of 4,000 homes in California to another company. It also manages another 7,000 homes that an affiliated REIT owns. Och-Ziff Capital Management Group and Oaktree Capital Management have already started selling their homes. Other firms, including Blackstone Group and American Homes 4 Rent have pulled back from buying homes as prices have soared.

Instead of trying to sell their tens of thousands of homes, Blackstone and American Homes are selling synthetic structured securities that are backed, not by mortgages like the toxic waste that contributed to the financial crisis, but by something even worse: rental payments, based on the flimsy hope that these homes will stay rented out. The already dumped $3 billion of this stuff. Wall Street is jubilating. The fees are going to be huge: the market for this type of synthetic concoction is estimated to be $1.5 trillion.

Now that they have to focus on making the business model work with what they’ve got, they have to do the grunt work of fixing up tens of thousands of far-flung homes and renting them out one at a time, and keep them rented out, and they have to come to grips with American mobility where strung-out renters wander in and out and are late paying their rent if they can pay at all, and it’s hard, tedious work.

With buying more homes in overheated markets no longer a priority, or even an option, American Homes is embarking on the next step: buying competitors. It just announced that it would acquire Beazer Pre-Owned Rental Homes, a REIT backed by Beazer Homes, private equity firm KKR, and others. It now owns 1,300 homes. Everyone had jumped into this Fed-sponsored game, even home builders like Beazer. American Homes CEO David Singelyn put it this way during the earnings call in May: “We will be one of the players in the consolidation of this sector.”

The goal: manipulate the market to their liking. Through consolidation, the biggest players will try to raise valuations – or at least keep them from collapsing – and control the smaller players that are desperate to take their profits by dumping homes on the market and thereby opening the floodgates. All heck would re-break loose in the housing market. It would reverse the flow, and all the paper profits PE firms have already bragged about to their clients would suddenly evaporate. And that must not be allowed to happen.

“Asset prices have reached stunning levels, obviously out of line with ‘fundamentals.’ The “most dangerous” are housing bubbles; when they burst, they “wreck whole economies.” Read…. UBS: The Secret Reason The Fed Is ‘Tolerating’ Bubbles

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  1. Jim Haygood

    ‘They have to do the grunt work of fixing up tens of thousands of far-flung homes and renting them out one at a time.’

    Unlike building new tract houses, which can be done in mass production fashion, facelifting old houses is a time-consuming craft. Each house has its own needs, as well as surprises lurking within the walls and behind the cabinets.

    PE suits are never going to get this job done right, especially since you can’t rent a house while it’s full of dust, tools and opened walls. Eventually they will have to sell those houses (the ones the tenants didn’t destroy) to owners who care.

    1. Vatch

      “surprises lurking within the walls and behind the cabinets.”

      Such as a cat hiding or trapped behind a large bookcase? Okay, maybe that’s more likely to happen in a home that is already occupied.

      1. ambrit

        I understand that this is an exceptional feline. Could it have been tracking down an anomalous magnetic field indicating a hidden listening device?

    2. ambrit

      Au contrair mes amis.
      First, the “suits” don’t give a d— about the actual houses. They rely on ‘reports’ from sub contractor underlings to judge the potential profitability of the “units.” When the “suits” begin a serious application of the ‘metrics’ system to the entire enterprise, reality will be left further and further behind.
      Second, once a ‘unit’ drops below some income generation standard, it gets the heave ho. (The equivalent of the “Toxic Tranche” in securities.)
      Third, the ‘heave ho’ can take several forms. The ‘unit’ could be sold out of the trust at a “loss” to some desperate individual, and a tax write off taken. (Bottom feeders come in all shapes and sizes.) The ‘unit’ could be donated to a charity, private or public private hybrid, for a tax write off. (The corporation gets to make itself look good in public relations terms.) The ‘unit’ could be destroyed outright, and, again, a tax write off taken. (I can see public entities, desperate for a reduction in infrastructure maintenance costs, subsidizing such a “return to nature.”)
      Finally, at the present outrageously high valuations the rental corporations place upon their ‘units,’ very few potential “owners who care” can afford to venture into these shark infested waters.
      A much better “solution” to some of these problems would be some sort of “squatters rights” movement. After all, if the “suits” have managed to destroy the lands registry system in America, they cannot complain if some enterprising groups take advantage of the situation and begin “reclaiming” some of these “ownerless” properties. If they are smart, these groups will get to know the local law, and forge relationships with them. Then, when Mr. Big Shot shows up with some goons in tow to evict the local squatters, he will have a fight on his hands. With any luck, all politics will be local.

