The foreclosure crisis in America has had many unexpected twists. But none may be as striking as the latest development: real estate speculators, with billions in ready cash, are swooping into hard-hit locales and buying foreclosed and low-end homes with the same vehemence that created the housing market bubble.

They’re hoping to rent these properties to ex-owners or others, but they’re creating distortions that truly worry housing advocates. Banks are flocking to cash buyers, not to people with loans. First-time buyers can’t get in. Rents are skyrocketing. Home values and prices are going up.

If Maria Benjamin had her way, the For Rent sign hanging from a post on the small front lawn of the bungalow at 22 Chanslor Ave. would not be there. Nor would similar signs on other lawns across Richmond or a string of other working-class cities on the industrial northern end of San Francisco Bay.

Benjamin is program director at the Community Housing Development Corporation of North Richmond, which relies on a portfolio of government housing programs, some with roots dating back to the New Deal, to assist first-time home buyers. Her mission, as has been the case for housing activists for decades, is built on the belief that owning a home helps to stabilize individuals, families and communities.

But in a turn that affordable housing advocates like Benjamin could not imagine just two years ago, starter homes like the two-bedroom, one-bathroom, 939-square-foot bungalow at 22 Chanslor, keep being snatched from her clients’ hands. Homes that were abandoned or boarded up as the housing bubble burst are now hot properties, but not for the kind of buyer Benjamin seeks.

“We have people who have been making offers for a year or more, continuously being turned down,” she said. “They’re being outbid by investors.”

“Waypoint is a giant player,” said Benjamin, referring to a company that started in the Bay Area in 2008 and expects to raise $1 billion from Silicon Valley venture capitalists this year as part of an ambitious plan to buy 10,000 homes across America’s foreclosure belts. “But it is not only Waypoint,” she said. “They’re buying up and targeting low-income neighborhoods… They’re targeting cities that don’t have strong rent controls.”



Benjamin is upset that working people who have played by the rules—saving money, holding jobs, filling out piles of paperwork to get low-interest federal loans—or tried to restructure debt to keep their homes—are being steamrolled. She says there’s no precedent for corporate takeover of low-end homes on the scale that’s unfolding, a concern voiced by others, including realtors in Southern California where outlier counties are seeing a third or more of foreclosed homes bought with cash.

“It’s been going on for about 20 months,” Benjamin said. “In the beginning, the investors were on the courthouse steps buying these properties, but they weren’t organized. They were smaller investors. Now there are investment pools that are coming together. So they are more organized and more strategic. Our folks don’t stand a chance.”

Another Set of Rules

Waypoint, however, tells another story. It sees itself as something of a capitalist white knight, riding into blighted communities and doing what few private investors have done as the foreclosure crisis spread like a wildfire and left shuttered homes, or buildings with Occupiers who refused to leave as banks and lenders refused to restructure their debt.

There’s an old saying in real estate that you make money when you buy, not when you sell. Waypoint’s investors—like other big investment pools with similar plans—see low-end homes as a giant untapped equity play. Property values in this market dropped by a half or two-thirds in value in cities such as Richmond as the real estate crash bottomed out. Pheonix, Las Vegas, Tampa and other foreclosure centers all had similar price collapses. The sector was poised to rise in value at margins exceeding most stocks and bonds, if home values even recovered a fraction of their former peak.

Investors with hundreds of millions in ready cash, such as the Blackstone Group, Colony Capital, Oaktree Capital Management started buying thousands of homes in the most depressed markets for cash and as-is. Their sales pitch promised returns of 6 to 8 percent from rental income and a longer-term payout of 16 to 18 percent once the properties are sold in a half-dozen years or so, said Paul Staley, who buys, rehabs and sells homes for a Bay Area affordable housing non-profit. The investor's cash meant banks and other mortgage lenders didn’t have to worry about inspections, appraisals, government standards and haggling with buyers. Those market "efficiencies" pushed players like Community Housing Development Corporation of North Richmond and its clients out of the equation.

But then Waypoint spent tens of thousands of dollars fixing up its homes. If you look at its website, you’ll see houses with new paint inside and out, new kitchens, carpets and floors, tubs and showers. They weren’t bringing buildings up to new construction code, but they were spending $20,000 or more on each to improve them. That investment had not been seen in this kind of housing stock in low-income communities in years. It helps to stabilize falling home values for neighbors (whose mortgages may be underwater) and it fortifies the local property tax base. For those efforts, and launching a slick marketing campaign where Waypoint said it would award prompt-paying renters with "points" that could be used to buy the home or to get cash back after leases end, the company has become a local media darling (although it is now downplaying these programs).

