[Transcript] How Financial Models Advance and Constrain Low-Income Communities


Fed Communities Staff

Jennie Blizzard

Good afternoon and welcome to the second of three seminars in the Federal Reserves community development research seminar series, Keys to Opportunity in the Housing Market. I’m Jennie Blizzard from Fed Communities. Today’s seminar, co-hosted by the Cleveland and Minneapolis Feds, will explore how financial models advance and constrain low income communities. During today’s 90-minute session there will be two panel discussions and an opportunity for you to ask questions.

First, we would like to share that this session is being recorded. The views expressed during this event are those of the speakers. They do not necessarily represent the views of the Federal Reserve Board of Governors or the Federal Reserve System. We’ll be taking questions throughout portion of today’s session. You could submit questions in the Q and A tab. I’ll now turn it over to Lisa Nelson, Assistant Vice President of CD Research at the Cleveland Fed, to briefly introduce the panels. Take it away, Lisa.

Lisa Nelson

Thanks, Jennie. I have the pleasure of introducing our panels today that will explore two features of housing markets that matter for low and modern income communities. Contracts for deed and investor owned single family rentals.

The first panel on contracts for deeds will be moderated by Sarah Bolling Mancini, who is the co-Director of Advocacy at the National Consumer Law Center. She’ll be joined by John Green, managing principal at Blackstar Stability, Hal Martin, a policy economist at the Cleveland Fed, and Eric Seymour, assistant professor at Rutgers University.

After the first panel, we’ll move directly into the second panel on investor owned rentals, which will be moderated by Libby Starling, Senior Community Development Advisor at the Minneapolis Fed. She will be joined by Brian An, Assistant Professor at Georgia Tech, Laurie Goodman, a fellow at Urban Institute, and Kyle Mangum, a senior economist at the Philadelphia Fed. Sarah, I’ll turn it over to you now to kick off the first panel.

Sarah Bolling Mancini

Thank you, Lisa, and thank you to everyone at Fed Communities for hosting this very important event today. I’m so pleased to be with you all and honored to be moderating this first panel on contract for deed sales, are they a viable pathway to home ownership? I’m going to keep my remarks short so that we can get into our panelists and then have plenty of time for discussion.

Just to set the stage a little bit, I want to give some background on what contracts for deed are and the different features of these transactions. I’ll start with an example from a real life person.

Zachary Anderson was in his early fifties and was working as a city mechanic when he saw signs dotting his southwest Atlanta neighborhood advertising homes for sale with low down payments and low monthly payments. He called the number on one of those signs and was told to sign some papers and FedEx them back to the company, Harbor Portfolio. He got a letter that said, congratulations on the purchase of your new home.

Mr. Anderson had no idea that the transaction he entered into was anything different than a traditional mortgage loan. His contract carried a 10% interest rate, and the price of the home was roughly five times what the company had paid when they acquired it post foreclosure from Fannie Mae.

Mr. Anderson made substantial repairs to his home. He repaired the roof, replaced pipes, painted, installed gutters, and he paid faithfully for years. He also paid property taxes and homeowner’s insurance only to discover at a certain point that the deed to the house was not in his name and he was at risk of losing all of his investment in the home.

Mr. Anderson had entered into a contract for deed, also known as a land installment contract or land contract. These contracts for deed are seller financed transactions that are often targeted at consumers who are unable or believe they’re unable to get a mortgage loan.

Contracts for deed are this form of seller financing in which the home buyer promises to pay a fixed amount of money at a certain interest rate over a certain term, often 20 or 30 years. But unlike a traditional mortgage loan, the deed to the home remains in the seller’s name until the buyer has paid the entire purchase price. If the buyer misses a single payment at any point during the term, the contract purports to allow the seller to cancel the contract and the borrower has forfeited the benefits of the contract and the seller can then keep all the money the buyer has paid, all of their investments in the home, and any equity that has been built up and kick them out like a tenant through an eviction process. When they terminate the contract in that way, that is known as the forfeiture remedy and it’s something we’re going to talk about a good bit today and how that works. Essentially in these contracts for deed, buyers have all of the responsibilities of home ownership and none of the rights or protections of home ownership.

