REQUIRED READING: The vast majority of families that are somewhere between initial default and foreclosure would prefer to stay in a single-family home rather than move into a multifamily dwelling. But there is a problem: the current deficit between the available inventory and the number of distressed and displaced homeowners. That deficit is estimated at up to 7 million homes. This void is a major factor in Wall Street's recent declaration of single-family rental homes as an emerging asset class.
The buzz and momentum around single-family rental real estate as an asset class has spawned a new breed of institutional investor. These investors have raised over $6 billion in committed capital and have a thirst for high volumes of acquisitions. But the perpetual backlog in the liquidation of distressed assets has led to a lack of available inventory, which has impeded the deployment of this institutional capital.
Despite this inventory shortage, institutional players have already begun to experience an initial level of success in developing their rental portfolios. In addition to the capital that has been raised in private equity, a handful of institutional investors have succeeded in levering their scattered site rental pools to the tune of almost $2 billion.
It is expected that this trend will continue, and it seems that there is a real potential for securitization of these loans in the near future. This activity has created an immediate opportunity for servicers to enhance their traditional offerings with new products catering specifically to loans made on single-family rental pools.Â
By adjusting their existing servicing structures to fit the new single-family rental, servicers can tap into this trend and create new revenue streams. Because most single-family rental portfolios include assets in multiple locations, multiple property managers are used to manage assets in different markets.Â
Servicers will need to add a component that tracks and monitors the performance of each property manager in each locale. They should also create standardized processes for each property manager to follow, a universal reporting format and a single repository for performance data. In addition to these requirements, servicers should also monitor and/or maintain repair and vacancy reserves, as well as validate annual occupancy and condition-based factors.
Servicing loans is not the only opportunity brought about by this trend. Institutional investors also offer servicers the opportunity to access a timely and efficient disposition channel for non-performing loans (NPLs), real estate owned (REO) property and short sales. To investors, the income potential of a property is as important – if not more so – than a discounted purchase price.
In many markets, rents are relatively high when compared to the purchase price. Institutional investors can pay close to par value for the home based on its current condition and still meet their target cashflow expectation for the property. These investors are liquid and are not plagued with the many financial obstacles facing the typical retail home buyer in today's marketplace.Â
These investors can purchase REOs that are already tenant occupied and can also purchase NPLs and short sales with the intent to facilitate a workout that keeps the current homeowner in the property as a renter. Servicers can streamline loss mitigation by matching the needs of the displaced homeowners with the institutional investors' efforts to purchase and hold rental properties, ultimately creating alternative disposition strategies.
In order to attract and communicate with these institutional investors during the disposition process, it is important for servicers to understand how this type of investor evaluates properties. Traditional valuations include automated valuation models, broker price opinions (BPOs) and appraisals, but when purchasing assets specifically for rentals, income potential needs to be considered as part of the valuation process. Estimated rental income, vacancy rate, rental saturation and rental price movement over time are just a handful of important factors to consider.
An analytical approach
In order to optimize profitability, it is wise to use formalized, reliable analyses that are designed to deliver these additional data points. Address-level reports are available and offer the highest level of accuracy.
The reliability of this data is critical for investors to derive accurate figures for the cap rate, cashflow and yields that are required for their decisioning processes. Real estate appraisers and brokers have begun to enhance their BPOs and appraisals with this type of data as a basis to derive income-approach value estimates. Servicers seeking a more streamlined approach to an income-based valuation can use ZIP-level gross rent multipliers which can significantly enhance their ability to evaluate real estate based on income potential.
Even though the institutional and media attention to single-family homes as an asset class is fairly new, single-family rentals have always been a major part of the housing market. They represented over 10 million units and 10% of the aggregate housing market in 2000 and have been the fastest growing part of the housing sector since the market peak in 2007.
Even if the market normalized tomorrow and the deficit of 7 million homes disappeared, single-family detached homes would still represent over 14 million total units and almost 2 million sales transactions per year. This market has all the markings of a sustainable asset class for the foreseeable future. As such, the servicing community will be wise to embrace these special servicing and alternative disposition opportunities as long-term solutions for defaulted loans.
Walter ‘Wally’ Charnoff is founder and CEO of RentRange LLC, based in Westminster, Colo. He can be reached at (855) 350-7368.