Corporate Housing Purchases Cause Crisis

Investment Analysis Clubs Macro Economic Trends and Risks
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I started this post as a reply to another, but IMO it deserves it’s own thread.

We are in a time where the rent/buy calculators swing strongly to buying a home being your best option
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That could quickly change when mortgage rates hit 5% and 6% next year! (they probably won’t though, because the fed will be forced to back off in 2 ways, first they will likely slow their interest rate increases, and second, they will have to start buying mortgage debt again).

Sorry to sound like a broken record, but the state of housing has much more to do with a skewed supply/demand curve and less to do with mortgage rates. Yes, this time it is different. Demand has been created for larger living areas with the potential for home offices given the WFH trend which is likely to stick, and the fear of having to go back into lock down should Covid escalate or another unknown virus present, as well as high participation by corporations in buying single family homes to put on the rental market. These corporate buyers pay cash, creating a home buying market where if you cannot pay cash you better offer well over asking on the home. https://www.redfin.com/news/investor-home-purchases-q4-2021/… Lots of very good data at this open to all article and I highly encourage you to read the article in full.

This corporate trend is not new. I noticed it after 2008 in Atlanta, when large blocks of foreclosed homes got snatched up by Blackstone and put on the rental market, which then gap up in rent price because the corporation controls so much of the inventory. Youngest is facing the problem in his new city as well, with the high high rents making it necessary for him to simply rent a room in a 3 bedroom townhouse for $1K/month. Just an ordinary townhouse, and in the burbs, about 20 minutes from the city with higher rent prices. The only way he will be able to buy a house is by using the Bank Of Mom and Dad, which will pay cash. I see the same affordable housing crisis here, even before rents gapped up 20+% this year. We also live in a small city where there are many places that rent by the bedroom, inventory controlled by investors.

IMO, it is local and Federal gov’t that needs to control this, in order to continue to provide affordable housing to the locals. Raising mortgage rates will only strengthen the hand of those who can pay cash, driving rents higher and prices higher. Currently our city is eliminating SFH zoning in favor of 3+ units, which will only make buying properties more interesting to investors and compound the problem, effectively forcing families from the city as housing units get smaller and more expensive on a per bedroom basis. One way to mitigate the growing affordability problem could be to change the tax rules for owner occupied vs rentals, or perhaps for more than X rentals, be that 1 or 4, or whatever. There are many landlord laws that only apply to those with more than 4 rental units. Locally, that could be a higher tax rate for rental properties than owner occupied. Property taxes have skyrocketed in our city, with escalating sales prices, causing long time owners, many elderly, to have to sell their home. Escalating assessments are kicking many who were previously in the real estate tax waiver program to lose the benefit simply because they stay in their home as it’s value escalates past the max home value for the program, while their income does not grow. Federally there could be take backs for over X rentals of many of the great tax breaks one gets on a rental property. There is a feeding frenzy from corporations because they see the purchase as a great deal. Tax law changes could mitigate those benefits for investors and even the playing field a bit.

Corporations will understandably continue their feeding frenzy until actions like these are taken.

These corporations disingenuously like to claim that they have bought only something like 2% of the home sales, but that is on a national basis, while the corporations focus on specific locations where potential to get high rent is supported by strong diverse economies and supply constraints. It is near impossible to extrapolate real estate data to reflect what is going on in a specific location. Not all averages are meaningful, with almost nothing about the national average numbers that people like to bandy about for real estate being meaningful to indicating what the real estate scene is like where you live.

Real estate is much more complicated than how high the mortgage rates are. Having a safe affordable place to live is increasingly threatened, and is IMO a large factor when it comes to uprisings of normally easy going people. This affordability crisis needs to be addressed by understanding the details of what is going on, and taking steps to mitigate it.

IP

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I have one of these corporate houses next to me. No problems, regular lawn service, no rowdies but I don’t like it. Take their business elsewhere. By the way, they restyled this house into a “modern” one and it looks hideous or should I say, not to my liking and it looks out of place in the area.

Shell corporation is listed as owner.

Lucky Dog

PS who dislike people who rent their houses for AirB&B……it means strangers in the neighborhood with no interest in keeping the peace and misbehavior.

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These corporations disingenuously like to claim that they have bought only something like 2% of the home sales

It’s worse than that. They claim, possibly accurately, that they currently own only 2% of (SFH?) rentals, but (from your link) Investors bought 18.4% of the U.S. homes that were purchased in the fourth quarter (of 2021), a record high…

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It is worse for young home buyers than I realized. Son of good friend worked hard in college, is already earning 6 digit income 3 years out, saved $90k in three years, bid $17k over asking price, no inspection, realtor said ‘he didn’t even come close.’

