By Timm Herdt and Stephanie Snyder
One of the world's largest private-equity firms is making a $34 million bet on residential real estate in Ventura County, buying up homes at a pace of nearly one a day for the past three months.
Ventura County is one of 10 markets nationwide in which Invitation Homes, an arm of the New York-based Blackstone Group, has spent $2.2 billion this year to purchase more than 12,500 distressed homes. The plan, company executives say, is to establish the nation's first large-scale platform to rent single-family homes.
The rate of acquisitions in the county has been swift and has accelerated in just the past three weeks.
Recorded sales filed with the Ventura County Clerk and Recorder's Office show that Invitation Homes, through a corporation called THR California, has purchased 101 homes in the county since Aug. 3, with the frequency picking up in September and peaking with 26 transactions in the first 17 days of December.
THR's purchases accounted for 3 percent of all home sales in the county in November, and more than 9 percent of the value of all real estate purchases in the city of Oxnard.
READ: First-time home buyers face growing competition
Blackstone, a giant investment firm with worldwide real estate assets of more than $50 billion, owns 600 community shopping centers across the United States and has high-profile holdings such as Hilton Hotels, the Waldorf-Astoria and San Diego's historic Hotel del Coronado.
The Blackstone shopping spree, coming on top of spirited buying activity by other investors large and small, accelerates a trend that has seen the nature of residential neighborhoods in Ventura County and across California begin to shift away from owner-occupied enclaves.
County Assessor Dan Goodwin reports that the number of households in which a homeowner's property tax exemption is claimed has dropped by 6,522 since 2008, a 5 percent decline. To qualify for the exemption, a home must be occupied by its owner.
Seizing opportunity
The business strategy of Invitation Homes is unlike that of so-called "house-flippers" who purchase homes in need of repair, make improvements and then quickly sell a home at a profit.
"This is not a short-term play for us. We're not quick-flipping," said Mark Beisswanger, chief operating officer for Invitation Homes and a former Ventura County homebuilder. Rather, the goal is to develop a company "that can provide single-family rentals under a brand name."
The company has been similarly aggressive in acquiring homes in other California markets. County recorders' records show that, through early this month, THR had purchased nearly 450 homes in San Bernardino County and more than 120 in Riverside County. Additionally, the Sacramento Bee reported in late November that THR had acquired more than 550 homes in the Sacramento region.
It is not known how long this home-buying splurge will continue. Company officials say they have no numeric targets for the number of homes the firm ultimately will purchase, but the intent is to continue buying as long as market conditions provide good investment opportunities.
In addition to spending its own vast cash resources, Blackstone has secured a loan for at least $300 million from Deutsche Bank to leverage additional purchases, The Wall Street Journal reports.
"We've certainly seen a whole lot of investment activity, especially in California," said Svenja Gudell, senior economist for the online real estate analytical firm Zillow. "But I'm not aware of anyone else that has that model. It certainly is a niche opportunity."
What made it possible, of course, was the financial meltdown of 2008 and the accompanying collapse in the housing market that spawned a wave of foreclosures.
Top bidder
Invitation Homes officials say the overwhelming majority of the 96 detached homes and five condominiums the company has acquired in Ventura County have been through foreclosure auctions and purchases made directly from banks. The officials assert the firm is not directly competing with families, which have had a difficult time of late buying homes because of limited inventory and intense competition from investors armed with cash.
But in some cases, the competition has been direct. Ventura real estate agent B.J. Ward said he recently handled a sale in which six investors competed with six hopeful homebuyers in Oxnard. Among them was THR, which made an offer $11,000 above the asking price (see accompanying story).
THR pays cash for the homes, and company officials say it typically pays a 10 percent to 15 premium to acquire targeted properties. Additionally, the firm is committed to spending at least 10 percent of the purchase price to make immediate renovations on each property. The homes it has targeted in Ventura County are all modestly sized, post-foreclosure properties. County records show it has paid an average of price of $336,670.
Most of its local purchases have been in Oxnard (42 percent) and Simi Valley (35 percent).
New Territory
What will be the long-term effect of the outsized presence of Invitation Homes in the county's single-family home market and its intent to convert all its homes into rentals? Observers say there are potentially positive and negative consequences.
Oxnard Mayor Tim Flynn has long been concerned about the spike in investor-owned rentals in his city, saying a flood of rental properties inevitably will depress home values.
"The higher the owner-occupancy rate, the higher the value of homes in any neighborhood," he said.
Flynn said unscrupulous small investors have been buying Oxnard homes, illegally converting them to duplexes or triplexes and then renting them to multiple families to boost their return on investment.
"It's high time we had a rental inspection program," he said.
Flynn said it's likely, however, that a large firm such as Invitation Homes will abide by city housing codes, in part because "the stakes are too high" for it to do otherwise.
