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Using Single-Family REITS to fund REO Rentals

 

The current foreclosure crisis calls for a new funding vehicle to finance the transition of real estate owned (REO) properties into the rental market. The Federal Reserve, in its recent letter to Congress, identified the need for Congress to adopt policies for overcoming obstacles inhibiting the conversion of REO properties to rentals. The Fed writes:

Reducing some of the barriers to converting foreclosed properties to rental units will help redeploy the existing stock of houses in a more efficient way. Such conversions might also increase lenders’ eventual recoveries on foreclosed and surrendered properties.

In case you are interested in the size of the market, the Fed quantifies the potential opportunity:

While the total stock of REO properties is difficult to measure precisely, perhaps one-fourth of the two million vacant homes for sale in the second quarter of 2011 were REO properties. The combination of weak demand and elevated supply has put substantial downward pressure on house prices, and the continued flow of new REO properties — perhaps as high as one million properties per year in 2012 and 2013 — will continue to weigh on house prices for some time. To the extent that REO holders discount properties in order to sell them quickly, the near-term pressure on home prices might be even greater.

One of the obstacles is the lack of large scale, professionally managed, well-financed organizations in the single-family rental space. The business has traditionally been run by small-scale, local investors. These current operators lack the resources to absorb the large number of REO properties entering the market. If financial institutions are forced to sell into a market of this structure, it will significantly increase the losses they are likely to incur.

That is why a new vehicle like a single-family real estate investment trust (SF-REIT) should be considered. REITs, with their access to public capital and highly skilled talent, represent a possible solution for the current crisis. A REIT entity tailored to the unique characteristics of single-family rentals could provide:

  • ability to raise debt and equity financing in public markets to support higher bid prices for REO properties,

  • professional management to implement the technology required to manage geographically disbursed and physically heterogeneous properties,

  • ability to rapidly absorb large portfolios of REOs out of financial institutions in exchange for cash and REIT units and

  • enable widespread public participation in this expanding industry while giving investors liquidity for their investment

SF-REITs will face much different operating needs than multifamily REITs. Therefore it will be necessary to tailor new legislation to accommodate these needs. But the benefits are clear and opportunities large.

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Based on information from the Austin Board of REALTORS ® (alternatively, from ACTRIS) for the period through 8/21/14 5:08 AM PDT. Neither the Board nor ACTRIS guarantees or is in any way responsible for its accuracy. All data is provided “AS IS” and with all faults. Data maintained by the Board or ACTRIS may not reflect all real estate activity in the market.

Information being provided is for consumers’ personal, non-commercial use and may not be used for any purpose other than to identify prospective properties consumers may be interested in purchasing.

This IDX solution is (c) Diverse Solutions 2014.

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