Investor Home Purchases and the Rising Threat to Owners and Renters: Tales from 3 Cities
INVESTOR HOME PURCHASES AND THE RISING THREAT TO OWNERS AND RENTERS: TALES FROM 3 CITIES
Historically, the price of buying a home was based on how much local residents could afford to pay and the traditional economics of supply and demand of existing and future homeowners. Renters, meanwhile, were most likely living in a property owned by a “mom and pop” local operation. Today, however, housing markets in the United States are rapidly changing with corporate investment in real estate driving up purchase prices, which are now tied to competition among far away investors. Meanwhile, the percentage of rental properties owned by sole proprietors has been cut in half. These new and disturbing trends threaten homeownership, wealth building, and the very fabric of our neighborhoods.
That’s why in a new report, Investor Home Purchases and the Rising Threat to Owners and Renters: Tales from 3 Cities, Accelerator for America, the Nowak Metro Finance Lab, and The Reinvestment Fund offer a new analysis of investor purchasing behavior and its impacts. This new report builds on the publication earlier this year of Averting a Lost Decade: Rethinking an Inclusive Recovery for Disadvantaged Neighborhoods by Accelerator for America and the Nowak Metro Finance Lab that began shining a national spotlight on this problem.
Reporting and research highlights the challenges faced by renters in private equity-backed properties, from maintenance requests gone unfulfilled to evictions as a core part of a fee-based business model. Furthermore, over the last two years, many homebuyers have found themselves beat by all-cash corporate offers, especially in neighborhoods with more affordable houses that previously may have provided opportunities for lower income residents to build wealth. These trends pose critical questions for city leaders: Will these homes ever come back on the market? What happens to the tenants who live in these new rental properties? How will this impact plans for revitalizing neighborhoods and building paths to inclusive prosperity?
The Tales from 3 Cities report analyzes changing housing markets in three different places: Philadelphia, PA; Jacksonville, FL; and Richmond, VA.
MAJOR FINDINGS
In the most distressed neighborhoods in Philadelphia, Richmond, and Jacksonville, more than 1 in 5 homes sold go from homeowners to investors. In Jacksonville and Philadelphia, more than half of transactions in the most distressed neighborhoods result in an investor purchasing the property.
In the last 30 years, the proportion of the rental market owned by sole proprietors has approximately halved, going from 77% to 41% of all rental units.
Investor purchases of single-family homes are particularly prevalent in neighborhoods with low sale prices and high vacancy, elevated mortgage denial rates, and higher shares of residents who are Black or Hispanic.
Investor purchases from owner-occupants are often concentrated in areas with below average but not the lowest homeownership rates, where both prospective buyers and current owners have struggled to access mortgage financing.
A QUARTET OF CHALLENGES
We see four clear challenges posed by the rise of investor purchases, centered on current homebuyers, future homebuyers, homeowners, and tenants:
For current prospective homebuyers, corporate investors have an edge because they offer quick, all cash transactions. Since corporate investors explicitly target lower-priced homes that need repairs, many homebuyers may be limited in their ability to compete with institutional buyers who are willing to purchase above the appraised value of a property.
For potential future homebuyers, once a house is in the hands of an institutional owner, it is unclear whether a house will return to the open market again. Investors may instead hold property for a very long time, or choose to bundle their portfolios and sell to other institutional owners. This raises concerns that neighborhoods may fundamentally change from ownership neighborhoods to renter neighborhoods, to the detriment of community stability and the ability of neighborhood residents to build wealth.
For current homeowners, the business model of a house flipper is to buy low and sell high. Pernicious flippers, wholesale buyers, and institutional homebuyers may target low-information homeowners with offers of quick cash without inspections. This sort of information asymmetry is bad for owners, who may be leaving money on the table. Over time, neighborhood prices may appreciate, but in a neighborhood owned by corporate landlords, little of that appreciation may accrue to a city’s actual residents - threatening the ability to build intergenerational wealth through homeownership.
For tenants, research and reporting shows that corporate and institutional landlords may have business practices adverse to tenants’ interests. Many institutional owners have made evictions part of their business practice, using the filing of an eviction as a tool to extract higher fees from tenants. Further, corporate landlords are accumulating a bad record of property maintenance, and through a dizzying array of LLCs shielding them from liability and accountability, these landlords may not maintain their properties or respond to city authorities.
AFA Advisory Council member and Philadelphia City Controller Rebecca Rhynhart responded: "This report exposes the alarming issue of the rise in investor purchases of homes and the issues that causes for residents in our city. Given the existing issues of affordable housing supply in our city, what this shows is that the rise in outside investors purchasing homes, driving up rents and not always caring for the properties in the right way, is harmful to our city. This report outlines practical solutions to address these challenges at the federal, state, and local levels. At the city level we need proactive code enforcement and active inspections to make sure properties are up to standards, as well as effective down payment assistance programs and other efforts to ensure an affordable and accessible housing market in Philadelphia.”
A SUITE OF SOLUTIONS
In order to address the four challenges outlined above, our paper offers 19 potential solutions that the federal government, state governments, and local governments should investigate and implement to stem the tide of parasitic capital entering housing markets. These solutions include:
The federal government should create a Task Force on the New Housing Market with high level representatives from federal, state and local governments.
States should pass laws requiring the disclosure of beneficial owners for LLCs. The murky ownership of corporate rentals makes it difficult for tenants and local governments alike to identify who is responsible for fixing problems in a property, and states have the power to bring transparency to current ownership.
Local governments and their partners can help homebuyers be more competitive through down payment assistance programs and obtaining portfolios of single-family homes from investors for re-sale to owner-occupants. Additionally, local governments should pass broad tenant protections, such as just cause eviction and a right to counsel for eviction. Cities can also undertake proactive code enforcement and appropriate inspections to ensure that all rental properties are in good repair for the tenants who live there.
NEXT STEPS
Our report is part of our ongoing work at Accelerator for America and the Nowak Metro Finance Lab towards a more inclusive recovery. In order to move our work forward, we welcome collaboration with organizations that are currently working on-the-ground to implement solutions across the four sets of problems we outlined above. If your organization is working to address the flow of parasitic capital flowing into housing markets, and its impacts on homeowners, homebuyers, and tenants, please reach out.
For our city partners, we look forward to working together to quickly implement the proposed solutions outlined in this report and innovating together to ensure that we protect and enhance our residents’ quality of life and opportunities for economic mobility.
As always, thank you for all that you do.
Mary Ellen Wiederwohl
President and CEO | Accelerator for America