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December 22, 2014

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J. Patrick Coolican:

Your next landlord in Las Vegas could be a hedge fund

Big-time investors testing the water in the land of underwater homes

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Hedge funds could be the next big player in the Las Vegas real estate market, buying up hundreds of single-family homes and renting them out as an investment.

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J. Patrick Coolican

Hedge funds could be the next big player in the Las Vegas real estate market. And I’m not talking about apartment complexes or commercial property. I’m talking single-family homes.

In other words, in a year or two, if you’re renting a single-family home like an increasing number of valley residents, your landlord could be a hedge fund or some other “alternative investment vehicle,” such as a private equity group, pension fund or university endowment.

“We’ve been contacted by a number of different groups who have never considered owning single-family residences as rental properties in their investment portfolios,” says Brian Krueger, vice president for strategic services at Coldwell Banker, the real estate firm.

These financial powerhouses could buy hundreds of homes at once. Cash buyers already constitute half the home purchases in the valley.

Krueger can’t say who the suitors are, and he says none have taken the plunge, yet. They are dipping toes in the water, however.

“They are organizing money and have started to come in and do due diligence,” he says.

Doug Brien, managing director and co-founder of Waypoint Homes, tells me he was in Las Vegas last week to survey the landscape. Waypoint, an Oakland, Calif.-based company, has bought 1,000 homes as rental properties in other markets. Brien’s group GI Partners has raised $400 million from an Ivy League endowment and a large institutional investor to buy many more. With leverage, the fund could grow to $1 billion.

This seems likely to happen here in Las Vegas because it’s already happening in other markets.

The Wall Street Journal reported in August that McKinley Capital Partners has bought more than 300 foreclosed single-family homes in the Bay Area and has a partnership with Och-Ziff Capital Management Group LLC, a New York hedge fund, to buy at least 500 more.

What’s the play in New York hedge funds becoming landlords?

“It’s just another distressed asset,” says Robert Lang, director of Brookings Mountain West and a real estate expert.

Hedge funds are investment funds looking for good returns that other people aren’t aware of or don’t have the resources to capture. They’re like Billy Beane in “Moneyball,” hoping to find underpriced assets. (At other times they look for assets they believe are overpriced and bet against them. Hence the name, hedge fund.)

In this case, they’re reacting to the emergence of what Oliver Chang of Morgan Stanley calls “a rentership society” — a play on the Bush-era “ownership society” buzz phrase. In a research report, Chang says people losing their homes and their credit ratings to short sales and foreclosures, combined with tight mortgage credit, means many people are suddenly looking to rent. But they’ve grown used to the space and amenities of a single-family home so they’re not interested in a conventional apartment.

Meanwhile, with all the bank-owned homes coming on the market, there’s lots of supply.

Throw all this together, and between 2005 and 2011, the number of families in Florida, Arizona and Nevada renting a single-family home has increased 67 percent, according to Dennis McGill of the firm Zelman & Associates. Meanwhile, the homeownership rate here continues to plummet toward 50 percent.

The Journal says McKinley’s model is to buy a house for $100,000, put $10,000 to $25,000 maintenance into it, rent it for $1,200 per month and then see annual returns of between 8 and 12 percent. Given the current economic volatility, this is an outstanding investment.

Assuming prices stabilize and begin to rise in a few years, the return only improves.

Lang says Las Vegas is a viable market because much of the housing stock is relatively new and standardized — like McDonald’s hamburgers, they may not be gourmet, but each one is more or less the same. It would be harder to buy up hundreds of homes in older cities because each house is often different from the rest and thus not as simply packaged.

Still, it’s no sure thing. One reason, it’s an entirely new business for these firms, requiring local boots on the ground — Realtors, contractors, property managers.

A recent white paper from the Federal Reserve also speculates as to why we haven’t seen bulk buying in the single-family residence market, questioning whether investors can find financing and achieve the necessary efficiencies to make it profitable. There’s also government-controlled Fannie Mae and Freddie Mac and resolving how the federal government wants to dispose of all the homes it now owns.