        1. James Levy

          What I read at Counterpunch was that they were bundling these homes, turning them into rental corporations, then dumping the stocks on the second-tier suckers. They’ve found that being a successful landlord takes patience and commitment, two things these bastards are disinterested in.

  2. Blue Meme

    Each new financialization scam finds a new way to hoover up the cash of another set of marks. Same muggers, new victims.

    It is kinda like the parable of the scorpion and the frog, except that this scorpion never drowns, and simply climbs onto the backs of an endless supply of new frogs.

  3. Oguk

    Seems like good bye to middle-class home ownership…if that wasn’t already happening fast enough.

  4. sgt_doom

    A most excellent article, and something along those lines:

    Full Spectrum Economic Warfare

    Some time ago, The Stranger’s former fashion columnist, Marti Jonjak, wrote several excellent articles for the paper about the horrible nightmare she was experiencing regarding her living situation at an apartment building on Capitol Hill in Seattle.

    This has become the norm, both around Seattle and throughout the nation, thanks to the private equity/leveraged buyout of companies and real estate over the past decade.

    Part of the fantasy finance world, structured finance or leveraged and ultra-leveraged buyouts allow the use little or no collateral to purchase buildings and extract the most money out of them (or leeches bleeding hapless innocents to death, would be another phrasing of it).

    The real estate investment firm, Ethos Property Group, which is affiliated with Pacific Living Properties, the nightmarish property management firm featured in Ms. Jonjak’s articles, says this at its web site about another Seattle property:


    One of the best locations in Seattle across from the Pike Place Farmers market. The investment needed cosmetic rehab and reworking of the underlying financing to increase rents as much as 200%.

    Of course, the overall RE deals fall under the category of structured finance (securitizations and credit derivatives) and another web site of Ethos Property Group, well explains their financial backers:


    Major debt and equity partners were Merrill Lynch Capital and Cityview/Calpers.

    Many who have experienced this nightmare of a property management firm taking over operation of an apartment building and slashing services while jacking up rents, with consistent and constant rental increases of a most usurious nature, have similarly, with the same time frame, been laid off due to other private banks (private equity firms) doing leveraged buyouts of their companies.

    Even though the laid off employees might not have been aware of this (and too often they aren’t), this is frequently been the case.

    Imagine being laid off due to a PE/LBO (private equity/leveraged buyout) while simultaneously experiencing your rent being jacked up to an ungodly degree, also due to a real estate private equity leveraged buyout or structured financial deal?

    Meanwhile, you could also be experiencing other fraudulent attacks: your telephone or cell phone bill lists bogus rates (Qwest, T-Mobile, etc.), your HMO or private health insurance is double and triple billing you or family members (always difficult to figure, given their billing process), and a host of other horrendous experiences, so many times originating from the same category.

    Also, in the same vein, you could be experiencing the loss of a job through a PE/LBO while experiencing fraudclosure by one of those banks which have been financing all those structured finance and LBOs (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, etc.).

    Private equity leveraged buyouts, which is really just inverted rehypothecation (the use of the same collateral for multiple and endless loans) which is supposed to be illegal in America, although legal in the UK’s City of London, allows for others to make your life a living hell, and repeatedly so, while they reap all the profit, while adding no value to this country and society.

    The principle components of the world of fantasy finance, which finances all sorts and forms of chaos, from what I described above, to wars, government coups, and various and sundry negative events, are:


    Credit Derivatives


    Private Equity/Leveraged Buyouts

    Hedge Fund HFT Speculation

    In order to believe in the nonsense of fantasy finance, like believing in Tinker Bell in Peter Pan in order to continue her existence, you must simply accept the nonsensical bullcrap they peddle.

    Local Sources:

    (Marti Jonjak’s articles)


    PLP/Ethos Property Group criticisms:




    Other Sources/General but important articles:



  5. Ignacio

    So, those rent-backed securities will almost certainly be sold to pension funds and the like, and thats why large PE firms want to keep high house prices. The bussiness will be dead once the securities render losses to the holders and nobody wants to buy that crap anymore. What will then do the Fed to prop the 3.0 housing bubble?

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