Headline: Big money buying homes

Investment firms throw millions into Charlotte market

Subhead:
Reporter: By Andrew Dunn and Deon Roberts
Desk:
Source:
Day: Saturday
Dateline:
Print Run7/13/2013
Date:
Digital Run
Date:
Corrections:
Text: By Andrew Dunn
and Deon Roberts
adunn@charlotteobserver.com
deroberts@charlotteobserver.com
Wall Street-backed investment groups have emerged as a new breed of
homebuyer in Charlotte, snapping up homes in middle-class neighborhoods
across the city to turn them into rentals.
Four of the most active firms have spent at least $82.6 million buying more
than 600 single-family homes in Mecklenburg County, one by one - most of
them in the past four months, an Observer review of property records shows.
The volume of sales is much smaller than in markets like Phoenix and
Tampa, Fla., where investors have already bought thousands of homes.
But in Mecklenburg County, those four firms have made up as much as 10
percent of the total existing-home sales in the county this year. And the total
could be still higher: These companies often use subsidiaries with different
names to execute their purchases.
For homeowners who have been looking to sell, these new buyers are a
welcome sign and have jump-started the nascent housing market recovery.
The investors are generally buying homes for between $100,000 and
$200,000 and paying cash.
But after watching prices jump more than 15 percent in other markets, some
economists and experts worry that the activity in Charlotte could fuel

another housing bubble among middle-priced homes.

Others fear that these investors are crowding out individual buyers who
might want to put down roots. If the investors pull out of the properties in
five to seven years - as many observers expect them to do - it's unclear what
impact that might have on Charlotte's housing market.
"It's never been done before, " Wells Fargo senior economist Mark Vitner
said. He said the institutional investors' business model is unproven and
comes with "all sorts of risks."
Sales have been distributed widely across the county, though they've tended
to cluster in the crescent stretching from the Steele Creek area, north to
Huntersville, then following Interstate 485 in eastern Mecklenburg County.
Perhaps nowhere are the sales more concentrated than Steele Creek's
Planters Walk neighborhood, where investors have bought at least 30 homes
in a community of about 700, the property records show. Purchase prices
have ranged from about $110,000 to $175,000.
Homeowners there are only now starting to become aware of the sales.
"All they're looking at is the bottom line. What is that going to create?"
asked David Gersdorff, 43, from his front step last month.
He's lived in Planters Walk for 13 years: "Are they even going to give a crap
about the neighborhood? And what's that going to do to the value of my
house?"
Who's here
The most active player in Charlotte appears to be American Homes 4 Rent, a
Malibu, Calif., company that has become the nation's second-largest singlefamily homeowner.
The company has amassed a portfolio of more than 14,000 homes in 20
states, largely in Texas, Florida, Arizona, Illinois and Georgia, according to
securities documents filed last month as it prepares to go public.
American Homes 4 Rent has bought at least 400 homes in Mecklenburg
County over the past year, an investment of nearly $60 million, the
Observer's review found. It also has a property management partner with an
office on Catawba Avenue in Cornelius.
The nation's largest homeowner, the private equity giant Blackstone, has

bought more than 100 homes and counting. The firm markets and leases
them under a subsidiary called Invitation Homes.
The city has also attracted smaller players, like investment groups affiliated
with Toronto private equity firm Tricon Capital Group, and Connecticut's
Ellington Capital.
Ellington declined to comment, citing a "quiet period" in advance of an
initial public offering for its rental business. American Homes 4 Rent,
Blackstone and Tricon did not respond to requests for comment.
But in a blog post published on the company's website, Blackstone defended
its and other private equity firms' home purchases. The company said it
hasn't been buying enough homes to appreciably change home prices;
instead, the price appreciation is a function of a low inventory and
historically low prices up to now.
Blackstone also said it's been renovating abandoned and foreclosed homes,
improving neighborhoods. And rental homes, Blackstone says, are an
important part of the housing market.
"Renters should have the opportunity to live in a good neighborhood and
send their children to good schools, " the company wrote.
Around the country
Charlotte is not the only market luring these big investors interested in rental
properties. Atlanta, Dallas, Houston, Phoenix and Memphis, Tenn., are
others, real estate experts say.
The investors started buying primarily in recession-rocked markets such as
those in Arizona and California. But they began gravitating to the Southeast
last year, said Sam Khater, an economist for Irvine, Calif.-based housingdata company CoreLogic. In the Southwest, he said, the housing stock is
"fairly young" and, thanks to the dry climate, less likely to be deteriorated
and in need of repairs, making the homes attractive to investors.
"As those markets began to really heat up, they began to rotate out and fan
out to the Southeast, places like Atlanta, Charlotte, Tampa, " he said, adding
that the strong population growth in those areas makes them a draw for
investors.
In the Tampa Bay area, for example, reports of bidding wars have already
become commonplace, said University of Central Florida economist Sean
Snaith. Nearly half of all home purchases are made with cash, a sign that the

