Single Home Opportunity or Scary Black Box?
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Single family homes have historically been the hunting ground of mom and pop landlords. The 2007 to 2009 housing led recession, however, may have changed that, with giants like Blackstone Group (NYSE: BX) moving aggressively to buy, fix, and rent out these properties. How is a small investor to compete? Two recently launched real estate investment trusts (REITs) hope to be the solution, but only one is really worth considering right now.
Large investors traditionally avoided single family homes because the market is highly fragmented. This left the area to smaller investors who would buy a few homes for investment purposes. The overhead costs of keeping tabs on individual properties and tenants, and the difficultly of building up a material concentration of assets, was simply too much work for institutions to bother with.
The recession, however, left a massive number of homes owned, usually unwillingly, by banks and the federal government. With so many available homes, prices plunged. Hedge funds and asset management firms stepped in. While it would seem more logical for these players to try to flip the assets, they have chosen to own, fix, and rent them instead.
The big changes that allow for this new focus include the connectivity available with the Internet, which should make keeping tabs on properties and tenants easier, and the relative concentration of the distressed homes. The latter issue makes acquiring a meaningful position in a market far more feasible than before. All of this is good news for the big players, but what about the little guy?
Giving the Little Guy a Shot
The head of Fannie Mae, which owns over 100,000 homes, recently told Bloomberg that it plans on selling most of its homes one by one, not in bulk transactions. So a little guy willing to put in sweat equity may still have a shot. For those less inclined to using their sweat, two recently launched REITs may offer a solution.
Silver Bay Realty Trust (NYSE: SBY) was created by Two Harbors Investment Corp. (SNY) and owns, rents, and manages single family homes. The company came public in late 2012. Essentially, Silver Bay got a lot of cash from the IPO that it used to buy over 3,000 homes from its parent Two Harbors, with the intention of acquiring additional single family homes to grow its business.
Management states that it uses a top-down approach to its home purchases, picking out the markets it believes offer the best opportunities. This makes complete sense. It also hopes that this will allow it to focus its efforts on the management side, by having economies of scale in key markets. Again, a logical plan.
It sounds like management is going after the right market with the right approach. While the potential is huge, a fact highlighted in the prospectus, there's no guarantee that Silver Bay will live up to that potential, even though 3,000 homes is a good starting point. Note, however, that the dividend policy is virtually non-existent, making this a growth and momentum investment.
A Black Box
Altisource Residential (NYSE: RESI) also came to market in late 2012. This company was part of a complex restructuring of Altisource Portfolio Solutions (ASPS) in which the REIT and Altisource Asset Management Corporation (AAMC) were distributed to shareholders in a taxable transaction. The REIT will, effectively, be run by Altisource Asset Management.
Like Silver Bay, Altisource Residential plans on owning and renting out single family homes. Only, Altisource Residential doesn't own any. It basically owns cash that it can use to buy single family homes. Without any homes this is little more than a blank check company that hopefully, maybe, will be able to buy enough single family homes to build a business.
A Little Problem
With 3,000 “starter homes,” Silver Bay has started life with a big business. With a blank check, Altisource has started life with big dreams. A problem for both companies is that Blackstone's Jonathan Grey, the global head of real estate, recently told Bloomberg that home prices are moving faster than his company had expected. This is leading Blackstone to up its purchases, which could impact prices further. There are other big players moving into the space, too.
Without any homes, Altisource may find that it can't buy enough homes at prices that make owning them in a corporate structure worthwhile. Then what?
New and Untested It
will be interesting to see how the institutionalization of single family homes plays out. There are signs that home ownership in the United States is set to stagnate or fall over the long term as a changing job market makes home ownership more difficult to achieve and more complicated to deal with if one changes jobs. That would be good for landlords.
However, housing markets change over time. So what was once a desirable place to own can slowly turn into a place where you wouldn't want to walk alone at night. What does an institutional level owner do then and what impact will its portfolio shifts have on the market?
Also, despite good intentions and the powers of technology, managing thousands of single family homes is still an untested proposition. Blackstone reportedly owns 16,000 homes. How will managing so many individual homes actually work? While that number may make Silver Bay's 3,000 homes look a lot easier, even that smaller number is material. Of course with no homes to start, Altisource is on easy street.
What to do?
There are a lot of questions that need to be answered and only time will tell what happens. For investors looking to take advantage of the single-family home opportunity and the institutionalization of that asset class, Silver Bay is worth a look. Altisource, however, should be avoided until it has a decent portfolio under its belt.
ReubenGBrewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!