This was for a house at Brandermill, a subdivision nowhere near the city of Richmond.

We felt we overpaid for our house two years ago. Now big city retirees are making multiple offers, no inspection, at least $100k more than we paid for our comparable house in the same neighborhood.

Young families have no chance.

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These corporate buyers pay cash, creating a home buying market where if you cannot pay cash you better offer well over asking on the home.

I’m no expert in selling houses. Ms. AW and I are still in the first house we bought in 1982.

But this statement confuses me.

We have no desire to hold a mortgage when it comes time to sell the house. Why would we care if someone is paying cash or financing it through a bank mortgage? Either way, we’re getting cash.

Your house selling noob,
AW

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We have no desire to hold a mortgage when it comes time to sell the house. Why would we care if someone is paying cash or financing it through a bank mortgage? Either way, we’re getting cash.

Paying cash eliminates several potential points where a contract can fall through. No need to worry about an appraisal, which is particularly tough in a rising market as it looks at past data, not really seeing the rise going on. Will the sellers get the mortgage? We have had times where we could have paid for a property in cash, but with self-employment income it was a struggle to show enough documented income to qualify for the mortgage. Paying cash means you can waive home inspection along with others. And settlement can happen MUCH faster.

HTH,

IP

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It did help. Thanks, IP.

AW

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Put another way, “cash” in the context of an offer to buy a house is shorthand for “no financing contingency.”

So if the sale falls through due to financing, seller can keep the security deposit. Of course, it’s better if the sale doesn’t fall through. When our house was on the market and we considered an offer with no contingencies from a young couple, our Realtor contacted the buyers’ parents’ broker to verify they could follow through, and received a reassuring response. So we accepted.

In fact, by the time of closing, the buyers had obtained a mortgage, which was fine by us. As you said, we’d be getting cash regardless of how the buyers came up with it.

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“We have no desire to hold a mortgage when it comes time to sell the house. Why would we care if someone is paying cash or financing it through a bank mortgage? Either way, we’re getting cash.”

True…but the all cash, no inspection, ‘as is’, close in 10-30 days or your choice is hard to resist. the sale will go through with high certainty. Through a house purchasing entity, almost 100% certain.

With a mortgage involved, might require home inspection - possible ‘defects’ to be corrected or code violations or updates required… and hassles from the mortgage company.

At age 75, still in my house, but one of these years might wish to downsize. Don’t know how long the trend will continue, but by mailbox has daily offers to buy my house - no hassles. every day it seems. But of course, everything I might wish to downsize to - is going up up and up. Heck at age 80 or 85, might be living assisted type place…

My uncle…stayed in his 80-90 year old house till 90 years old…then moved to continual care place for last 4 years…did well until last 3 months at 94 when he went off a cliff health wise. Had his own 1 bedroom place… 2 meals a day served - activitiies - moved to nursing care unit last 3 months…

My house 31 years old now…in popular Dallas suburb with great schools, parks, recreation, libraries, a couple hundred places to eat… 300,000 people in this burb surrounded by other burbs…

t.

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The thing to watch is for when they eventually start selling the massive number of homes that they have acquired. That could have a huge impact on the market.

I did not dig into but my impression is that a lot of the financing for the purchase of these homes is coming from low interest rate corporate bonds. One random one I saw in a press release for a company that owns the house behind me was for a billion dollar in bonds that mature in 2028 and 2034. If interest rates are a lot higher when they need to issue new bonds to cover that money then a lot of rentals may no longer make sense and they will sell them.

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Hi, IP,

I enjoyed your thoughtful OP and agree with much of it, but I do disagree with this comment:

Currently our city is eliminating SFH zoning in favor of 3+ units, which will only make buying properties more interesting to investors and compound the problem, effectively forcing families from the city as housing units get smaller and more expensive on a per bedroom basis.

In areas where there is a lack of affordable housing, it seems to me that the solution must be to make it easier to build more homes, which the zoning change does. Desirable cities and towns throughout the country suffer from lack of affordable housing stock due to restrictive zoning and NIMBYism preventing the construction industry from keeping up with demand. Now there is a fairly widespread movement to ease the restrictions and let the ‘invisible hand’ get to work without so much government interference.

Could the zoning changes make a given single family property more interesting to investors, as they see the opportunity to buy and build several more units on the property? Sure, but when those units are built, that increased supply will help sate demand and moderate rent increases.

