California billionaire bets on rentals with Wake home-buying spree

dbracken@newsobserver.comFebruary 23, 2013 

Daniel Creswell’s house in northeast Raleigh sat on the market for nine months until late last month, when a deep-pocketed buyer arrived seemingly from another era.

Creswell had bought the property back in April at a foreclosure auction for $162,500. After fielding low offers for months, the mystery buyer offered $210,000, or $10,000 below his asking price.

Creswell eventually agreed to a price of $213,000, or $1,000 more than the home originally sold for in 2002. In addition to paying cash, the buyer paid the closing costs and the cost of the home inspection.

“They didn’t ask us to fix anything, either,” said Creswell, 35, a pastor at a Wake Forest church who has flipped six houses since the market crashed in 2008. “They just bought it. It was the easiest housing closing I’ve ever been a part of. ... They were a dream buyer.”

The dream buyer is American Homes 4 Rent, a Malibu, Calif., company that since late December has paid nearly $13.3 million in cash for 81 houses in Wake County, according to property records. The company, which formed last year, is one of several firms hoping to profit from rising home prices by amassing thousands of single-family homes across the country and converting them into rentals.

Such companies have raised billions from pension funds, private equity firms and other institutional investors to fuel their buying sprees. To date, these companies have focused their attention mainly on markets with large inventories of distressed homes, particularly in Arizona, Florida, Nevada and California.

What’s noteworthy about American Homes 4 Rent’s buying binge in Wake County is that it isn’t just targeting distressed properties, or even existing homes. About a third of its purchases have been new homes acquired directly from homebuilders.

“Very reasonable offers, they’re not trying to low-ball us,” said Dan Cunningham, of Brandywine Homes, which sold a house in the Braemar subdivision in Zebulon to American Homes 4 Rent for $152,000. “I mean, I don’t understand why they’re buying new homes to rent, but that’s their business model, I guess.”

Some experts are worried about investors such as American Homes 4 Rent moving into the Triangle, a market that did not experience the overbuilding and dramatic price fluctuations that many others did. Chief among their concerns: that investors are once again engaging in the sort of speculation that was rampant in the lead up to the housing meltdown.

“I think that this influx of institutional capital into the residential market is creating a bubble within the housing bust,” said Mark Vitner, a Wells Fargo economist in Charlotte. “It will end once the investors that are putting money into the funds come to realize that there are much lower-risk ways to earn the returns that they’re seeking.”

While institutional investors have helped stabilize pricing in some markets, there are concerns that the scale of their buying could distort prices in the near term. The purchases could make it look as if the region’s housing market is healthier than it actually is and adversely affect communities if the expected returns don’t materialize.

“If they decide to unload these properties, that will open up another can of worms,” Vitner said. “We just don’t know where it goes.”

‘Bless their hearts’

Institutional investors have invested at least $5.4 billion for purchase of single-family rentals nationwide during the past 18 months, according to Barclays, and an additional $8 billion is expected to be invested within the next couple of years. American Homes 4 Rent’s buying spree is being financed in part by a $600 million investment from the Alaska Permanent Fund, a $45 billion fund that invests royalties the state collects from oil companies.

Executives with American Homes 4 Rent did not return calls seeking comment. The company’s founder and chairman is B. Wayne Hughes, a billionaire who made his money providing another type of for-rent real estate: storage units. Hughes built Public Storage into the largest storage rental company in the world.

American Homes 4 Rent now advertises rentals in two dozen markets in six states – Arizona, Georgia, Nevada, Texas, Illinois and Indiana. In North Carolina, the company has been scooping up homes in Wake County and in the Charlotte area, where it has acquired more than 50 properties in recent months, according to property records.

The company has bought homes priced from the $130,000s to the $220,000s in Wake, with the average price hovering around $164,000. In some cases, the company has been paying more than $100 a square foot for its properties.

“Usually an investor will come in just at some ridiculous number you can’t deal with,” said Jeff Murdock of Murdock & Gannon Construction, which sold three new homes to American Homes 4 Rent in the Carlton Park subdivision in northeast Raleigh. “But these guys weren’t that way, bless their hearts.”