Waypoint spokeswoman Beth Haiken declined to make any executives available, saying they’d spent last week “skiing with their kids on spring break” and now “had to get back to work.” That’s too bad, because it would be very instructive to hear their take on the national trend they are part of—including questions about their business model and what they believe will be its long-term impact on affordable housing. Executives told USA Today that Waypoint now owns 3,300 homes and “expects to own 10,000” by the year’s end.

As you might imagine, skeptics abound. On the local level, Richmond’s Benjamin is worried about what kind of landlords they will be. Early on, she said they seemed to be making mistakes by renting to anyone and then evicting people who couldn’t pay. “To me, the biggest concern is the property management of these scattered sites,” she said. “There is no track record for this type of property management.”

On a more macro level, there are substantive questions about this business model and how it will play out, especially once it gets past the easy stages of buying and rehabbing properties with other people’s money. Waypoint seems to be relying on forecasts that suggest it can drive up local rents, get find enough occupants at price points that require middle-class paychecks, and eventually sell the properties to satisfy its billionaire venture capitalists.

“The question is what is scalable in that business model,” asked housing historian Eric John Abrahamson, author of Building Home: Howard F. Ahmanson and the Politics of the American Dream. “Is property management scalable? Is the intelligence that it takes to buy well scalable? Because one of the things about real estate historically is that it tends to remain a profoundly local business.”

Affordable Housing Trends

Owning and renting homes has deep roots in American culture, Abrahamson said, noting that the country’s founders—and later New Deal reformers—saw property ownership as a path to social stability and citizenship. As a result, the government created the kinds of programs that promoted buying homes. Yet, today, as Washington has allowed the banks and others that created the 21st century’s first housing bubble and crash to continue with little oversight, Abrahamson said that access to property has taken a backseat to market efficiencies. “The question is being raised in a way that hasn’t been raised for decades,” he said. “Is home ownership the way to promote community? Does government have a real stake in promoting ownership. Should the mortgage deduction be continued?”

The transformation of thousands of single homes into corporate rentals is a new business model, he said, adding that it would be telling to see how companies like Waypoint face a host of new pressures, from getting rental income to meet their goals to finding and buying more homes to satisfy investor’s expectations to their impact on the communties they target. “Are they just tapping the speculative bubble and climbing in the short-run?” he asked. “Or is their business model sustainable through the real estate cycle?”

“Up to this point you have to give these guys credit,” said Staley. “They have demonstrated something that alot of people didn't think was really possible, which was to scale up a very granular business… As far as I can tell, they're doing it. But google Och-Ziff. They got out. They sold their portfolio late last year.”

Compared to two years ago, there's a lot more competition for low-end homes. Housing analysts say that up to $10 billion could be spent in 2013 to buy up to 80,000 distressed homes for conversion to rentals across America. Those would be added to 12 million single family homes now rented. The press clips on Waypoint’s website seem to be chosen to say that its industry—the rental real estate barons—is barely impacting local market trends or inflating local home prices.

But recent statistics suggest otherwise. Walter Molony, National Association of Realtors spokesperson, said in 2011 that, “the investment market share surged extraordinarily in terms of the volume of transactions.”

“It was up 64.5 percent, from 1.3 million sales in 2011 from 749,000 in 2010,” he said. “It’s hard to say what the 2012 data is going to come in at. The overall sales were up 9.5 percent. The investment component might be flatter, and that’s because properties that are most popular with investors, foreclosures and other low-end property, have been shrinking as a market share.”

In 2011, “distressed properties” were 35 percent of all home sales, Molony said. “Now it is down to 23 percent,” he said, referring to January figures. “We’re projecting that it will be below 15 percent by the year’s end. So this might be something of a transition year when investors have to start looking at higher price ranges.”

These statistics suggest that the supply of low-end housing is shrinking and that housing costs—buying or renting—are all but certain to rise; and not just in communities hit by the foreclosure crisis, but in nearby areas as well. That change in supply and price will undoubtedly cause investors like Waypoint to change their plans or stake out new markets. They have new offices in Southern California, Florida, Georgia and Illinois. But it is also undermining local affordable housing options for ordinary Americans.

“My guys tell me that every person—and I am really not exaggerating—every potential homeowner who comes in our fold that’s been out there looking and has made offers has been beat by an investor," CHDC’s Maria Benjamin said. “It might be that they’re [investors] bidding $150,000 or coming in with $75,000 in cash. But our folks have to go out and get a FHA mortgage. That requires an inspection, and that health and safety requirements are met before the transaction can go through.”

Abrahamson, the housing historian, has another take on the latest housing market trends.

“I think we’re in a new gilded age,” he concluded. “The things that contributed to social stability in the past, whether they were home ownership or some form of lifetime employment at one firm or one career—all those things created stability within community. But all those things are going away.”