Institutional investors exploiting market for HOA single family homes

Investors move beyond bulk purchase of condos, expanding their inventory of rental properties

By Deborah Goonan, Independent American Communities

As a follow up to yesterday’s article HOAs are built on foundation of property values, not social values, today’s focus is on how institutional investors exploit the real estate market, increasing profits for their shareholders and decreasing affordability for both home buyers and tenants.

Here’s how it works.

When economic conditions were favorable for new construction – as they were in the years leading up to the 2007-2008 market crash – developers built homes as quickly as possible.

A flurry of high demand, spurred by easy mortgage lending terms at the time, led to high sale prices.

When the housing bubble burst, many homeowners and small investors were caught off guard as the value of their homes plummeted (even in HOAs, despite industry claims that strict enforcement of restrictive covenants preserves property values). The foreclosure crisis followed, and millions of American homeowners found themselves underwater on their mortgages.

Developers were left with large inventories of unsold new homes and condos. New construction came to an abrupt halt. Some smaller home builders declared bankruptcy.

Institutional investors entered the market, snapping up unsold properties in bulk and at rock bottom prices. Condos were acquired with the intent of leasing them to tenants. Demand for rental properties increased as former homeowners lost their properties to foreclosure by their homeowner and condo associations, as well as lenders.

As investors acquired control of condo boards, many condominium associations were terminated and the housing was then converted to rental apartments. Investors were able to increase rents substantially to keep up with demand.

Some large companies, such as Blackstone and Invitation Homes, began to snap up single family starter homes at foreclosure sales. The homes were renovated and then converted to rental properties, mainly for families with children seeking desirable school districts and space to play outdoors.

As investors acquired homes in cash only transactions, the supply of residential property at starter-home price ranges decreased, pushing up prices, and, in many cases, locking out home buyers that needed a mortgage to finance their purchase.

In recent years, home prices have recovered in some markets, but have remained depressed in less desirable geographical locations.

Institutional investors are selling a portion of their inventories of rental homes at a profit. But they are also holding onto a significant number of rental properties, as rents continue to rise.

Higher rents motivate millennials and other former homeowners to re-enter the home buying market. However, supply of homes for sale (new and existing construction) remains low, and prices remain relatively high due to stiff competition for homes in some of the fastest growing markets.

Those who cannot afford to buy a home or cannot get approved for mortgage continue to pay higher rents, and an increasing number of single family communities governed by HOAs are a prime location for rental properties.

Institutional investors favor homes in HOAs.

All of the above claims are fully documented. See the reference list below for my sources.

There is one factor not directly addressed in all of these reports of America becoming a renter nation, even in single family home suburban neighborhoods.

Why do institutional investors prefer to purchase in HOA subdivisions?

The answer is simple.

Just as with condominium associations, voting interests in homeowner associations corporations is allocated to each unit or parcel of property owned.

The more units an investor corporation acquires, the more shares of the HOA corporation it owns. The more shares that an investor owns in the HOA, the more voting interests it has in that association-governed community. More voting interests equate to more political power in the association, and the greater the investor’s influence over the HOA board of directors and membership decisions involving capital improvements, significant budget increases, approval or denial of special assessments, or amendments to the governing documents.

Investors cannot amass the same level of political and economic advantage over their neighbors in non-HOA communities, because, no matter how many properties an investor may own, votes belong to the people (registered voters) who reside in those communities. And each person gets only one vote, regardless of property ownership status.

When you connect the dots, it becomes clear who benefits most from continued new construction of association-governed communities.

Hint: it’s not the ordinary housing consumer seeking to buy a home of their own or to rent a home over the short or long term.