How should we feel about all this?

On the one hand, conventional wisdom tells us that an owner is a better neighbor than a renter. Perhaps. But at this point, we’re becoming a city of renters, so I’m not sure if it matters if the landlord is a hedge fund in Greenwich, Conn., or a guy in San Diego who owns five rental properties. Both have an interest in maintaining the properties, which also means maintaining the neighborhoods.

Brien hopes to bring a “lease plus rewards” program that would help tenants, who have lost a home or can’t get financing, rent a house and earn credit toward a later purchase. He would also offer financial fitness counselors who would help tenants shore up credit and move toward ownership. This sounds like an ideal program for Las Vegas.

Brien notes a couple of reasons why investors might hesitate to buy into the Las Vegas market. First is the economy, including our heavy reliance on gaming, conventions and tourism and questions about how that will affect job and population growth. (This first hesitation seems like a good reason to diversify our economy.) And, second, uncertainty about prices, given their continuing declines.

If big investors such as Brien come in, they would help suck up inventory and get us to the bottom, while also signaling to the world that the smartest and richest investors on the planet are betting on Las Vegas.

On the downside, as Lang notes, when people in the valley owned their homes and their values were rising, that wealth was accumulating here. Now, many of those rental checks could be sent to investors somewhere else.

Which means we’re like an economic colony.

But that’s always been the case.

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  1. "It's just another distressed asset," says Robert Lang, director of Brookings Mountain West and a real estate expert."

    Coolican -- "distressed" being the key word here, but nobody factored in just how much distress is coming at these investors like a runaway train. Our AG is after the culprits behind "tens of thousands of fraudulent foreclosure papers with the Clark County Recorder's Office." Check that out @ http://www.vegasinc.com/news/2011/dec/16...

    Our Supreme Court has ruled fraudulent docs in the foreclosure process equals a void transaction. So what will happen when all those vindicated homeowners wrongfully foreclosed on start showing up on all those renters' doorsteps with court orders in hand demanding their homes back?

    All together now, can we say "can o' worms"? This topic will keep you busy for a long time. I hope you're up to it.

    "If you're going to take my house away from me, you better own the note." -- Joe Lents (who hasn't made a payment on his $1.5 million mortgage since 2002) in Bloomberg's 2/22/08 "Banks Lose to Deadbeat Homeowners as Loans Sold in Bonds Vanish"

  2. This is a good thing and I do hope it impacts the housing market in Las Vegas.

  3. Who cares who owns the rental property as long as the lessor & lesee come to an agreement on the terms? It's strictly a financial transaction between two parties - perfectly legal in every way. Is Coolican looking for a problem to solve when there is none or is it more of the same from the parasitic class? Right now, you could buy my home for less tha I paid for it 25 years ago (If I were selling. I am not. So don't bother me!) and Coolican comes up with straw men like hedge funds? There was never a better time for all of you "renters" to make a deal on owning your own home with prices & mortgage rates as low as they are right now. So, look at the glass as 3/4 full; not 3/4 empty and pay no attention to that man behind the curtain: Coolican!

  4. President Obama, Fannie Mae, and Freddie Mac are currently presenting a plan to sell their foreclosures in bulk to investors. This is bad for Las Vegas, it is already extremely difficult for a typical purchaser to buy a home in Las Vegas, cash buyers undercut you at every corner, the average days on market for single family homes is less than 60 days(a traditional market is 90-120 days). Prices are low right now, so are interest rates, this is an incredible opportunity for the average man, unfortunately our government has sold us out to the rich, once again.

  5. Killer is right on. All this high-falutin' modern finance (i.e. "securitization") has thoroughly trashed the title system. If we had had a Torrens system, title would have been evidenced by a paper certificate with a unique number. But we kept the the tried and true Recorder system, so when things got sliced and diced and robosigned, ownership bits could not trace through. The result is chaos in land titles for anything that has gone through the sausage machine -- pretty much everything in the urban/suburban areas and in the rural areas that aspired to development.