Now, there’s another type of transaction we will also touch on today, which is a close cousin of the contract for deed and that is a lease with option to buy or lease option. A lease option transaction actually involves two separate contracts. A residential lease and an option to buy the property for a certain price within a certain time period, usually relatively short, between six months and two years, although it can be longer. Until the option is exercised, the consumer is a tenant in this type of transaction. However, often their agreement says that the tenant has the burden of making repairs to the home and bringing it up to habitable condition, which violates landlord-tenant laws in almost every state. However, those contracts often say this, even though it’s illegal.

The consumer is also required to pay a substantial option fee when they enter into the transaction. Often that’s between $2,000 and five or six thousand dollars and that fee is non-refundable if the borrower is not able to exercise the option. In fact, very often buyers and lease options are not able to exercise the option either because they still can’t qualify for a mortgage loan within that option period, or in fact, they’ve agreed to buy it for a price that is way above fair market value and no bank will make a loan for more than fair market value.

Both of these types of transactions have a number of features that make them more likely to fail than to succeed. Oftentimes, the sellers in these transactions make more money when the consumers default because they’re not required to do a foreclosure sale. They can just take the property back, keep all the money the consumer has paid, and then turn around and get another consumer into the home, taking another large down payment or option fee.

There are a patchwork of state laws that apply to these transactions, and we’ll talk a little bit about that during the Q and A session, but in reality, most states do not protect consumers from the most harmful aspects of these transactions. So with that, I will invite our first speaker on this panel, Hal Martin from the Cleveland Fed, to chime in with our first session.

Hal Martin

Thank you very much, Sarah, and thanks everyone for having me here. I’m going to describe what we are trying to do in a research project that’s shared with colleagues at the Federal Reserve Banks of Atlanta as well as Cleveland. One of the things that’s really important to understand more about these contracts for deed are what the outcomes are. Understanding when they succeed, when they fail, and how we know that.

Our study is aiming to unpack the deed records that exist within county recorders offices across a number of states so we can answer this question at scale. We have assembled these records at some effort because these records are not conveniently packaged up and easy to understand in terms of what happens when somebody starts a contract of deed. What then occurs in the recorded record for that property. That’s exactly where we have to look in order to find out if a person succeeds in acquiring a deed ultimately or if they fail in some particular way so we’re interested in capturing that.

We look at recorded episodes that occur from about 2000 through 2019, so we have the range that happens before the Great Recession on through almost present day. For anyone hoping to download that neat set of records, we have some advice about how exactly to go about that, what the pitfalls are, but one of the biggest risks that we face is partial identification. This is one of the things that I think is a theme throughout the contract for deed space, is that recording does not necessarily happen for these documents, for contracts for deed. That means that regulators and those who oversee the market are often flying blind and understanding who’s even subject to these and is facing the risks that are associated with them.

For those that are recorded though, we examine what we can and we’ve assembled a coaching set of records, as I said, and we are going to hope to pull outcomes out of those that either tell us when someone succeeds, when someone fails, and the ways in which we know that they fail through things like a property conveying to somebody else other than the contract for deed buyer.

In principle, we think somebody might go into these things for a number of reasons. For instance, if the credit market is maybe particularly thin, there aren’t very many lenders, and there’s some recent evidence that suggests that that can be a factor for how robust the availability of mortgage credit is. We’re going to be taking a look at that context in which these contracts for deed occur and succeed or fail. We’ll be looking at the credit characteristics of neighborhoods in which these occur as well because the supply of quality buyers credit could impact one’s ability to access the traditional mortgage market.

We’ll also be looking at, also be looking at the socioeconomic and demographic characteristics where these things take place to understand more about how they succeed or fail. Of course, there’s other types of defects in the market that it can occur that we can’t touch on, but they’re really important to think about in the context of why these contracts for deed continue to take place and occur.