American Homes 4 Rent has not yet started marketing its presence in the Triangle, and it’s unclear how much inventory it is looking to acquire. Although investors now account for a larger percentage of home sales in the Triangle than they did before the housing bust, that percentage remains well below other harder-hit areas. All-cash purchases accounted for 16 percent to 21 percent of sales last year, twice the level of four years ago, according to Triangle Multiple Listing Services.

Local builders who have sold homes to American Homes 4 Rent say they’ve heard from agents acting on behalf of the company that it is looking to purchase as many as 100 houses a month in the Triangle or more than a thousand this year. Such numbers would represent an enormous bet on a housing market the Triangle’s size – there were just 7,317 homes listed for sale in the region at the end of January – and thus seem unlikely.

Jack Rostetter, CEO of H&H Homes in Fayetteville, said typically such investors like to create excitement among builders and sellers when they first enter a market.

“They seldom really come through at the scale they advertise,” he said.

H&H has sold American Homes 4 Rent three properties in the Sumerlyn subdivision in Southeast Raleigh, and Rostetter has been trying to talk to the company about its needs going forward. He said American Homes 4 Rent’s arrival in the Triangle makes sense when you consider that the inventory of distressed properties has been falling as home prices rise and investors rush to make acquisitions with all the money they’ve raised.

“A lot the distressed properties have been bought up ... that whole shadow inventory is starting to fade fast,” Rostetter said. “It leaves these investors aiming at ... alternative ways to get product that still meets, or is close to meeting, their profile.”

What the company wants

The profile of the homes American Homes 4 Rent is targeting is described in minutes from a meeting last May of the Alaska Permanent Fund’s Board of Trustees. It was at that meeting that the trustees agreed to allocate the fund’s first $400 million toward a joint venture with American Homes 4 Rent, but not before some trustees raised questions about how the investment would be managed and possible exit strategies.

According to the minutes, American Homes 4 Rent is targeting homes with about 2,000 square feet that are less than 15 years old and are located in neighborhoods with better-than-average schools. The company paid around $65 to $75 per square foot for the first 1,500 homes it acquired, according to the meeting minutes, and it expects vacancy rates of 5 percent or less in its portfolio.

Most Triangle neighborhoods – no matter their price point – have seen an uptick in rental properties as a result of the housing bust. The number of renters has expanded as people lost their homes to foreclosure, or found that they could no longer qualify for a mortgage. Still others have decided that buying a house simply isn’t as good an investment as it once was.

The percentage of housing units in the Triangle occupied by renters was 34.6 percent in 2011, up from 33.9 percent in 2007, according to U.S. Census Bureau data.

The danger for homeowners in the neighborhoods being targeted by American Homes 4 Rent is that rental properties become so prevalent that they deter others from buying and ultimately act as a drag on prices.

American Homes 4 Rent hopes to charge monthly rents equal to about 1 percent of the purchase price, and provide returns of about 6.5 percent a year to the Alaska Permanent Fund, according to the board’s meeting minutes. In three to seven years, if the housing market recovers, the portfolio could be sold or be converted into a publicly traded real estate investment trust, which is what Hughes successfully did with Public Storage.

Investors such as American Homes 4 Rent are hoping to benefit both from rising rental rates during the period they own the homes and any price appreciation that may occur over that same period. Apartment rents have risen substantially in the Triangle in recent years, and demand for rental housing is expected to remain strong, particularly if the economy remains sluggish and the inventory of homes on the market remains at historically low levels.

The Triangle, in particular, may look like a market primed for just the type of growth that will create a windfall for investors such as American Homes 4 Rent. The region’s population growth is now exceeding the number of new houses being built, and the low inventory of residential lots means builders are now paying more for land, which will inevitably drive up the price of new homes.

But it’s also clear from American Homes 4 Rent’s buying in Wake that the company is broadening the profile of the properties it is targeting. While housing may look affordable here, prices have been slow to rise during the recovery and the Triangle has historically experienced modest annual price appreciation even during good economic times.

Vitner said Wake County may offer the company relatively low returns given the risks involved in acquiring, leasing and managing rental houses scattered across numerous neighborhoods.

“It’s not a bad strategy, there’s just a lot more risk than I think people realize,” he said. “It surprises me that we’re seeing this much speculative behavior in the housing market after having gone through the bust that we went through.”

News researchers Brooke Cain and David Raynor contributed.

Bracken: 919-829-4548

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