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Currently our city is eliminating SFH zoning in favor of 3+ units, which will only make buying properties more interesting to investors and compound the problem, effectively forcing families from the city as housing units get smaller and more expensive on a per bedroom basis.
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In areas where there is a lack of affordable housing, it seems to me that the solution must be to make it easier to build more homes, which the zoning change does.

Ben, in theory, yes, the units themselves will be less expensive per unit. But on a per bedroom basis, they will be much more expensive. Take the home we just sold for example. It is a 4br/2ba on 0.2 acres. Even at our projected rent of $2,900 for the unit, that is $725/bedroom.

With zoning change we would make our 4bd into a 2/1 over under duplex, and because we are unlikely to split the utilities, it would become a 30 day plus rental, which qualifies as a long term rental. Utilities included and furnished. Rents would go to $2750 per month per unit, which is $1375/br. Yes, apples to oranges in some ways, but even with a duplex where the tenants share the bill with gas/electric 50/50 and water prorated on a per person basis, the base rent would still be easily $2,000 per unit or $1,000/bedroom. We have the market for these rents, though that may dampen some what should the need for traveling medical professionals decline with endemic Covid.

A third unit would be built in the back yard, creating another 1 or 2 bedroom detached unit, for which there is a great need. Assuming a 2br, it would go for around $2,200/month, including neither utilities nor furniture. It would be a long term rental. It would also eat up a great deal of the great fenced back yard that is perfect for kids to play in.

It was highly tempting to see our investment through to this plan, but we have reached the conclusion that we would rather be playing than working the rental. I am trying to put our investments on more of an auto pilot than hands on. Either way you reconfigure the property, with max 2 bedrooms per unit it minimizes the ability of a family to rent it, and it increases the cost of the unit on a per bedroom basis.

I appreciate your thoughts, but I just don’t see this facilitating affordable housing unless you are looking at the smaller units as comparable to the converted units. If there is fallacy in my theory, please point it out.

FWIW,

IP

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I appreciate your thoughts, but I just don’t see this facilitating affordable housing unless you are looking at the smaller units as comparable to the converted units. If there is fallacy in my theory, please point it out.

I have no quibbles with your analysis of what could be done with your specific property, and agree that if the new owner and others in similar situations uniformly take that approach it would reduce the stock of units with more than 2 bedrooms and increase the cost per bedroom. But, I would want to recognize that your specific situation may not be that common, with a 4 bedroom house hypothetically being converted into a more lucrative duplex with two 2/1 units, is not that common. Most houses have 3 bedrooms or less, and we can also imagine plenty of scenarios where housing stock is increased without the negative impact possible in your case.

Taking your case specifically, a new owner might decide that the cost/work of making the main house a duplex isn’t worth it, and instead just builds the new 2/1 in the backyard: more supply without any change in the existing stock except for the loss of the back yard.

Or consider a typical 3/2 house over an unfinished basement, very common in my area: under the new rules, perhaps the owner creates a new apartment in the basement, maybe even adding another full 3/2, and they build the 2/1 in the back yard. Sure the inhabitants of the original 3/2 enjoyed a lot more privacy and a much bigger back yard, but now 3 families can live where 1 did before.

I think the theory is sound: your city, like mine and many others, needs more supply to meet demand and bring prices down, or at least keep them from skyrocketing ever higher, and the easiest and best way to create more supply without having to build a lot more infrastructure and impinge on surrounding farmland and forests, is to make it possible to build more densely on existing lots.

PS - I think I remember from prior posts that you live in the Charlottesville area? I was just up there this weekend to visit family and we enjoyed a lovely weekend staying in the upstairs of a house, the original 3/1, while the owners live in an apartment in the basement. They are quite young, and I expect they rely on income from the upstairs unit to be able to afford the house. My wife and I agreed that Charlottesville had a great vibe, great restaurants and we could see living there. It reminded us a lot of our home, Asheville, NC, but with a MUCH bigger university which changes the dynamic rather a lot.

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Taking your case specifically, a new owner might decide that the cost/work of making the main house a duplex isn’t worth it, and instead just builds the new 2/1 in the backyard: more supply without any change in the existing stock except for the loss of the back yard.

After the zoning change is done, when homes come up for sale they are more likely to be bought by a developer/investor who will max out the number of units and bedrooms. A primary home purchaser will be less likely to be able to afford what the developer can afford, causing prices to rise and taxes to continue their upwards trend, all lowering affordability. The real irony is that there used to be in house apartments allowed, but the city cracked down on those as illegal. Our neighborhood in fact used to be 2 family zoning, and across the street from us still is, but the neighborhood association requested the change to single family zoning because with our proximity to the University, the apartments were getting rented to students and not locals.

