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  • 5 May 2015

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Flips, remodels, redevelopment and new rentals alter market

Cash-rich investors edge out traditional new homeowners

COURTESY: LEAH NASH FOR INVESTIGATEWEST - Justin Buri at his home in the St. Johns neighborhood on a recent April evening. Buri has seen firsthand the pressures of a changing housing market at his job with the Community Alliance of Tenants.


The developing story of the Portland real estate market shows that when buying a home, nothing beats cold, hard cash.

However, the question becomes: Who has the cash? Hint: It’s not the dreaded Californians.

Data on how such buyers affect the listed market are difficult to corral. But an InvestigateWest analysis of roughly 12,000 buyers who paid cash for listed homes in Multnomah County between 2006 and 2014 found more than 850 individuals or their corporate doppelgangers buying between two and nine homes. Those buyers were joined by the 26 institutional investors that captured hundreds more.


Among the approximately 12,000 purchases, there were at least 2,750 flips, remodels, redevelopments and new rental acquisitions in place of new homeowners at the lowest price point of the market. Owing to the lack of transparency in real estate holdings — many homes were acquired by opaquely named corporations, and some buyers use several at a time — and to the tendency of equity groups to place houses in the names of their investors rather than of the investment company, that number is likely much higher.

There is, perhaps, no place in which the shift has been captured better than at the DoubleTree Hotel near the Lloyd Center. This is where investors converged April 2 for the 2015 Vendor Fair hosted by the Northwest Real Estate Investors Association, in a white box of a room with fluorescent lights where vendors told a tale of emerging trends.

Companies like Lake Oswego’s Beutler Exchange Group, which holds investor money between flips to defer taxes, were in the mix. Several others offered self-directed IRAs, which, in addition to the standard tax benefits, can be used to access nontraditional assets like real estate and notes. There were hard-money lenders, offering cash for quick flips at 12 percent interest rates and varying points. Alpine Mortgage Planning was represented for its construction loans, which some investors use to repackage their debt once they hit the Fannie Mae limit of 10 mortgages, opening up borrowing for more.

Tenant screening services, inspection companies, insurance and title companies — all were advertising. And the browsers were not your Wall Street types. They were regular people of all races and every age, wearing clothes as varied as leather, jeans and sport jackets, some toting kids, others sporting purple hair, giving even this event its Portland flare.

Some version of this scene repeats itself almost every week in Portland, at meetings and workshops designed to help people build wealth this way, and to make the most of flips and rentals. The post-crisis marketplace is full of investor-friendly tools. They are tools that have combined with limited supply and tight credit to tilt the market in favor of all-cash bids.

A ‘fair shot’ or not?

For some companies and investors, it’s all a bit of financial fun. Castle Partners, L.P., a pooled investment vehicle registered in Delaware, bought properties through its Oregon affiliate Castle Advisors using several companies with variations on the name COTD, an apparent play on the seafood menu phrase “catch of the day.” One real estate developer held property in a company called Boondoggle LLC. Another bought six houses with My Financial Workout.

For Justin Buri, who is executive director at the Community Alliance of Tenants, buying in this market meant pushing past his unease with its burgeoning equity issues. It’s not his style to troll neighborhoods talking about which are about to “pop” with fresh waves of gentrification. While viewing his own prospective homes, he watched real estate agents wave off nearby properties — other people’s homes — with assurances they would be torn down. It fit him like a shoe on a doorknob.

“Being a player in that was really challenging for me,” he said.

But his own need for stability egged him on. He can now tell his story in the rowhouse he and Julieth Buri own, a St. Johns property with an abundance of natural light, bursts of bright color, and flashes of art-savvy decor. The couple were able to buy the home after deciding to look farther from more popular areas.

Through their own struggles — they were displaced renters before they were homebuyers — Justin Buri also watched the Community Alliance of Tenants shift focus from keeping rentals up to snuff to helping tenants stave off eviction and rent increases as the real estate market amped up.

