An insider explains what PE firms that bought thousands of single-family homes around the country will face.

Wolf here: occasionally I highlight comments that add a different angle or flavor or an illustration or more depth to an article published on Wolf Street. This is a comment by “bobster111” on my article, The Big Unwind: After Messing up the Housing Market, the “Smart Money” Bails Out. The article discussed how large private equity firms and other institutional investors, after buying up tens of thousands of vacant single-family homes in a few key markets, were now pulling back, with sales to institutional investors in Q3 plunging to the lowest level since 2010.

By Bobster111:

Single-family landlording was traditionally a business for small local landlords who usually owned maybe 5-15 houses and sometimes a few apartments. They made money by owning for a long time, screening their tenants very carefully, managing their own places, and doing most of their own repairs.

I had a property management company for some years and a number of rental properties for quite a bit longer. Hard to make money in single family. If you call a contractor to fix everything, repairs cost too much. In terms of screening, I turned down as many as twenty applicants in a row for a house, mostly for lying in their applications, but also for evictions they failed to note, failure to pay utility bills, etc. It’s very laborious to screen properly. Credit report alone is not adequate at all. So many landlords take the easy way out and rent to somebody with OK credit who talks a good game.

As a landlord you tend to lose your best tenants when they buy a house. Many, many tenants rent because they are too irresponsible to buy a house – they’re not good with their money, neglect repairs, don’t know how to fix anything properly.

Buying and selling foreclosed houses can be a good business (that’s what I did on a small scale). But you have to realize that many foreclosed houses are foreclosed over and over again. I’ve seen the same house foreclosed on 4 or 5 times over 15 years or so. Many of these foreclosed houses have odd floor plans, are in marginal neighborhoods, have mediocre to poor construction quality, etc. Marginal buyers buy marginal houses because sometimes that’s all they can afford, and often because they just don’t know good or bad construction quality when they see it.

When the market is good, anything with an address will sell. When the market is bad, lenders won’t lend on the shacks they used to lend on, and many buyers can’t qualify anymore.

Many of these houses being sold by PE firms now will just be foreclosed again in a few years. Someone should do a study showing how much prices drop on these houses within 5 years. By “bobster111” commenting on The Big Unwind: After Messing up the Housing Market, the “Smart Money” Bails Out

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