Firm Commentary: California Short Sale agents need be advised that the largest real estate investors in the country are manipulating home values through rapid price inflations that could form another bubble, Herald-Tribune analysis shows. The over-payment strategy is has created a slew of potentially adverse impacts — INCREASINGLY KILLING SHORT-SALE APPROVALS, increasing a rise in home squatters and sparking bidding wars among buyers — all resulting in what some analysts consider dangerously false inflation. However, both you and your SELLERS can use legal pressure to FIGHT BACK.
The single home shopping spree — involving prices that are tens of thousands of dollars above free-market norms — is part of a larger plan by the giant hedge fund BLACKSTONE GROUP LP and its rivals, California’s Colony Capital LLC, Two Harbors Investment Corp and Silver Bay Realty Trust Corp. to soak up an already tight housing stock, convert properties into rentals and ultimately dictate area rents.
The “BLACKSTONE EFFECT” is spreading in California and causing banks to REJECT short sale offers and loan modifications to struggling borrowers, in favor of Hedge Fund money. That is what happened to Janille McCall and her short sale agent. McCall’s agent tried to negotiate a short sale on her suburban home to avoid the scar of a default on her credit. She found a buyer who was pre-approved by the bank to borrow $225,000 and made an offer of $180,000. A contract was signed in April. But Bank of America rejected the bid, and Blackstone bought the home for $194,000 at an auction June 4. The hedge fund bought six other foreclosures at auction that day. “We kept trying to reason with the bank,” McCall said. “But they dragged their feet and dragged their feet and ultimately never went for it.” as quoted in the Herald-Tribune.
Blackstone is overpaying for single family homes in areas including Northern and Southern California — where prices fell so far that they “overshot,” said David Roth, managing director at Blackstone overseeing single-family home rentals. Blackstone has spent more than $4.5 billion on over 30,000 homes to manage as rentals, deploying capital from the $13.3 billion fund it raised last year, said Jonathan Gray, global head of real estate for the world’s largest private equity firm.
What started as bargain-basement buys at California foreclosure auctions has shifted to higher-priced short sales, traditional Realtor listings and even purchases from local flippers. Such deals will have widespread ramifications for individual California buyers. Most troubling to some, the firms routinely outbid owner-occupiers by paying significantly more for houses than what the same properties fetched just months earlier. “They’re out to buy as many homes as they can, and price is no longer a factor,” said Jack McCabe, a real estate consultant. “We’re shifting from a market controlled by individuals to one that’s controlled by institutions, and that’s very dangerous. They have great potential to manipulate prices.” as quoted in the Herald-Tribune.
Blackstone has bought so quickly it’s “warehousing” more than half of the homes it’s acquired as it completes the purchase and hires staff and contractors to renovate and rent the properties, Gray said. It takes about 30 days to fix each home and then as much as 30 days to lease the property, he said. “Renovating the 16,000 homes is an enormous job,” Gray said. By comparison, D.R. Horton Inc. (DHI), the largest U.S. homebuilder by volume, sold 18,890 homes and generated $5.35 billion in revenue in fiscal 2012. Colony Capital has bought about 5,500 homes since April, spending more than $500 million, and expects to reach $1.5 billion invested by the end of the year. Closely held Waypoint Homes said it has bought about 2,500 homes and expects to have 10,000 homes by the end of 2013. While Blackstone ultimately will benefit from the properties’ price appreciation, in the meantime, the homes will generate revenue and cash flow, Gray said.
MORE EXAMPLES OF OVER-PAYING and MARKET INFLUENCE
Already market watchers say they are concerned that Blackstone’s purchase prices have influenced so-called “comparables” — similar transactions that appraisers use to value homes and are KILLING SHORT SALE TRANSACTIONS. Colony, for instance, bought one home in May for $172,000. The same residence sold the previous November for $64,000 — a markup of 275 percent in six months. The two-bedroom, one-bath home measuring 1,013 square feet was built in 1956 and valued by the county at $66,500 last year. Colony took the same tack when it bought a home in Venice in April for $136,000 — an appreciation of $62,500 over its last sale, shortly before Christmas. Then, it sold for $73,500.