    So, if you are a hedge fund manager, do you buy into foreclosed/short-sale real estate, knowing that you are buying into uncertainty as to ownership and a problem where title cannot be insured? (Well, this being modern America, maybe you do, get a huge bonus when things are looking good, and then, after things fall apart, get another huge bonus for fixing the mess you didn't understand when you created it.)

  6. "President Obama, Fannie Mae, and Freddie Mac are currently presenting a plan to sell their foreclosures in bulk to investors. This is bad for Las Vegas..."

    Chris090408 -- bad for everyone, but not in the ways you contemplated. See below.

    "All this high-falutin' modern finance (i.e. "securitization") has thoroughly trashed the title system. If we had had a Torrens system, title would have been evidenced by a paper certificate with a unique number."

    lericgoodman -- good call, especially on the Torrens system. The recording laws could be the Achilles Heel to all this, as our AG is actively pursuing. I've seen a few files and all to often there's dates that don't match, and the big badge of fraud, the notary's jurat is attached separately from the assignment or transfer. And at the root of all this is MERS, which unfortunately our courts are fiercely protecting.

    There's an old, old common law principle underlying all this -- "nemo dat quod non habet," literally "He who hath not cannot give" -- which means one cannot sell what one doesn't own. The foreclosers were virtually unopposed anywhere for years. Those who used solid old legal principles like this and the centuries-old law of notes too often found judges yawning in their faces and giving their homes away to the big banks, regardless of how flimsy their claims.

    That's all about to come back and bite 'em all, including the new "owners." Last summer our Supreme Court gave us two excellent foreclosure opinions, one of them recognizing Massachusetts' Ibanez case. That's the one nullifying many foreclosures for sloppy paperwork and suspect claims to ownership. A nullified foreclosure = vindicated homeowner who can come back and claim his home again, even from the new "owner." Plus damages, including emotional distress.

    The justice fun hasn't even started here. And the only winners will be the lawyers. Again.

    "Why don't the banks want us to see the paperwork on all these mortgages? Because the documents represent a death sentence for them..... in America, it's far more shameful to owe money than it is to steal it." -- an article from the November 25, 2010 issue of Rolling Stone by Matt Taibbi "Courts Helping Banks Screw Over Homeowners"

  7. The reality is not that Fannie & Freddie have been considering selling in bulk and renting, but they've been doing it for several years now. We've represented several clients bidding on these properties as well as worked with several properties owned by Freddie & Fannie that are tenant occupied. We've also worked with Hedge and Investment funds that have successfully proofed up in excess of $1 Billion in US funds to purchase with. The sum of all the funds these groups control exceeds the national debt several times. This is the reality, not the possibility!

    Daryl DeShaw
    Keller Williams Realty
    Daniels-DeShaw Group
    www.Daniels-DeShaw.com

  8. @Daryl, the point is that Fannie and Freddie are no longer going to market their properties, they are going to be selling their properties, in bulk, to investors, bypassing the agents that list them and the buyer's agents. Also, by doing this they are eliminating the possiblity of anyone other than a multi-million dollar investor being able to purchase a Fannie/Freddie property.

  9. "In this case, they're reacting to the emergence of what Oliver Chang of Morgan Stanley calls "a rentership society"..."

    Home ownership has always built up communities in terms of quality of life, good neighbors, a common interest in keeping homes in good condition, and binding communities together through common interests - like quality schools and teachers, education of their children, "pride of home ownership," etc.

    But WITHOUT HOME OWNERSHIP - communities suffer, because it comes down to "renters" NOT HAVING a "Piece of the Rock." In many instances, renters could care less about their neighbors, or the quality of life in the community they live in. They are just looking for a place to live. Renters are often - to some degree - transient people, and not seen as equally "solid participants" in a housing communities as people who OWN a home.