"I hope people invest in properties, make a lot of money and do something to invest in the neighborhoods," he said.
Company officials say they will insist that their rentals meet industry standards for occupancy, which call for a maximum of two residents per bedroom plus one additional person. In other words, no more than seven people could reside in a three-bedroom home.
Whatever the long-term effect of having more rentals in residential neighborhoods will be, real estate experts say the wave of purchases by Invitation Homes and other investors has played a major role in stabilizing Southern California home prices, which have recorded monthly year-over-year increases for most of 2012.
"So many people did foreclosures and short sales, and those homes are going to institutional investors who are almost controlling the market right now," said agent Brian Graver, of the Thousand Oaks office of Keller Williams Realty. "I don't know if it's necessarily a good thing or a bad thing. It's certainly where we are right now. It's truly keeping the prices stable."
Potential Returns
Because investors are purchasing many distressed properties before they come to market, Graver said, those properties are not being factored into sales prices considered by real estate appraisers. As a result, "houses are being appraised at higher levels."
The November report from the real estate analytical firm DataQuick confirms that analysis. It shows Ventura County home sales were up 31.2 percent and prices rose 5.9 percent from the same month a year earlier.
The report also notes that cash purchases accounted for a third of all Southern California home sales in November, just shy of a record set in February.
"Investor activity and cash purchases remain unusually high, and more buyers feel confident about their jobs, the economy and the likelihood housing prices have bottomed and are likely to rise," DataQuick President John Walsh said.
Financial experts agree that Blackstone, by jumping into the market just after it appears home prices have bottomed out, could reap significant returns from a robust rental market and also enjoy the benefits of price appreciation on its assets.
George Leis, head of Union Bank's Central Coast region and former CEO of the bank's recently acquired Santa Barbara Bank and Trust, said Blackstone appears to have developed a winning strategy.
"For them, it's brilliant," he said. "They get to enjoy the stream of rental income, and as the housing market rebounds, they will do pretty well if they decide to exit that strategy and sell the homes."
The housing rental market is strong and has remained so throughout the economic slowdown.
"Rents have been climbing," said Gudell, the Zillow economist. "You had all those families who had been foreclosed upon, creating a whole lot of demand that was soaking up available units."
She noted that rents in Ventura County are up 1.6 percent from this time last year.
"We'll see increased demand linger around for at least another couple of years," she said.
Zillow reports that the median rent for a single-family home in Oxnard, a city in which Invitation Homes now owns 42 homes, was $2,015 per month in November, up from $1,984 in March.
An Invitation Homes property on Will Avenue in El Rio provides an example of the company's investment prospects. The home was purchased for $221,000 on Sept. 7, improvements were completed on Dec. 12 and the home was offered for rent at $2,000 per month. Using the midpoint of a Zillow investment formula, Invitation Homes might receive a 6.5 percent return on investment from rental income.
Possible Trend
Gudell said buying opportunities for distressed homes should remain for some time, although the selling price in many markets for post-foreclosure homes is now at or near the prices in the traditional market.
"At some point, we will see the foreclosure inventory being worked down, but we're not there yet. There's a fairly long pipeline," she said. "The distressed market will start to fade out, but we will not see it dry up for another three or four years."
One reason demand is high for single-family home rentals, she noted, is that former homeowners who sold their homes through so-called "short sales" cannot qualify for another mortgage for at least two years. A "short sale" is one in which the lender agrees to a sale price of less than the mortgage owed and then forgives the remaining debt.
Those whose homes were foreclosed upon will have to wait even longer to qualify for another home loan.
Beisswanger, of Invitation Homes, acknowledges these factors, but also believes there could be a long-term trend toward more families preferring to rent, rather than own, homes.
"We're seeing very positive rental demands and rates," he said. "We think this is still a factor of the housing crisis, but also reflects a demographic shift toward more Americans favoring the flexibility of renting."
Leis, of Union Bank, agrees that the housing market might change in the years ahead, to the benefit of Invitation Homes and other landlords.
"For this generation, it may not be as important to own a home as it was for previous generations," he said. "A rental affords them a level of flexibility, saves them a down payment and allows them to be a little more free-spirited."
For those who maintain the traditional American dream of homeownership, however, institutional investors such as Invitation Homes are making that dream very difficult to realize, said Graver, the Thousand Oaks realty agent.
"For homes under $500,000, it's incredible how many buyers there are," he said.
Graver said he recently showed such a home and within 45 minutes had eight offers — half of them from investors. In that case, the seller preferred that the home go to a family, turned down the investors and waited for the family to secure a mortgage.
It was, he said, a rare event.
"You're seeing it very clearly," he said. "In most cases, the better-looking offer is the cash offer."