Latest Buying Craze: Forsaken Single-Family Houses

The glut of foreclosed homes for sale has been a stubborn problem, causing neighborhood eyesores and depressing prices for the entire housing market. Just as it began to look as if the housing recovery would continue to spin its wheels under the weight of these cast-offs, groups of investors began to see the profit in buying up large swaths of these abodes at discounted prices, then renovating and renting them.

Investor groups are all over the map
This past May, homebuilder Beazer Homes (NYSE: BZH  ) , together with asset management firm KKR (NYSE: KKR  ) , announced a newly formed trust that would buy single-family foreclosures cheaply, fix them, and rent them out. Since then, other investment-oriented companies have also jumped into the game. Two Harbors Investment (NYSE: TWO  ) , a residential real estate investment trust, has been exceedingly active in this area. The company has been snapping up homes in parts of the country made desolate by high foreclosure rates -- such as Florida and Nevada. The REIT purchased nearly $72 million worth of troubled rental homes in the second quarter, quite a spike from its first-quarter total of $6 million.

Lately, investment firms are springing up that are dedicated to buying jilted single-family properties on the cheap, then repairing and renting them for an unspecified period of time. These companies are start-ups with a twist: Their founders were former executives at big investment banks, so they ought to know just how valuable this market can be.

One such firm is being set up by a former Morgan Stanley (NYSE: MS  ) housing strategist, whose goal is to sink $1 billion into a stable of rental houses over the next two years, focusing on the crummiest, and therefore the least expensive, on the market. Another is a notable Goldman Sachs (NYSE: GS  ) alum, best known for helping to unleash the subprime mortgage industry on an unsuspecting public. His new company will be hosted by Goldman, which will be hawking the fund to well-heeled investors.

Fool's take
These newcomers are joining the ranks of private equity and hedge funds that have been sniffing around the foreclosure sector for some months now. In addition to KKR, Blackstone and other equity groups such as Starwood Capital Group have seen the promise that this investment strategy can bring to the table.

It might make some people cringe to think that some of the architects of the housing meltdown might now be profiting from the detritus of the fraudclosure mess. The fact is, however, that today these firms are serving a purpose. Many of the worst of the abandoned properties are too far gone to be of interest to small investors, and their continued presence on the market is hobbling the recovery. As long as housing remains in the dumps, the economy will continue to sputter -- so anything that helps is a plus, in my book.

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Fool contributor Amanda Alix owns no shares in the companies mentioned above. Motley Fool newsletter services have recommended buying shares of Goldman Sachs Group. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On August 07, 2012, at 7:11 PM, tnk4800 wrote:

    Let see here.....Goldman Sachs, Morgan Stanley etc. etc.cause the bubble, then the crash, then buy the assets, dump the crap on the taxpayers, buy up the foreclosures, fix em up a little and rent the houses back to the very people they foreclosed on. Sounds like a plan if you can get away with it.

    Hey wait a second...they ....

    -Tim

  • Report this Comment On August 08, 2012, at 10:50 PM, CaptRichie wrote:

    Firms that buy up foreclosed single-family houses will rue the day they began. I know other investors who would walk away from these houses if they could get their cash out. Between deadbeat tenants, vandals, thieves, turnover cleanups and midnight service calls, they're just not worth the grief. Add to the fact that unlike apartment buildings where the tenants are localized, these single family buildings will be dispersed and will require far more man-hours to oversee.

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