    This is not to say that renters are bad tenants; it just points to home "renter-ship" as not being as good from a "partnership and community investment" point-of-view, as people who have a ($) VESTED INTEREST in the home they OWN.

    One current problem with the move towards home "rentership" is that apartment RENTAL RATES are going up on an average of 3 percent a year. This percentage of RENT INCREASES was, FORMERLY, the average RATE OF APPRECIATION that HOME-OWNERS enjoyed (and built equity).

    Being "underwater" now - with reduced, or no equity - is a major impediment to selling or buying a home, relocating for a job, retiring, etc. And many people - especially younger ones - don't see ANY VALUE in BUYING a home in this economy. Further, they do not want (or cannot afford) the expenses associated with buying a home, nor do they want the financial RISKS of ome ownership; especiall because it will be hard to accrue meaningful equity in the near term.

    Thus, with all this going on, including CONTINUING FORECLOSURES, lost JOBS, etc. - and having to deal with tight credit - people are LESS MOBILE than they used to be - and apartments ("rentalship") is becoming more attactive.

    This is also a major problem for cities. The fewer homeowners (and mortgages) there are, the less of a tax base there is. This means a loss of needed finances to run the city.

    If this "Hedge Fund, home ownership" idea takes off, America's HOMES will become more like TOOLS of the STOCK MARKET - rather than places to live in, and build home equity for the future. This will only make Americans MORE DEPENDENT on the government ("handouts"), and will (ultimately) eliminate the ability for most Americans to buy and own a home.

    I see no "bottom" to the current downturn in the housing market. And Hedge Fund investors may soon become the NEW OWNERS OF AMERICA's HOMES.

    But then, what happens to us in our "pursuit of happiness"?

  10. @ TomD1228 - By the way...
    Your comments reminded me of a home in my neighborhood where a woman on WELFARE (with 2 children) was GIVEN a 3,400 SQ FT - 4 bedroom - home to live in; rent free. Her "rent" is subsidized by HUD - who "BOUGHT" THE HOUSE FROM THE PRIOR OWNER. Soon, HUD, FHA, Fannie Mae, Freddie Mac - and other government agencies - will all be able to "rent" homes from Hedge Fund investors.

    And the government will PLACE the "homeless, indigent, people on welfare" and others in homes of (formerly) great value. This will be poossible because the government will RAISE OUR TAXES To PAY FOR THE COSTS involved. (Thus, President Lyndon Johnson's "Great Society Program" will be enhanced far beyond what he ever imagined!)

    Thus, as the government becomes a "ready client" for HF investors, that ought to SPUR the further onslaught of home purchases by the investors - which I see as an eventual GOLD MINE for them, and WNDFALL profits.

    Why else would Hedge Fund investors be amassing incredible amounts of capital (Trillions of dollars) for such purposes? This is not any kind of a futures or forecast "Hedge" offering. This capitalism and greed at its "finest."

    What's next to drag the people of this country down?

  11. Upon reading this article, I was taken back. Please permit me to express my absolute contempt towards ANY party who is and continues to EXPLOIT good Citizens in the name of profits solely! I am so incensed about hearing how these treasonist predators continue to RAPE the innocent people in this desert landscape.

    WHERE is my profit, my return in MY investment????

    Here is my premise: "The Journal says McKinley's model is to buy a house for $100,000, put $10,000 to $25,000 maintenance into it, rent it for $1,200 per month and then see annual returns of between 8 and 12 percent. Given the current economic volatility, this is an outstanding investment."

    Well, in 2005, I put my $10,000 to $20,000 down, and I paid my $1,200 in mortgage payments, and WHERE IS my "annual returns of between 8 and 12 percent."??????

    The United States Government, political leaders and cronies BAILED OUT all the investment BANKSTERS AND WALL STREET INVESTORS, what about the people, the good Citizens like ME?????

