A new type of business model
Much attention has been paid in the news recently to a new wave of companies that have been more than just dabbling in rentals, as they try to corner the market when they buy investment properties. These companies have been actively creating an assembly line of purchasing foreclosed properties, fixing them up and then putting them on the market as strictly rentals. These firms then seek tenants for all their recently bought properties.
Some of these companies are based in the hardest hit real estate areas of the country over the past few years, most notably California and Florida. They utilize seed money from large investor firms that bankroll them with multimillion dollars in funding. Thus, these firms do not have to rely on traditional mortgage financing for all their acquisitions.
Fine tuning how they buy investment properties
Apparently these companies have fine tuned the buying process to such a keen degree that they use a veritable minion of inspectors to go evaluate up to 20 homes a day. The firms then decide, based on the raw data the inspectors provide, whether to make actual bids on a property. These inspectors will spend approximately 15 to 20 minutes in each house, then plug into their iPads the data about the condition of each house. Proprietary software, created by each specific firm, then interprets the data based upon revenue parameters that each company is expecting.
Items such as the condition of the kitchen, appliances, floors, roofing and landscaping are all covered, to name just a few pieces of raw data collected. Then, a highly sophisticated algorithm contained in the software is used to determine what repair costs would be required to bring the property up to snuff for renting out in each particular area.
Coming up with a bid price when they buy investment properties
Once those costs are figured out, a number is produced representing the total repair cost along with what the house should be worth in today’s market in it’s current condition. The combined total yields an estimated price range the company will offer as their bid on the house. And this is done hundreds of times a day, as each firm makes bids all over their respective states. So mom-and-pop investors are not only competing against themselves now, but they’re also competing against these large companies that deal in such large amounts of distressed and foreclosed properties.
But let’s consider one thing that the mom-and-pop operator has over these large assembly line style operations. These large companies have only been in existence for a very short time, and even though they are creating a huge market for the purchase of distressed properties, they have yet to show a long-range track record for actually doing the hard work – that is, holding onto properties for the long run.
The holding process
This is where the truly difficult part of being a rental property owner comes in. As I have advocated in previous articles here, you really want to stay local when you’re managing your own properties. Large-scale companies that are buying in many disparate areas and municipalities have a tough road ahead of them. Finding good tenants, dealing with delinquent tenants, emergency repairs – these are all difficult things to manage, even with a professional property manager in place.
Different municipalities each have their own set of unique tenant/landlord laws. The company that’s doing this type of assembly line purchasing of properties will also have to be able to deal with these different municipalities and their local laws. The amount of time, energy and most probably, attorney power will be staggering for companies like this.
Figuring in for delinquencies
Imagine a situation where you have a 5% delinquency rate on all your properties. But as a mom-and-pop operator your properties are in one or two local municipalities. And you know you’re going to have to use an attorney to evict anyone that does not willingly want to leave. Now imagine doing that in a large-scale way. Try 5% on several thousand properties in many different locales. Attorney costs alone will be staggering for a company like this. I’m not sure how investment companies are putting money up for companies like this to exist, but they’ll soon find out that the purchasing of the properties was the easy part. In a few years, holding onto these houses will prove to be very difficult.
When it comes time to sell investment properties
In addition, when it comes time to sell off some of these properties, as I’ve already mentioned in a prior article about jettisoning your worst performing properties, there’s going to be a major hurdle in front of them. Even in a few years, there will still be a huge glut on the market of distressed properties and other rental houses, and these large companies may not be able to even get back what they paid for the properties if they sell them too soon. I’m also not a big believer in cookie-cutter approaches to fixing up houses for rent. I believe when you purchase a property to rent and to hold long-term, you’re going to be putting your own personal stamp on it. So while you are making basic repairs and fixing up properties in a very simple way, you’re still doing it in your own style. Not so with a large company that’s doing hundreds, if not thousands, of properties.
Assembly line as a way to buy investment property – a bad idea
So only time will tell how long these assembly line investment property companies will exist, but I think they are in for a very difficult awakening process in the next few years. As they try to find good, qualified tenants, hold onto these tenants and manage the properties in each of these different locales, they’re going to encounter a whole host of headaches. They’ll find out, painfully, what mom and pop investors already know – that holding rental property for the long run is really hard work. And that purchasing property, while time consuming and difficult as well, pales in comparison to the workload ahead of them after the purchase.
photos courtesy of chambanamoms.com, nanowerk.com, homeinspectors.com, appraiserjobs.com, tenantscreeningblog.com,