One of the big ones in my mind is asymmetric information. Things that the seller knows that the buyer doesn’t know, and whether or not buyers have enough information to recognize poor or substandard properties as well as offers. We’ll be looking at some of the context clues around the credit market characteristics and the housing market characteristics in particular to try to understand what’s driving these things to succeed or fail. That’s our overview of our research. With that, I want to turn over the mic to John Green. John.

Sarah Bolling Mancini

Actually, I think Eric Seymour is going to go next, and then John Green will be third. Eric, are you able to unmute?

Eric Seymour


Sarah Bolling Mancini

There you go.

Eric Seymour

Great. Fantastic. Thank you, Hal. My research looks at housing markets in places like Detroit following the foreclosure crisis. When I was looking at the business practices of large investors in foreclosed properties, I found that some of them were selling their properties using contract for deed or land contracts.

In places like Detroit, housing markets were very weak during the recession, and foreclosures were often in poor condition. So you had a large number of distressed, lower value properties that a bank wouldn’t accept its collateral for mortgage, and you had a large number of households with bad credit, irregular income, or other circumstances so it would make it difficult to qualify for a loan.

From the investor’s perspective in the foreclosed properties, it was expensive and risky to invest in those homes to offer them as rentals, but they could use contract sales to assign responsibility for repairs and maintenance to their customers like Sarah described.

But because customers were likely living paycheck to paycheck, this made it difficult for them to address the major repairs which often appeared only after entering into a contract because the properties were conveyed in “As is condition.” If they did pay for repairs needed to make their homes habitable, they might be late with the contract payment. In either case, a contract buyer was often found in violation of the terms of the contract and subject to removal and replacement.

My research has looked at the prevalence and geography of where these large contract sellers bought homes following the foreclosure crisis. Slide, please.

The two largest companies that I looked at were Harbor Portfolio Solutions and Vision Property Management were the largest buyers of foreclosed properties from Fannie Mae. These companies bought large numbers of homes from Fannie and other sources in the Midwest, particularly in southeast Michigan area and parts of the southeast, including Atlanta. Because some states do not require contracts to be recorded, I focused on where these companies bought homes, even if they didn’t eventually sell those properties using contract for deed. In many cases, these firms flipped properties to other investors or let them be repossessed by local governments through tax foreclosure. Slide, please.

Within these cities and regions, Harbor and Vision and other related firms generally concentrated their investment in majority of Black neighborhoods. This isn’t just because there were more foreclosures in Black neighborhoods. In the Detroit metro area, about 30% of Fannie Mae sales of foreclosed homes were located in majority Black neighborhoods, but more than 60% of properties purchased from Fannie Mae by Harbor and Vision were located in majority Black neighborhoods, so doubly represented in majority Black neighborhoods.

This map shows the relationship in Chicago. It shows the racial composition of neighborhoods, specifically the share of Black residents and contract seller investment in Chicago. We found similar patterns in the other cities that we looked at. Slide, please.

I’ve also been looking at outcomes related to contract sales, looking specifically in Detroit. What I focused on is not success as much as near term failure, specifically eviction or tax foreclosure. This is a very difficult outcome to observe or to study. While evictions are typically used to remove renters, contract sellers sometimes use them to remove contract buyers as well as participants in lease with option to purchase arrangements. Tax foreclosure may be the fault of the contract buyer, but it’s more likely the fault of the contract seller who is often responsible for making those payments. By withholding tax payments, contract sellers maximize their short-term revenues.

We found that for all recorded land contracts in Detroit between 2008 and 2015, about 35% were followed within just a few years by either an eviction or tax foreclosure. For Harbor and Vision contracts, the failure rate was more than 40%. Some entities, including the largest landlord who would offer properties sometimes using contract for deed, Detroit Property Exchange, they had a failure rate of 60%.

In conclusion, my research has shown the reemergence of these risky and arguably predatory contract sales in economically distressed places like Detroit. These sellers capitalized on the combination of cheap and distressed homes and people with limited income and credit and highly constrained housing options. While the contracts might appear to offer opportunity for home ownership, they have often worsened households financial circumstances. That concludes my presentation, and I think now I pass to John.

John Green

Good afternoon. I serve as managing principal of Blackstar Stability. We are a real estate investment management company that is focused on expanding equitable ownership of affordable single family homes and we do that in some ways that are pretty unique.

