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A year ago, buying foreclosed homes to rent out was the sure-thing trade for investment firms backed by money from private equity companies, hedge funds and pension systems. But with the supply of cheap foreclosed homes dwindling, some early investors are looking to cash out a bit by flipping homes to competitors.
The Waypoint Real Estate Group, one of the first companies to raise money from private investors to buy foreclosed homes, is quietly shopping as many as 2,000 houses in California that it acquired in the last few years in several private investment funds, said three people who had been briefed on the matter but were not authorized to discuss it. The homes, which are largely rented, are being shown to other companies backed by investor money that have also scooped up distressed houses in states including Arizona, California, Florida, Georgia, Illinois and Nevada.
Waypoint is considering selling about half of its 4,000 homes. Some of the biggest institutional investors in the market for foreclosed homes — companies like the Blackstone Group, American Homes 4 Rent and American Residential Properties — have slowed their pace of acquisitions in response to an increase in home prices and a dearth of foreclosed homes that do not require significant renovation.
Waypoint is following other early investors like the Och-Ziff Capital Management Group and Oaktree Capital Management, which have sold homes bought near the start of the financial crisis. But unlike Och-Ziff and Oaktree, Waypoint is not leaving the single-family home market. It is still managing more than 7,000 homes for a publicly traded real estate investment trust, or REIT, it formed last year with the Starwood Capital Group called Starwood Waypoint Residential Trust.
Jason Chudoba, a spokesman for the trust and Waypoint’s management company, said the firm did not comment on market speculation.
The single-family home market, after a wave of acquisitions by companies backed by Wall Street money, is changing as institutional buyers now focus more on expanding their operations to manage tens of thousands of homes across the United States. Industry participants say that the rapid buying of foreclosed homes has ended and that they expect other early institutional buyers to sell homes to lock in profits. They say they also expect the business to consolidate into the hands of a few large companies.
“Consolidation is a natural thing as inventory goes down,” said Aaron Edelheit, a former hedge fund manager and chief executive of a smaller company in Atlanta, the American Home, which manages more than 2,500 rental homes in several Southeastern cities.
Over all, institutional buyers have bought over 386,000 single-family homes across the country since 2011, according to RealtyTrac, a property research company.
That institutional buying has had a significant effect, especially in cities like Phoenix, Las Vegas, Atlanta and parts of Southern California, where housing prices plunged the most during the financial crisis. The institutional investment in those places helped fuel double-digit recoveries in home prices in the last year and brought some stability to local housing markets, though critics contend that institutional buyers have crowded out first-time buyers.
But the rapid pace of acquisitions could not continue. Even Blackstone, the largest acquirer of homes, which spent $8.6 billion for 45,000 units in 14 cities, has reduced its once-feverish buying. It now spends about $30 million a week to buy homes, said a person briefed on its plans, compared with $140 million a week last summer. The $30 million that Blackstone spends buys about 116 homes.
Now, institutional buyers like Blackstone are more focused on fixing the properties they already own, renting them out and using the properties as collateral to back bonds that can be sold to investors.
Blackstone, American Homes 4 Rent and Colony American Homes have brought five rent-backed securitization deals worth $3 billion to market. The bonds in those deals are backed by loans issued on 20,741 rental homes owned and operated by the three companies, according to Morningstar’s credit rating divisions, which has reviewed and rated the deals.
The companies are finding that the most challenging part of the rental business is expanding their property management operations — often from scratch — to deal with leaky toilets, damaged roofs and tenants who do not pay rent on time. Blackstone’s property management business, Invitation Homes, for instance, has grown to more than 1,500 employees from just 14 two years ago. The rapid growth has not always been easy.
“Most of these companies have 18-month track records as property managers, so they are still working out the operational details,” said Michael Gutierrez, managing director of operational risk assessments at Morningstar Credit Ratings. “There have been growing pains.”
Mr. Gutierrez is responsible for reviewing the ability of a company that is issuing securities backed by single-family homes to manage the properties it has acquired. He says his team assesses oversight of the contractors the company hires to renovate and repair homes, the speed with which it responds to tenant complaints and the training employees receive about dealing with renters and their adherence to fair debt-collection practices.
Morningstar’s presale rating reports on the bonds offered by Blackstone, Colony American and American Homes 4 Rent have deemed the work of the companies’ property managers acceptable. But the reports note that all the companies are young with limited operating records.
As for the Waypoint homes being offered to rival companies, most of them are in Northern California or the so-called Inland Empire east of Los Angeles. The homes are held in 10 investment funds that Waypoint began raising money for in 2009 from investors as varied as Columbia University and the private equity firm GI Partners. The three people briefed on the matter said Waypoint appeared to be in no rush to sell the homes and might opt to sell them piecemeal.
When Waypoint’s management group joined with Starwood Property to oversee the operation of the new REIT, there was an understanding that the investment company would look to gradually unwind its private real estate funds, said one the people briefed on the matter. In fact, in March, one of those original Waypoint investment funds sold a portfolio of 707 homes for $144 million to the Starwood Waypoint REIT.