‘Unfair advantage’: Putting a human face on investors’ impact on housing affordability, availability

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Realty groups such as JBGoodwin and Keller Williams are familiar names in San Antonio. So are homebuilders such as David Weekley and M/I Homes. And rightfully so — they are major forces in the local housing market.

But so is Cerberus Capital Management, a private equity firm based in New York City, and Tricon Residential, a company from Toronto — yet few have heard their names.

Both firms own hundreds of homes in San Antonio they lease out as rentals. They’re part of an industry known as single-family rentals, or SFRs, which is growing fast in cities across the U.S., and especially in Texas and the Sun Belt.

Local housing activist Sofia Lopez has spent much of the past three years studying the industry’s growth and the impact it’s having on tenants and aspiring homeowners. In October, she headed to Washington, D.C., to testify about it before the U.S. Senate’s Committee on Banking, Housing and Urban Affairs.

Lopez began looking at the industry around the time she became a deputy campaign director at the Action Center on Race and the Economy, or ACRE, a think tank and organizing group whose staff members are stationed in cities across the nation. At ACRE, she works to find ways to address the housing affordability crisis sweeping the U.S.

“We think that the people who are most impacted are the ones who understand the solutions better than anybody else,” she said. “So we want to help elevate those voices in articulating solutions to the housing crisis.”

Her testimony in October described the single-family rental industry’s origins in the subprime mortgage crisis of 2007 and 2008 — before that, there were few large-scale investors who rented out single-family homes — and how its focus on efficiency has put pressure on tenants facing financial hardship.

Lopez, who earned an undergraduate degree from Swarthmore College and a master’s in city planning from the Massachusetts Institute of Technology, formerly served as a board member at the San Antonio Housing Authority. She recently sat for an interview to discuss the single-family rental industry, the role of private equity in its growth and how the financial deals giving rise to residential developments can impact the lives of tenants. The following has been edited for brevity and clarity.

Q: Could you lead me through the history of the single-family rental industry?

A: A bunch of loans were made in the runup to the foreclosure crisis that were subprime loans that had variable interest rates. And credit was incredibly loose, right? Essentially, people had the rug pulled out from under them when all of these loans became mortgage-backed securities. So there were mass foreclosures.

This meant a huge opportunity for institutional investors to come in and buy up these homes really cheaply. Somebody, I think from the (Federal Housing Finance Agency), said at one point that we initiated these bulk sales to institutional investors because we wanted to prove that we could stimulate a market. We wanted to prove that these investors could come in and they could stabilize homes that otherwise would have had a lot of vacancies. The argument being that otherwise it would have been bad for the wealth of all of the people who were able to stay in their homes.

Q: In your testimony, you described how Invitation Homes proved the financial viability of the market. Did that happen gradually in the years after the foreclosure crisis?

A: I would say so. One of the things that I read in preparation for my testimony quoted (Blackstone Inc. Chairman and CEO) Stephen Schwarzman’s autobiography. There was a line in it where he’s recounting a meeting that he had with several of the other folks at Blackstone, and he said something to the effect of, “People aren’t going to be able to access credit to become homeowners, but they’re still going to need a place to live. That’s a really interesting business opportunity.”

Q: You described how private equity has played a large role in the industry’s growth. Getting down to basics, could describe what private equity is?

A: Yeah, it feels somewhat amorphous. I would say one of the biggest ways it has operated in the retail space — which is kind of where the theory of private equity has been the most developed — is it’s characterized by leveraged buyouts, so it will take on significant debt when it acquires a company. It will then sell off many of the valuable assets. Often, they lay off workers. There’s the expectation for a set return on investment.

From the tenant experience side, the way these companies have operated tends to look like the aggressive enforcement of evictions and scaling back on costs — similar to the retail side of things, right? Trying to get rid of things that are seen as dead weight so they’re better able to funnel the profits to the people who are actually investing, to people that they’ve guaranteed these returns to.

Q: What other kinds of difficulties do tenants face?

A: There are quite a few standard practices, like requiring people to pay their rent through an online portal. You couldn’t go to an office even if you wanted to. That requirement often entails like a $5 fee per month. If you’re someone who doesn’t have a ton of disposable income that $5 a month fee is going to add up.

I mentioned also this issue with utilities, where people are required to put their utilities either in their own name or in the company’s name, but for whatever reason the company decides to move it in the other direction. What’s more typical is that the company wants the utilities in their own name and they charge a service fee on top of that.

There are all these sets of rules you have to comply with, and don’t have any way around, that trigger all of these additional fines and fees. And it’s impossible to get ahold of anybody with the company — there’s definitely not people locally. These folks that I’m working with in Minnesota have said that when their tenants call they get through to folks in Atlanta who really can’t help them in any material sense. There’s not a person who’s locally accountable.

Q: What about someone who’s looking to buy a house? How do these companies affect their experience?

A: In my research, I found that these companies tend to focus on a particular segment. So if you’re unfortunate enough to be interested in a home that’s on the somewhat-more-affordable side of the spectrum, if you’re interested in a home that falls within a certain square footage range, or if it’s within a high-performing school district, you’re really in trouble because you’re going up against a set of companies that have billions in cash that they can marshal. They have massive staffing that they can dispatch — but they often don’t need to because of the technology they have at their disposal. So they’re able to make offers for homes that are all-cash. They don’t have to go through inspections — they want to buy them sight unseen. That’s a much faster process versus what you or I might do when we’re trying to buy a home. It’s a pretty unfair advantage that the companies have.

Q: The technology they use is often referred to as PropTech. What is PropTech?

A: PropTech is the set of property-focused technologies that were one of the conditions that allow the single-family rental industry to flourish. There are all of these sophisticated algorithms that each of these companies has created to help them identify where to buy properties and where they can anticipate seeing returns. People talk about buyers that are associated with these companies showing up with iPads, pitching little tents on county courthouse steps as people are going through foreclosure. There are so many stories of people saying that I showed up at the county courthouse steps and I tried to keep my house, but somebody from Invitation Homes ended up buying it.

Proptech includes everything from the smart locks on your door, the doorbell with the camera in it, but also it includes these very sophisticated algorithms that tell you when you should or shouldn’t buy a home, that you and I don’t have access to.

Q: The algorithms take into account factors such as age of the home, school district …

A: … Square footage. Yeah, exactly.

Q: What are some other issues that you’re looking into right now?

A: Very broadly, I’m focused on the ways in which finance dictate what people’s experiences are like in the homes that they live in. All of us need a place to live. Some of us end up in homes that have these kinds of complicated financial structures that mean that they’re more susceptible to eviction. Their landlords have to respond to the demands of the kinds of financing they get.

Q: What kinds of financial arrangements do you see, and how do they impact the lives of tenants?

A: One of the things I talked about in my testimony was the rent-backed securities that many of these institutional investors end up getting to purchase portfolios of homes. Things like that are underwritten at assumptions that include a 94 percent occupancy rate. So if you have a situation like the pandemic where people fall behind on rent, they lose their jobs, what does that mean for these companies who have to maintain a certain occupancy in order to pay back these bonds that they issue based on people’s rent? That impacts their ability to acquire more of these homes in the future. It’s kind of a systemic threat for the companies that they have to navigate, and it comes down on tenants through things like eviction filings.

Q: So basically, the financing that these firms have received mandates that they have to maintain a 94 percent occupancy?

A: They’re underwritten at that level. The people they have used to issue or create that security are anticipating that it would be 94 percent occupancy. If it dips below that, it threatens their ability to get more of that funding at that particular price, which I’m led to believe is a pretty cheap source of funding for them. So it’s a fundamental threat to their business model.