February 14, 2014 By: Nancy R. Mathieson
In December, the Chicago Tribune ran a feature article about large companies buying thousands of local single-family homes to rehab for renters. “Wall Street Moving in on American Dream” reported on large-scale investors becoming landlords for thousands of local families who can’t come up with the deposits or credit ratings needed to buy their own homes.
Cook and Will Counties are popular destinations for these investors. During the first six months of 2013, eight companies bought a total of 863 homes in suburban Cook County. In Will County, these same companies bought 480 homes in the first 10 months of the year. The suburbs are considered a safer investment because of issues related to schools. Many of the properties are distressed or in foreclosure.
Michael Parent, president of the Mainstreet Organizations of Realtors in Downers Grove says the tightening of financing restrictions on lending had exacerbated the glut of unsold foreclosed homes, and sees these large-scale purchases as way to move out inventory. “In real estate financing, first we had regulations, then we had no regulations, and now we have ‘strangulation’ (under Dodd-Frank)” said Parent. “Home buyers are squeezed so tight for mortgage approval based on their credit ratings that the housing market has continued to struggle. This type of investor becomes the renter’s ally, giving them rent-to-buy options and a chance at home ownership in a world where a FHA 30-year mortgage requiring 5 percent down is still beyond reach.”
One large investor, Chicago-based Hyperion Homes, focuses on both southwest U.S. markets (Dallas, Houston, Austin, San Antonio, Colorado) and the Midwest. Illinois is its largest market. While many Hyperion residents cannot qualify for traditional mortgages even with stable employment, a subset has a more irregular income and is unable to get mortgage approval because lenders consider their income unverifiable. Renter families can choose to pursue any home for sale (through brokers, classified ads, etc.) that meets Hyperion’s investment criteria. Through a lease-with-purchase-right program, Hyperion rents homes to residents, helping them build back their credit and guarantees them the option to purchase the home within 3-5 years. Hyperion is not a mortgage company and does not provide financing.
Is this a win-win? Renters can reap most of the benefits of home ownership, including living in single-family housing and sending children to suburban schools. Professional property managers arrange their home maintenance services, provided by local vendors. However, it may be too early to tell. Will big owners like Hyperion sell the homes when prices recover to less responsible landlords? Will they sell in bulk, pushing prices down again? What’s their exit strategy and over what period of time? Perhaps it will all work out, but only time will tell.
The Tribune’s original article profiled South Holland renter Kevin Tuggle Sr., who was excited about living in an updated home in a single-family neighborhood. Last fall, Kevin auspiciously told their reporters, “I’m so happy that I’m buying a snow blower.” Let’s hope his optimism about being a renter is as sound as was his foresight about this winter.
Nancy R. Mathieson follows Illinois politics and public policy, and held management positions at the New York Stock Exchange and Truth in Accounting. Twitter @NancyMathieson