Tuesday, January 10, 2012 / by Nathan Clark
Bulk Foreclosure Sales Appear Likely
A few months ago, the U.S. housing and mortgage-related agencies put out a public request for input on dealing with the large number of repossessed homes they had on their hands.
The prevailing thought back then was that there’d be some kind of government-backed program that would help investors purchase large numbers of repossessed homes that would then be converted to rental properties.
The idea seems to capitalize on a couple of ideas:
1. Selling bulk properties, as many as 500 at a time, some reports have said, will help get foreclosed properties off the market faster. The discussions to do this are among the first that address the REO and vacant-homes problem with more than a nickel-and-dime answer.
2. Converting REO to rentals addresses the demand for affordable rental housing. As the homeownership rate nationwide has dipped, the demand for rentals has increased. And so have rental rates.
Some estimates reveal that the agencies have as many as 250,000 homes in their possession across the country, and with the back-log problems that slowed foreclosure processes in 2011 likely to gum up the works less this year, doing something with the quarter-million homes already on the market seems important.
And it seems to be closer to coming to fruition, as well. CNBC reported that, according to unnamed sources, the White House is close to announcing the pilot program designed to deal with this inventory of REO. According to the CNBC report, details being ironed out include the potential market impact, how the government and its agencies can partner with private investors and what the operational challenges will be in managing big groups of homes that have become recently converted rental properties.
A program, if done correctly, could alleviate both some short-term and long-term concerns with real estate markets. Some areas that have been hard hit by vacant and blighted homes could benefit from such homes being sold and rented out. That would be an immediate impact.
Longer-term relief might be provided in the form of a program in place to deal with more foreclosures as they come on the market. If another 250,000 homes are destined to be repossessed this year, for example, it’s not a bad idea to have something already in place to help sell these properties.
But there could be bigger benefits to local economies, too. As investors pool money to purchase homes in bulk, companies are likely to form and jobs be created. Property management is going to be a need if homes are being turned into rentals by the hundreds, and contractors will be busy fixing homes up to get them ready for rental occupants.
Personally, I think it’s a great concept. I think the mindset of investors – and I’m talking about institutional investors here – is that real estate is a great buy right now. But what hedge fund manager wants the headache of setting up management of hundreds of rental properties? Providing a government-backed way to partner everybody – private investors and institutional investors – isn’t a bad way to get the money out on the table. And there is money waiting to be spent on real estate.
But there are some potential challenges. For one, private investors are going to want to feel no more exposed than anybody else in the game when it comes to risk. These aren’t all going to be cash deals, and the private investors are going to have to feel as though whatever financing might be provided will not leave them alone holding the bag. The structure is going to have to be more of a true partnership than one of banks handing out money because the government will bail them out if something goes wrong. We all know how that turns out.
The other major challenge, not to sound cynical, is that is IS a government-backed idea. That means there will be politics and slow-moving bureaucratic issues to deal with; that’s almost guaranteed.
But if agencies’ ambition is at least somewhat matched by their execution (when does that ever happen?), then it’s something to perhaps get excited about.
The prevailing thought back then was that there’d be some kind of government-backed program that would help investors purchase large numbers of repossessed homes that would then be converted to rental properties.
The idea seems to capitalize on a couple of ideas:
1. Selling bulk properties, as many as 500 at a time, some reports have said, will help get foreclosed properties off the market faster. The discussions to do this are among the first that address the REO and vacant-homes problem with more than a nickel-and-dime answer.
2. Converting REO to rentals addresses the demand for affordable rental housing. As the homeownership rate nationwide has dipped, the demand for rentals has increased. And so have rental rates.
Some estimates reveal that the agencies have as many as 250,000 homes in their possession across the country, and with the back-log problems that slowed foreclosure processes in 2011 likely to gum up the works less this year, doing something with the quarter-million homes already on the market seems important.
And it seems to be closer to coming to fruition, as well. CNBC reported that, according to unnamed sources, the White House is close to announcing the pilot program designed to deal with this inventory of REO. According to the CNBC report, details being ironed out include the potential market impact, how the government and its agencies can partner with private investors and what the operational challenges will be in managing big groups of homes that have become recently converted rental properties.
A program, if done correctly, could alleviate both some short-term and long-term concerns with real estate markets. Some areas that have been hard hit by vacant and blighted homes could benefit from such homes being sold and rented out. That would be an immediate impact.
Longer-term relief might be provided in the form of a program in place to deal with more foreclosures as they come on the market. If another 250,000 homes are destined to be repossessed this year, for example, it’s not a bad idea to have something already in place to help sell these properties.
But there could be bigger benefits to local economies, too. As investors pool money to purchase homes in bulk, companies are likely to form and jobs be created. Property management is going to be a need if homes are being turned into rentals by the hundreds, and contractors will be busy fixing homes up to get them ready for rental occupants.
Personally, I think it’s a great concept. I think the mindset of investors – and I’m talking about institutional investors here – is that real estate is a great buy right now. But what hedge fund manager wants the headache of setting up management of hundreds of rental properties? Providing a government-backed way to partner everybody – private investors and institutional investors – isn’t a bad way to get the money out on the table. And there is money waiting to be spent on real estate.
But there are some potential challenges. For one, private investors are going to want to feel no more exposed than anybody else in the game when it comes to risk. These aren’t all going to be cash deals, and the private investors are going to have to feel as though whatever financing might be provided will not leave them alone holding the bag. The structure is going to have to be more of a true partnership than one of banks handing out money because the government will bail them out if something goes wrong. We all know how that turns out.
The other major challenge, not to sound cynical, is that is IS a government-backed idea. That means there will be politics and slow-moving bureaucratic issues to deal with; that’s almost guaranteed.
But if agencies’ ambition is at least somewhat matched by their execution (when does that ever happen?), then it’s something to perhaps get excited about.