purchase was made by a deep-pocketed investor. Home prices are up more

than 15 percent in Florida over last year.
"My concern here is how do we transition from where we are now to
normalcy, " Snaith said. "That's not a sustainable situation in the housing
market."
The investors have been a bit slower to come to Charlotte. But the city,
housing market experts say, is attractive because it's a growing market
where investors can buy houses for relatively cheap, especially when
compared with what they would pay for properties elsewhere.
"A lot of these buyers are West Coast buyers, " said Chad Tate, owner of
Charlotte-based Opening Doors Properties. "They can buy a house here for
$50,000 that rents for $750 a month."
At least one buyer has established a presence in Raleigh as well, though the
effect appears to be less pronounced. By February, American Homes 4 Rent
had bought 81 properties in Wake County for $13.3 million, The (Raleigh)
News & Observer found. By July, the number of homes bought exceeded
200, property records show.
What they're buying
Those unusually high rents have been another lucrative incentive for the
investors.
The region's apartment vacancy rate was 6.2 percent in March, the latest
month for which data are available. In March 2010, the vacancy rate was
roughly double that, said Charles Dalton, principal for Charlotte-based Real
Data, which tracks the multifamily market.
In March 2010, the average monthly rent in the Charlotte area was $708,
Dalton said. That rose to $842 in March of this year.
Charlotte-area real estate officials say the investors appear to be especially
interested in middle-class neighborhoods in good school districts. Anthony
Moore, co-owner of Charlotte-based real estate company Pike Properties,
said the investors seem to want homes built around 1995 or later.
"Oftentimes they like ... what we call 'vinyl village' here, the newer-built
homes on slab with vinyl siding, " he said. "A lot of times they really won't
even look at the properties very hard. They'll literally just buy sight unseen."
Individual home sellers aren't the only ones affected. Tate, of Opening

Doors Properties, said he has had to change his business model. Two years
ago, he could buy a bank-owned property for about $40,000, invest about
$25,000 in it and flip it to a first-time homebuyer.
"That started drying up in the beginning of last year, " said Tate, who is also
president of the Metrolina Real Estate Investors Association.
Tate blamed large investors for buying up the bank-owned properties. He
hasn't bought one since the spring of last year.
Instead, he buys more expensive sites, paying about $200,000 for them,
knocks down the house that's on the land and builds an $800,000 home on
it. While it's a business model that can be more profitable than flipping
bank-owned properties, the pricier projects come with more risk, he said.
What happens next?
While homeowners are happy to see the values of their homes rise, the
concentration of investor-bought homes is fraught with concerns.
Mekael Teshome, economist for Pittsburgh-based PNC Financial Services
Group, which has bank branches in the Charlotte area, said some observers
are concerned about what happens after the investors' buying frenzy ends.
"The investors are ... driving up prices, " he said. "At some point, that's
going to end."
Another concern some observers have centers on whether another real estate
bubble - inflated, in part, by the investors - is forming, he said.
Vitner, the Wells Fargo economist, said this is the first time institutional
investors have swept the U.S., snatching up single-family homes to rent
them out, in what amounts to an untested business strategy. Typically, the
people who bought rental properties were "mom-and-pop" investors, he
said.
"I'm not quite sure how it's going to work out, " he said.
Vitner said institutional investors have likely exaggerated the extent of the
improvement in Charlotte-area home prices.
"It's priced some traditional buyers out of the market because the investors
typically pay cash and traditional buyers need to get a mortgage and it takes
time to get approval - and, on top of that, the investors sometimes are paying

above the appraised value."

Vitner said the issue is raising questions about how the investors are going
to collect rents, handle evictions and deal with problems, such as drugrelated ones, on their properties.
Also, he said, "there's execution risks, on both acquiring the properties and
eventually selling them. Are you able to rent them for the right price?"
Dalton, of Real Data, said the investors' purchases of rental homes will help
strengthen the overall housing market. They will offer some competition for
traditional apartments, although they won't directly compete with them, he
said.
"They're targeting, I think, a little different niche of the market than your
traditional apartment renter, " he said, adding that people have been shifting
toward renting rather than owning homes in the aftermath of the housing
downturn.
In Planters Walk, some purchases by the big firms are so recent, they haven't
yet been advertised, let alone rented.
Anthony Davis, 40, knew two neighbors on his cul-de-sac who sold to
American Homes 4 Rent in the past few months. In a way, their purchases
were good, he said.
"They came in and gave him his full price. It wasn't even on the market long
- maybe two months, " Davis said of one neighbor. "Last year, he was
selling his house, and he couldn't sell it."
But Davis has lived in the neighborhood for 10 years and had grown tight
with his neighbors. Would tenants feel the same way?
"I don't know what it will do to the community, " he said.
Dunn: 704-358-5235; Twitter: @andrew_dunn
Roberts: 704-358-5248; Twitter: @DeonERoberts
How we crunched the numbers
The Observer calculated home-purchase figures for the four investment
firms by counting and totaling purchases through these companies'
subsidiaries, as recorded with the Mecklenburg County register of deeds. To
get a rough approximation of what percentage of total home sales this

constituted, reporters divided the number of investment-firm purchases by

the total number of existing-home sales in the county. To determine the total
number of existing-home sales in the county, reporters used data from the
Charlotte Regional Realtor Association.
Charlotte's big players
Numbers are based on Mecklenburg County register of deeds data as of June
12.
American Homes 4 Rent
Homes bought: 410
Average price: $145,960
Total investment: $59.8 million
Blackstone
Homes bought: 102
Average price: $137,136
Total investment: $14 million
Tricon Capital Group
Homes bought: 47 (plus a portfolio of 550 rental homes from TPM
Properties)
Average price: $60,842
Total investment: $2.9 million (plus $26 million for the rental portfolio)
Ellington Capital Management
Homes bought: 46
Average price: $128,430
Total investment: $5.9 million