In May, Blackstone paid $265,000 for a five-bedroom home that was built in the 1980s. That same house changed hands just two months earlier for $185,000. Blackstone spent $142,000 for a home in January. Less than two months earlier, the 1,400-square-foot house went for $79,000. More recently, Blackstone bought a three-bedroom house for $270,000. Five months earlier, another investor paid $200,000. With dozens of similar examples of Blackstone purchases in excess of market rates, some Realtors fear the region could again be crippled by the artificial price appreciation that was a staple of the mid-2000s real estate run-up. The more houses Blackstone buys at inflated prices, experts say, the more those prices will be used by banks as a gauge to the value of all other similar properties nearby — a phenomenon that could skew prices throughout the market. Institutional deals have also resulted in a sharp decline in housing inventory, prompting some buyers to make panicked offers out of fear that they will be priced out, said Drew Peterson, a foreclosure specialist with the Re/Max Alliance Group. “It’s false inflation. These homes are becoming less affordable, and people are buying houses because they feel like they have to.” As quoted in the Herald-Tribune.
Blackstone’s California real estate agents may use formulas not based on worth, but on what a home can produce from collected monthly rents. The target is 8 to 12 percent. Bulk buyers last year paid an estimated 45 percent more than assessed value for the 5,289 foreclosures they bought. As more of those institutions now turn to short sales and traditional listings, industry analysts believe prices will balloon market-wide. “These big companies are paying way over market in general,” said Shannon Moore, broker and owner of Green Lion Realty, which works with smaller competing investors. “What they’re paying at auction is ridiculous. It definitely seems like they could be creating another false
bubble.” The effect…less short sales are getting approved.
Philip Muzi sold his home to a Blackstone subsidiary earlier this year. He bought it new in 1999 for $250,000, and later added a pool. Even with five bedrooms, three bathrooms and 3,000 square feet under roof, it is among the smaller homes in his neighborhood. When Muzi fell behind on his Bank of America loan, he tried a short sale but was unsuccessful on three different occasions. Bank of America ultimately transferred the mortgage to Bayview Loan Processing.
Muzi got an offer to sell for $360,000, but Bayview rejected the sale, claiming it had just received an appraisal valuing the house at $440,000. A couple of days later, a Blackstone representative offered Muzi $440,000. “That house is not worth $440,000 on its best day,” said Muzi, who works for Lexus in the automotive industry. “It’s a whole twisted mix. The way I see it, it’s just another run-up like we went through five years ago.” Although Muzi benefited from Blackstone’s lofty offer, he fears the company is pricing other buyers out — at a time when the inventory of homes for sale is at its lowest level in a decade, as quoted in the Herald-Tribune.
BLACKSTONE BUSINESS MODEL:
BUY, REHAB, RENT….and SELL in the NEXT BUBBLE
Companies like Blackstone and Colony expect to collect rents on the homes they have bought, but their real windfall could come in three or four years, when they can sell the homes at a profit. That buy-and-hold strategy comes as demand for residential rentals has climbed at one of the fastest paces in the nation. Many of those renters have little choice but to sign leases, because they were evicted from homes during the foreclosure crisis and have not established enough credit to buy again. The lag between Blackstone’s purchases and finding tenants could be spurring unintended consequences, including squatting, which be prevalent at the height of the foreclosure crisis. Wes Kirkpatrick came face-to-face with the phenomenon this year when he sold his to Blackstone to downsize after a divorce. When Kirkpatrick left, squatters moved in. His neighbors did not know where to turn to for help, and some experts suspect Blackstone could unintentionally be sparking the trend again. “These investment companies open the door to people that don’t belong there,” Kirkpatrick said. “And you can’t reach anybody from this massive company to notify them.” as quoted in the Herald-Tribune.
LESS SHORT SALES, THEN ANOTHER CRASH
Most analysts expect the investment firms to sell their collections of homes when interest rates increase, which would make other financial investments more attractive. By sheer volume, the companies also can set market values on both rental rates short-term and home values when they wish to sell, said Joe Adamaitis, president of the Gulf Coast Mortgage Bankers Association. But the firms could also cause the market to crash if they decided to suddenly flood it with inventory, Adamaitis said. If any unexpected variables derail the economy, he believes the hedge funds could send the housing market into another slump. That could be triggered by a fast rise in interest rates, an unexpected slow-down in the overall economy, or if people simply cannot afford the homes these groups want to sell and rent at much higher prices.
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