    This is an OUTRAGE! This is the most unethical, immoral, indecent gesture preyed upon good Citizens of our country and MUST STOP NOW.

    NOTHING should be allowed to be transferred to these economic vultures until the housing crisis is resolved to the satisfaction of folks like me. Titles need to be clear, clean, transparent, and CORRECT! As a Citizen, I demand the assurances that all my hard work and dedication of consistantly making my mortgage payments, will, at the end of the trail, when the loan is PAID IN FULL and satisfied, result in a title that I will possess and should be MINE.

    There has been such an unbelieveable lack of integrity in all the facets of the housing industry, that there remains a shadow of doubt. Maybe investing in property should be done in other countries, not the good ol' USA anymore, as we are witnessing the CRIMINALS running the show here sadly.

    It appears these CRIMINALS are running the country, and they must be stopped by any means possible. The good People of the United States of America have been duped, oppressed, and RAPED by corporate economic predators and their patsies, bought for politicians/political leaders.

    The average Citizen lacks the financial resources to resist and fight...but now, the gauntlet has been poised, and any 'TAKEOVER' of the housing market with impunity by these financial rapists must be met with resistance by and for the People.

    The line in the sand is being crossed, and WE the PEOPLE will NOT tolerate this EXPLOITATION.

    It is not in me to be a quitter. The future is in jeopardy, and we, who are able, need to be good stewards to protect what we can for the good of not only ourselves, but for those who follow us.

    Blessings and Peace,
    Star

  12. "It appears these CRIMINALS are running the country, and they must be stopped by any means possible. . .The average Citizen lacks the financial resources to resist and fight...but now, the gauntlet has been poised, and any 'TAKEOVER' of the housing market with impunity by these financial rapists must be met with resistance by and for the People."

    star -- you barely scratched the tip o' the iceberg on this one. But you're PO'd, and that's a good start. First, you can blame a lot on our best Congress money can buy. Reason -- the big banks behind most of what HOA_CONNEDo aptly calls FRAUDclosure are incorporated and otherwise chartered by federal law, and regulated by federal agencies. For the most part they've looked the other way, save for last April's token consent orders.

    Second, being one of many non-judicial foreclosure states, filing in court to challenge the claim against your property will bury you under an avalanche of paper by attorneys cashing in on billable hours. Somehow even a simple "Where's my Note? Who's the Note Holder?" declaratory approach can be overwhelmed by a procedural Frankenstein, if one lets it. All the while the foreclosers will fight tooth and nail against proving they every had a bona fide claim.

    Can you say "shell game"? The remedies are mostly where they've always been, in the centuries-old law of notes, hidden away in NRS 104, Article 3.

    "I know of some FRAUDCLOSURE/ILLEGALLY FORECLOSED FRAUD VICTIMS that have LIS PENDENS recorded on their titles."

    HOA_CONNEDo -- lis pendens is one of several simple, time-honored, highly effective tool available to every homeowner fighting your "FRAUDclosure." Mentioning it puts you ahead of the pack. Tell your victims to look up the Nevada Supreme Court's 1995 decision in Coury v. Tran and 1993's Levinson v. District Court.

    Next time how about turning off your caplock??

    "The note is the cow and the mortgage the tail. The cow can survive without the tail, but the tail cannot survive without the cow." -- the late Professor Chester Smith of the University of Arizona College of Law, as cited in Restatement (Third) of Property, Mortgages 5.4, Reporters' Notes

  13. Oh gosh, KillerB, I promise to watch my CAPS next time and be kinder to your eyes! I use the caps to draw attention, not to yell. I do all my screaming in this room, and the dog knows when the keyboard turns to blazes. I truly don't know if I could ever tolerate injustice silently, especially when so many are suffering, not just myself, but many of the families I serve, and my neighbors.

    Loved your response though, perfect. =)
    Thank you!

    Blessings and Peace,
    Star