Sarah Edelman, a senior policy analyst on the Housing Finance and Policy team at the Center for American Progress, a Washington, D.C., think tank that has studied equity ownership of single-family homes, says policymakers should continue to pay attention to what happens to first-time homebuyers as real estate investment continues.

“A potential owner-occupant has a very difficult time competing with an investor that pays in all cash, who waives the inspection or an appraisal. So going forward, especially as some of the distressed inventory dwindles, as investors start just buying homes on the MLS like you or me, we need to make sure that owner-occupants have a fair shot,” she said.

COURTESY: LEAH NASH FOR INVESTIGATEWEST - A home in the Woodstock area of Portland that was just put on the market is inundated with real estate agents cards.

The new speculation

Following in the footsteps of global investment firm Blackstone’s Invitation Homes and others, American Homes 4 Rent had purchased 34,599 single-family properties in 22 states by the end of 2014, according to its website. It has since begun offering rental bonds backed by single-family houses, selling off $552.8 million in debt to investors via bonds in February and March, according to what the company told investors. The rental bond deal is among the first of its kind, egged on by a $479.1 million deal by Blackstone’s Invitation Homes in October 2013. The Blackstone deal paved the way for similar deals, which sell debt and the promise of future payments, by other national rental companies, including Colony Capital and American Homes 4 Rent.

Rental backed bonds aren’t new — they’ve been used extensively in multifamily housing. But the backing of bonds through bundles of single-family rental homes is a new financial tool, one not yet regulated. Rep. Mark Takano, D-Calif., has pressed for congressional hearings on single-family rental bonds, and has asked the U.S. Securities and Exchange Commission for regulation and oversight of the bonds. He estimates there are more than 200,000 investor-owned properties across the country, worth in excess of $20 billion. The Center for American Progress has estimated the market for single-family rental bonds could grow to $70 billion by 2016.

Analysts everywhere have scratched their heads about what the entry of these companies into real estate really means. Think tanks like the Center for American Progress and the Right to the City Alliance, as well as researchers such as Desiree Fields, an urbanist and environmental psychologist who studies housing’s role in the capital strategies of large investors, and those at Harvard’s Joint Center for Housing Studies, have probed this new asset class in a series of analyses since 2013.

The reports partly credited equity-groups-turned-landlords with solving the shortage of high-quality, affordable rentals in some communities, and with helping to stabilize the housing market. But the reports also raised questions about what sort of landlords they will be — whether they will maintain the properties they own, keep management local, scrimp on tenant services, or be quicker to evict struggling tenants than their local counterparts — questions that remain unanswered.

It also isn’t clear, researchers note, how long these firms intend to hold the properties. Or what would happen if any one national landlord stepped out of the market and put tens of thousands of homes, or even a couple dozen in a single neighborhood, up for sale.

“There is a sense that this is an asset class that is not going away anytime soon, and I think that it’s leading companies to seek out new markets where there isn’t already a high concentration of investors,” said the Center for American Progress’s Edelman.

Portland fits the profile. There’s potential for appreciation here. And there are a lot of middle-income renters willing to pay higher rents.

In Multnomah County, American Homes 4 Rent has targeted new construction foreclosures on Mount Scott, in St. Johns, in New Columbia, as well as in Fairview and Troutdale.

Fields notes that social service groups once viewed the crisis as an opportunity, a chance to seize housing at a discount and put it into a land trust. But as they compete with cash for housing, it hasn’t happened. Not as envisioned.

“It seems like there were a lot of missed opportunities in the aftermath of the crisis when we could have thought about pulling housing a little bit away from the speculative model that it’s become,” she said.

Now, observers say communities are left to retool policies to protect renters, and to keep housing ownership accessible. As the city of Portland looks toward solutions, we’ll examine policy possibilities, and reaction, in our next installment of this series.

If you have experience buying or selling homes in Portland, email Lee van der Voo at: lee@invw.org. InvestigateWest is a nonprofit investigative newsroom for the Pacific Northwest.