Want to buy a home right now? You might have to outbid a $50 billion private equity firm first.
- Large-scale investors have been buying homes across the country to rent out for a profit.
- Big companies are outbidding average Americans by offering cash and skipping due diligence.
- Institutions may use their cash and leverage to snatch up more homes across the country this year.
- See more stories on Insider’s business page.
Cerberus Capital Management, the $50 billion private-equity firm in Manhattan, is well known on Wall Street for the major corporate buyouts it has completed through the years.
Lately, it has trained its attention on a more modest target, single-family homes in places such as Maineville, Ohio, a rural suburb north of Cincinnati where the median home price is about $270,000.
The investment company has scooped up dozens of houses across counties in and around Cincinnati over the past year, according to local property records and experts, buying up homes that it then leases out to renters to earn a profit.
Cerberus is one of several large-scale investors in the booming single-family rental, or SFR, business. Seeing opportunities to purchase properties at a discount after a wave of foreclosures during the Great Recession‘s housing crisis, companies such as Invitation Homes and American Homes 4 Rent have snapped up tens of thousands of houses across the country over the past decade.
The firms place tenants in the homes and charge them enough rent — an average of $1,765/month in the fourth quarter of 2020, according to consultancy John Burns Real Estate — to make their purchases worth it. The model has proved to be a cash cow: Cerberus launched its own SFR arm, FirstKey Homes, in 2015 and expanded the company’s pipeline of acquisitions by raising $500 million for it in 2018.
The companies say their portfolios encompass a fraction of the nation’s $36 trillion residential market.
But at a moment when there is already a shortage of housing inventory across the country, voracious corporate buyers such as Cerberus and Invitation Homes have added to the competitive pressures felt by everyday consumers seeking a home.
In December, for instance, Cerberus paid $287,000 for 217 Heffron Circle, a four-bedroom Maineville home with a roomy backyard and a three-car garage. The investment firm beat out a family that had placed a higher bid of $295,000, which was closer to the home’s asking price of $300,000, according to Michelle Sloan, a RE/MAX broker who manages its Maineville office and who represented the seller in the deal. The family had made its offer contingent on securing a mortgage for the property, whereas Cerberus was willing to pay cash.
“My client opted for the less risky offer for cash,” Sloan said.
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Sloan said Cerberus insisted on closing the deal as quickly as possible, in about 30 days, and declined to grant the sellers extra time to pack and move their belongings.
“At the day of closing, I went to get my sign from the front of the house, and my sellers were still carrying their clothes on hangers and stuffing them into their car,” Sloan said.
A property-records search by Insider of counties in and around Cincinnati showed that Cerberus has acquired more than 100 homes in that market over the past year. Sloan noted that she sold another Maineville house, 903 Pineneedle Place, to Cerberus for $247,000 in December as well.
Cerberus did not respond to a request for comment.
Over the past year, demand for single-family homes has grown rapidly because of a combination of factors, including buyers wanting more space after months of pandemic lockdowns and a growing sense that rock-bottom mortgage interest rates may finally be poised to rise. The country’s real-estate market is so robust that the average median home price nationally has crested to a 15-year high. Half of the homes for sale are selling within a week of listing, and bidding wars are so commonplace that one California home fielded 122 offers in two days. There are 40% fewer homes on the market than last year.
Sloan noted that there are about 150 homes on the market in the Cincinnati area, far less than is typical.
“In the spring, it should be closer to 600 to 700 or even 1,000 homes,” Sloan said.
Companies plan to buy up even more homes this year
Major companies involved in the SFR business counter that they invest capital in homes that need maintenance and give customers the chance to live in a house they might not otherwise be able to purchase. A spokeswoman for Invitation Homes rejected the notion that the company had become another market force that buyers have to negotiate past to realize the American dream of homeownership.
The spokeswoman, Kristi DesJarlais, pointed out that Invitation Homes purchased 235 homes in Orlando, Florida in 2020 — its most active market for acquisitions — less than half of 1% of the number of homes sold in the area during the year.
We are “just a small sliver of the single-family rental market — about one-half of 1% of the nation’s 16 million single-family rental homes,” DesJarlais said in a statement. “In 2020, we purchased less than two-tenths of 1% of all of the homes sold on the multiple listing services in the 16 markets in which we operate.”
But in a March 1 presentation posted on its website, Invitation Homes said it expected to have its busiest year ever buying houses. It said it plans to acquire more than $1 billion worth this year, the most since its founding in 2012. It also said it will sell off about $300 million of its portfolio, far less than in 2020, 2019, or 2018 when it sold $440 million, $900 million, and $512 million of its inventory respectively, in part because it wants to hold onto more inventory to capitalize on the expected upward trajectory of rental rates.
Areas such as Atlanta, Phoenix, and South Florida are among the $19 billion company’s largest markets and places where agents report the company flexing its financial heft to outbid other buyers.
Firms offer all cash and waive due diligence, so it’s difficult for regular buyers to compete
Last September, as the housing market was revving up from its monthslong coronavirus pause, broker Leslie Quintana oversaw the sale of a four-bedroom home in Litchfield Park, a city west of Phoenix, to Invitation Homes for $275,000. The company beat out a family who had offered $280,000 for the 2,038-square-foot property at 12321 W. Montebello Ave. Like Cerberus, Invitation Homes paid for the house in cash, whereas the higher competing offer was dependent on financing.
Quintana, an agent with West USA Realty, said she continues to receive a steady stream of texts and emails from Sixto Aspeitia, the broker who represented Invitation Homes in the deal, asking if she has any other clients who might sell to the company. By proactively seeking out homes to buy, the company, Quintana said, has sought to strike deals with sellers before they even place their property on the market — an arrangement that would preempt bidding wars with average homebuyers altogether.
“I might consider reaching out to him if a seller is seeking a fast transaction,” Quintana said.
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The growing involvement of corporate buyers in the housing market is ratcheting up competition in other ways. Some bidders said they have been asked to forgo steps in the home-purchasing process that are designed to protect the buyer, such as due-diligence periods, during which a buyer can retract an offer and reclaim their deposit if a home inspection finds that the condition of the property falls short of the description provided by the seller.
‘It’s complete insanity to me,’ one broker said
Stephanie Beckwith, a Redfin agent, said she recently represented a family in a bid on a home in Lilburn, a suburb of Atlanta. Her client was one of 10 finalists selected from 80 bidders after offering $30,000 above the $285,000 asking price and agreeing to pay cash.
“The seller’s broker called and asked if we would drop the due diligence,” Beckwith said. “It’s complete insanity to me.”
She said she brought the request to her client, who declined to forgo the diligence period and subsequently lost the bid. Although the deal hasn’t yet closed, and the identity of the buyer is not yet known, Beckwith said that she and her buyer believe that an investment firm or corporate landlord is the most likely to waive due-diligence periods in order to outmaneuver other bidders. That’s in part because those institutions have the financial wherewithal to address the unexpected issues, such as a leaky roof or malfunctioning boiler, that they may get stuck with as a consequence.
“It’s already an all-time-high moment of frustration for our buyers because the market is so tight,” Beckwith said. “I think there would be even more scrutiny if more knew these big players were involved.”