There’s been a lot of talk about the REO-to-rental market over the past year, but no clear indication of how securitization can play a role. That was the case as well at a break out session of the American Securitization Forum’s conference.
Still, market participants said the sector has come a long way since Fannie Mae first announced plans to dispose of a large prortfolio of real-estate-owned homes.
“A year ago, the idea of a lending against a large portfolio of leased homes was foreign concept, whereas people have gotten their heads around the combination of the security and the assets and the cashflow generated,” said Gary Beasley, managing director of Waypoint Homes. He said most money center banks have term sheets out or facilities in place to finance the warehousing of these properties.
On the other hand, yields on REO to rentals are not as attractive as they were a year ago, before there were so many investors bidding them up. Still, Beasley said, the potential returns are better because players have a better view of how they could ultimately exit the investments.
Competition today is “ferocious,” he said. “You have to be very disciplined about your buying and operating strategy.”
Much of the discussion focused on the pros and cons of acquiring properties in bulk or one-by-one and whether to outsource the day-to-day management or do it in-house.
Frank Terzuoli, a director for credit data and analytics at KPMG, said the prospective tenents for REOs are a new class of renters, since many owned their homes before the financial crisis. It’s not clear how long some of them will stay renters. “This makes it a hybrid investment,” he said.
Terzuoli added that the hidden costs of owning rentals “can really bite you…. They eat away at profits at the back end.” He cited as an example Florida, where home prices are low, but the cost of replacing a roof could exceed the cost of acquiring the property.
Michael Dryden, managing director of global asset finance at Credit Suisse, said that from a lender’s perspective, it’s very advantageous to have someone “watching the kitchen.”