Deep-pocketed investor paying cash for hundreds of Twin Cities homes

  • Article by: JIM BUCHTA , Star Tribune
  • Updated: September 1, 2013 - 11:15 AM

Invitation Homes has been paying cash for hundreds of metro houses and turning them into rental properties.

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Kevin Stone worked on the porch railing of a Blaine house owned by Invitation Homes.

Photo: BRUCE BISPING, Star Tribune

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This particular house hunter prefers a nice lawn and at least two or three bedrooms in a comfy neighborhood in the suburbs. But this isn’t your usual first-time prospect freshly approved for an FHA loan; this is Invitation Homes, a major investor backed by the $64 billion Blackstone Real Estate Group.

From Apple Valley to Woodbury, Invitation has been on a buying spree in the Twin Cities, paying cash for about 570 single-family homes in what it hopes will become a massive portfolio of rental properties scattered throughout the suburbs. Already, the Dallas-based company is creating a niche in the Twin Cities by targeting a younger generation of renters who prefer the creature comforts of homes instead of apartments.

“They’re not as quick to put down roots, and financing is a little harder to get, so that ownership piece of the American Dream might be pushed back a few years,” said Eric Elder, a vice president for Invitation, referring to the company’s target renters. “But there’s a desire for a backyard for the dog, for the suburban school district.”

More notably, the company is betting that the housing recovery underway in the Twin Cities, along with a strong rental market, will generate robust profits. Marcus Ridgway, Invitation’s chief operating officer, recently gushed about the area’s “fantastic” education system and vibrant economy.

“We believe that the Twin Cities has a solid economic foundation and has a future economic outlook that fits our business plan,” Ridgway said.

Across the country, private equity firms like New York-based Blackstone are quietly buying distressed properties and renting them out with the expectation that investors will profit from a growing appetite for renting, as well as appreciation on those properties. Blackstone has become the nation’s largest buyer of single-family homes, followed by American Homes 4 Rent, which now owns about 18,000 properties across the United States. Invitation has invested more than $5 billion in about 30,000 houses.

Such companies are being credited with driving the housing recovery in the Twin Cities and throughout the country because their bulk purchases of foreclosed homes help stabilize neighborhoods.

“It’s helping the market heal,” said Ron Peltier, chief executive officer of HomeServices of America, the company that owns Edina Realty.

Invitation’s average purchase price is $191,000, and it spends an average of $20,000 to fix up each house before putting it into the rental pool. It recently listed more than a dozen local houses on its website (invitationhomes.com), ranging from a 1,332 square-foot house in Crystal for $1,350 a month, to a 3,310 square-foot house in Woodbury for $3,250 a month. The company paid $358,000 in May for the house in Woodbury and $133,500 in April for the one in Crystal.

But deep-pocket investors such as Invitation, which has been buying properties since 2012, have become formidable competitors in a market already suffering from a shortage of listings. That’s especially true for starter houses that are in high demand among first-time buyers looking for cheaper prices and low mortgage rates.

Traditional buyers aren’t able to rival all-cash offers from big-name investors, so the entry of companies like Invitation puts increased pressure on markets dealing with scant inventory. Such competition has been fierce in Sun Belt states such as Nevada; Las Vegas investors have accounted for more than 40 percent of all sales.

But the Twin Cities will feel the pressure. “It is impacting that first-time buyer’s ability to afford a home, even though they’re still trading at huge discounts relative to where they were in 2006,” said David Land, a vice president and portfolio manager with Securian Financial Group in St. Paul.

Land and his colleague Joe Betelj, a vice president and portfolio manager, say these large investors have been a boon to communities hardest-hit by the recession. They are transforming the nation’s rental market at a time of unprecedented demand because they offer professional management to a relatively new segment of the market.

Agents on the lookout

And Invitation is wasting no time getting a solid footing in the Twin Cities. Elder said the company is busy assembling local teams that will manage its hundreds of properties. The company has opened several local offices and has hired nearly 50 people to staff them. It’s working with hundreds of contractors, vendors and suppliers to renovate its houses.

Invitation has a team of locally based agents on the hunt for properties. Geoff Bray, an agent with ReMax Results, is one of several metro-area agents who has had sellers receive offers from agents working for Invitation.

For those clients, the process can be both thrilling and frustrating. “It’s been positive for us. Other agents might tell you something different,” said Bray, who has been the listing agent on three deals that closed.

In all three cases, sellers were elated to receive a cash offer even though the buyer had not looked at the property. Some offers came in immediately after the listing hit the market. Once the seller agreed to a price and a purchase agreement was signed, a local representative for Invitation visited the house and sent a detailed report with photos, measurements and descriptions of the property to the home office to make sure conditions matched the listing description that was the basis for the offer.

Bray said sellers must be prepared for the frustration if an offer is rescinded, or if a bid is amended with a much lower offer price. “It’s all a business to them. They’re not emotionally invested in the house,” he said. “They look at it purely as a financial investment. If it doesn’t work with their numbers, they won’t pursue it.”

But even with all the economic stability the Twin Cities has to offer, some companies haven’t been so willing to take a chance on the area. With home prices steadily rising and foreclosures accounting for about 10 percent of all listings, some investors are finding fewer deals and consider an investment here risky.

Colony American Homes, one of the country’s largest real-estate investors, is taking a pass on the Twin Cities, said spokeswoman Caroline Luz. “And nothing for the foreseeable future,” she said.

Even Twin Cities-based Silver Bay Realty Trust Corp., which recently went public after assembling a portfolio of nearly 6,000 houses, mostly in the South, owns no real estate in Minnesota.

“We do not currently have plans to acquire single-family homes in the Twin Cities area,” said David N. Miller, Silver Bay’s CEO. “We have been strategically deploying capital to markets that were most impacted by the housing downturn, such as Phoenix and Atlanta.”

Real estate experts say Invitation’s model isn’t without risk. Chip Johnson, founder of Georgia-based Turnstone Group, said he expects prices in the Twin Cities to appreciate, creating the potential for a profit when the company decides to sell homes. But he and others are concerned that managing thousands of single-site houses across the country will be challenging, and that expected yields from rents will be difficult to achieve.

In June, Turnstone, which has been acquiring distressed assets from banks, sold a small portfolio of 48 North Carolina homes to Invitation. “I have concerns about the ability to perform effective property management on thousands of homes,” Johnson said.

Experts also say it’s inevitable that some of these institutional investors someday will become sellers. Ridgway didn’t rule out the possibility that Invitation eventually might flip its holdings.

For now, though, he said the company is making a long-term commitment to the Twin Cities houses.



 

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  • Invitation Homes is spending an average of $20,000 fixing up Twin Cities homes it buys.

  • A sampling of Invitation Homes purchases and rental offerings

    White Bear Lake

    1610 9th St.

    Rent: $1,400

    Bedrooms: 3

    Baths: 2

    Square feet: 1,480

    Sold for: $155,000

    Maple Grove

    7585 Orchid Lane N.

    Rent: $1,600

    Bedrooms: 2

    Baths: 4

    Square feet: 2,117

    Sold for: $186,279

    Blaine

    1843 113th Court NE.

    Rent: $2,200

    Bedrooms: 5

    Baths: 3

    Square feet: 2,709

    Sold for: $264,000

    Lakeville

    16978 Galleon Circle

    Rent: $2,415

    Bedrooms: 5

    Baths: 4

    Square feet: 2,863

    Sold for: $257,500

    Woodbury

    11345 Ivywood Trail

    Rent: $3,250

    Bedrooms: 4

    Baths: 3

    Square feet: 3,310

    Sold for: $358,000

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