Or consider a typical 3/2 house over an unfinished basement, very common in my area: under the new rules, perhaps the owner creates a new apartment in the basement, maybe even adding another full 3/2, and they build the 2/1 in the back yard. Sure the inhabitants of the original 3/2 enjoyed a lot more privacy and a much bigger back yard, but now 3 families can live where 1 did before.

Possible, but why deal with the year round noise when an owner occupied home can have an AirBnB for much higher rent and fewer days rented? Sure, your scenario is possible, but IMO mine is probable. At least currently a short term rental has to be in an owner occupied home or in commercial zoning.

IMO the city, in an effort to make housing more affordable to buy and keep as a personal residence, should increase the tax rate for rental properties, or at least for more than say 2 rental properties. This would boost revenue while imposing more expenses on the investors, making the rental a less good deal. It would also keep those in their homes long term from no longer being able to pay their taxes, getting booted out of the tax forgiveness plan because their property values have skyrocketed, though their income has remained the same. If so desired they could target those additional tax revenues to go towards affordable housing. Landlords charge the rent that the market will bear, which is not necessarily the same as what they need to be a decent investment. Raising their taxes will not impact rents, which are restricted by what the market will bear. This should increase primary home ownership and slow down investor purchases. If investors are crowding out residents, then make it less welcoming for investors.

…we could see living there. It reminded us a lot of our home, Asheville, NC,…

Funny, we’ve been eyeballing Asheville. It’s just too hot here in the summer.

IP,
Damned Yankee

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“…we could see living there. It reminded us a lot of our home, Asheville, NC,…”

Funny, we’ve been eyeballing Asheville. It’s just too hot here in the summer.

IP,
Damned Yankee

Yeah, we’re not looking to actually move. We love it here in Asheville and will probably stay until we die, despite the rapid change driven by hordes of tourists and influx of Damn Yankees, Floridiots, etc … moving here. :wink: Charlottesville, though, is one of the few places we’ve visited where we could easily envision living.

Climate in Asheville is similar to Charlottesville, but a little milder winters and cooler summers, looks like from a quick comparison. Surrounded by mountains, it’s also easy to drive 1/2 an hour or an hour and enjoy much cooler weather in a mountain forest at higher elevation.

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Hi Ben,

I replied offline as we are getting off the subject of Macro Economics. Look for my email if you will.

IP

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Put another way, “cash” in the context of an offer to buy a house is shorthand for “no financing contingency.”

So if the sale falls through due to financing, seller can keep the security deposit. Of course, it’s better if the sale doesn’t fall through. When our house was on the market and we considered an offer with no contingencies from a young couple, our Realtor contacted the buyers’ parents’ broker to verify they could follow through, and received a reassuring response. So we accepted.

In fact, by the time of closing, the buyers had obtained a mortgage, which was fine by us. As you said, we’d be getting cash regardless of how the buyers came up with it.

With the rapid increase in price from month to month, it may be beneficial if the sale did fall through. They could put it up for sale at an even higher price.

Recently, I put in an offer with $110,000 due diligence money, no financing contingency, no inspection contingency, and rent back to the sellers for two months. I won over an all-cash buyer.

PSU

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I appreciate your thoughts, but I just don’t see this facilitating affordable housing unless you are looking at the smaller units as comparable to the converted units. If there is fallacy in my theory, please point it out.

Maybe we are “turning into Europe”? On average, Europeans live in 1/3 to 1/2 the space we do.

It kind of makes sense, you can’t only turn parts of your “way of living” into European-style without many of the other parts coming along for the ride.

I can’t wait till we have a VAT to help fund universal heathcare and other universal stuff. #sarcasm

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… it is local and Federal gov’t that needs to control this…

or HOA’s, by restricting the number of rentals to a percent of total number of homes, and/or prohibiting a home from being rented out within the first two years of purchase:

https://www.washingtonpost.com/business/2022/03/31/charlotte…
Corporate landlords are gobbling up U.S. suburbs. These homeowners are fighting back.

This is effective, and I think it’s fabulous. I’d heard of condo buildings restricting the number of units that could be rented, because a high percentage of rentals makes it harder for new owners to get mortgages, hurting the value of all the units. Makes sense for SFH neighborhoods, too. Even as a renter myself, I support this 100%.

I’m not generally a fan of HOA’s, but in this case, more power to them!

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