Clash of housing bottom fairy tales: Big Bad Wolves v. Robin Hood Investors.

My friend and fellow real estate investor Mei was asking about competition for single family REOs from big institutional players buying them at the courthouse as in the Bloomberg article here. The article profiles Waypoint, a Southern California real estate investing outfit that has developed some great technology to facilitate buying and leasing REOs. Check out Waypoint’s website, it’s the best example I’ve seen of the lease/option, credit repair, rent-to-own strategy for real estate investors.

Will REOs to Rentals compete with Apartment Building Investments

It is a great question and one that I’d been wondering about too. Just so happens I was meeting with one of my private equity clients last week and we had a long conversation about that very subject. My client is the real estate/mortgage specialist at a 50B firm and they’ve been trying to crack this market profitably for about a year. Here’s the bottom line: Private equity needs to earn 15% IRRs unlevered to make their numbers and single family houses bought on the courthouse steps are not selling cheap enough to generate those returns, especially when the proper reserves are set aside for repairs, maintenance and vacancy. Even Waypoint with their bleeding edge tech is only 8 or 9% ROI.

… So unless Fannie and Freddie start selling in bulk and bundling the sales with cheap financing the big players aren’t really a threat to local investors, especially on the courthouse steps. Now Tom Barrack at Colony has an idea that I think might just work and that is take those bulk REOs and spin them into a REIT whose retail investors won’t demand private equity level returns. Colony has the expertise to buy pools of distressed mortgages as well and doing so may get them in the door cheap enough to make the numbers work.

I want to touch on something that the Bloomberg article totally missed the boat on… the worst is not yet over in the foreclosure mess. Yes foreclosures were down last year but that is because the TBTE banksters stopped their robo-signing mills while they bought off the Feds and 49 of the State Attorneys General for pennies on the dollar for their RICO level fraud and perjury. Now that systemic abuse of homeowner’s rights is completely legal expect to see significantly more foreclosure activity this year.

How much more? Depending on who’s numbers you believe the shadow inventory is between 9 and 15 million houses. Granted some of those will get worked out or short-sold but most won’t and that’s a lot of houses to get dumped on the market. Even if Tom Barrack, Sam Zell, Warren Buffett, Barry Sternlicht, Howard Marks and other big players start buying in bulk that won’t really put a bottom in prices because of what happens when you buy in bulk.

When you buy REO homes in bulk or in ‘tapes’ as they’re called, you get some gems, you get some decent ones that fit your model and you get some junk; and you dump the junk. That means the worst of the worst is still going to be coming on the market at lower than fire sale prices because every extra day that junk is on their books just hurts the portfolio returns and sucks energy away from executing the strategy.

So net/net/net I don’t think local real estate investors have to worry about the big guys muscling them out of the way on the courthouse steps.  If they do they’ll be over paying, right? It does however raise an interesting question for apartment building investors, will REO-to-rentals compete with us for tenants? See the answer in our next post: Will REO-rentals Really Compete With Apartment Building Investments?

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