Skeptics Criticize Single-Family REITs

Single-family real estate investment trusts (REITs) are springing up in response to the rise in availability of distressed properties. The new funds focus on buying up blocks of …

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Single-family real estate investment trusts (REITs) are springing up in response to the rise in availability of distressed properties. The new funds focus on buying up blocks of foreclosed single-family homes to rehab and then use for rentals and sales are increasing. Critics argue it will reshape society by turning the majority of Americans into tenants and that there will be no regulations preventing abuse of the new system, which may include passing off maintenance and other responsibilities to the new tenants. It’s further believed that many purchasers have no rental management experience and are not concerned with getting any before they start renting. For more on this continue reading the following article from JDSupra.

As more and more investment chatter centers around the possibility of investing in the huge volume of single family homes that have, or will be, foreclosed upon in the United States, many are seeing an opportunity in Single Family REITs.  (Read our earlier posts about this blossoming investment vehicle here.)

However, there are those that are very concerned about what Rental REITs (both apartments and SFDs) will mean in the long run to the American economy – and the U.S. Citizen.  Here are some of their concerns and criticisms (with a hat tip to Yves Smith at Naked Capitalism for collecting most of these in his column and its commentary):

1.  The expected popularity of this investment vehicle, together with the decline in homeownership in this country, may mean that many Americans will be tenants to private equity landlords: it will change the very essence of our society.  These private equity landlords won’t be like beloved Stanley Roper in the old Three’s Company TV Series – nearby, quick to respond to complaints, always involved in maintainance.  Nope.  The worry is that Private Equity Landlords will be anonymous, unapproachable and possibly mysterious owners of properties without any regard for their tenants’ concerns or the property’s needs.

2.  This is a new concept, and even if Rental REITs have some interest in being good landlords, they’ve got no pattern to follow, no example in the past to use in figuring out how to be the Corporate Stanley Roper.  

3.  Gretchen Morgenson of the New York Times points to skullduggery happening in New York City with apartment REITs:  including suspicions of sending fake notices and fraudulent notices of non-payment (when payments have been made) to replace low paying tenants.

4.  Some are predicting that these new Private Equity Landlords are going to transfer the responsibility of maintaining the property to the tenant as part of the lease terms.  

5.  If the Rental REITs fails to meet its own obligations, like Tishman Speyer did a couple of years ago on a NY apartment REIT, a large number of tenants are suddenly in limbo – and may not even be aware that their Private Equity Landlord has defaulted on its own agreements.  

As more discussion occurs on this new investment vehicle, especially its latest version – the Single Family REIT, these and other worries will be a part of the conversation.  And they should be.  However, here’s the big elephant in the room: there are unprecedented numbers of homes sitting on bank balance sheets right now because of all the foreclosures that have happened in this country.  We know the impact of this very well here in Florida.

Something needs to be done to move forward, and we have no pattern here for how to fix this mess.  It’s something new.  

So, new answers are being developed like Single Family REITs, not in a sinister way to thwart the American Dream, but in an optimistic way to get the economy moving again.  Those homes have to get off the bank’s shoulders so banks can get back to the industry of finance and not housing.

This article was republished with permission from JDSupra.

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