In particular, what we do is to focus on stabilizing communities by taking land contracts and similar sorts of instruments that confer the typical obligations of ownership onto buyers, and we turn those into real mortgages. We can go into the next slide, please.

Our company’s founded on a very simple premise, and that is that capitalism works best when there are more capitalists and that the best proxy for those capitalists is ownership, and communities and families are best served by that ownership. And so the sorts of inequality that we experience in the country at this point cuts sharply against that. In particular, the source of wealth inequality we think are primarily driven by gaps in home ownership and we think at the root of many of the disparities in home ownership, that access to financing is a primary hurdle and perhaps the primary hurdle for those working class families seeking affordable homes.

What we do as Blackstar is to buy large pools of properties that are encumbered by forms of seller financing, like contracts for deed. Like lease option agreements that function in substantially similar ways. We buy them in market rate, arms length transactions in large pools that are typically at meaningful discounts to the unpaid principal balance, and then work with the families who occupy those properties to extinguish those contracts and to replace them with traditional mortgages at fair market terms.

After we’ve converted, we will hold and season those loans that we’ve created for a period of time to demonstrate payment performance to secondary markets and then sell eventually and recycle that capital to effect more families.

We seek at the same time to influence the sort of policy outcomes available to those families trying to enhance enforcement protections and to demonstrate a business model that shows that it is financially feasible to serve even this difficult to reach smaller balance, lower cost property segment of the market in ways that are economically feasible and explicitly not extractive.

We’re structured as a private equity fund. We have existed for a little over two years now, but just recently in the second quarter of this year, held our final close at our hundred million dollars target. We can go to the next slide.

What I’d like to share briefly are a few of the sorts of outcomes that we have been able to realize thus far in the fund. As a demonstration and proof of concept, we purchased a pool of roughly 200 properties toward the beginning of this fund. What you see here is the composition of that portfolio of assets today.

This is a portfolio that was roughly 60/40 contracts for deed and substantially similar lease options initially. Today what you can see is that roughly half of them have been converted to traditional mortgages. An additional 5% of them have been paid off, meaning these families have refinanced with some other instrument. In particular, a third party mortgage that’s not been provided by Blackstar or paid off in cash.

You see the portion of the portfolio that remains as contracts and lease options, but notably to characterize the REO portion of our pool, none of these properties have been subject to foreclosure or forfeiture. We have had activity that’s been driven much more by what I’ll characterize as skips and walkaways. Families who have chosen to vacate properties that they deemed undesirable. In cases where we have judged that homes are not habitable and best left, we’ve offered cash for keys to families.

In limited cases, we have worked with families to manage toward sales and other outcomes when their financial circumstances did not provide them a clear path to ownership. Or that that was not their primary goal. So in sharp contrast to the sorts of outcomes that Eric was mentioning across his portfolio, you see where we stand today. You can go to the next slide.

Among the key benefits and among the key metrics that we use as our sort of indices of success and performance are the financial outcomes that are derived by the families in our portfolio. So some of the key ones are that in contrast to a traditional contract for deed, once a family has a transaction that we have completed, they not only have a mortgage, but they have a completed purchase and sale agreement. So they are now the outright owners, title holders of those properties.

So to the extent that there was any equity in those properties, that equity is now theirs. And so on average, we have transferred approaching $40,000 per family of equity to roughly 85% of those families that we have worked with and converted. What that has meant for them has been transformational. It’s a more than 20x increase versus their net assets.

We proxy versus net assets as so many families had negative net worth once considering liabilities, they’ve also realized approximately 30% reduction in monthly principal and interest payments and slightly higher for those who chose to minimize their payments by selecting a 30-year mortgage as opposed to the other alternatives that are available, those being 20, 15 and 10 year mortgages. We can go to the next slide.

And finally, we tend to focus on, in addition to the equity that we transfer, what I should mention notably is to the extent that the property is underwater, we actually absorb any negative equity. So roughly 12% of our families have been in that situation, and for those families, their principal balances have been reduced by roughly 25%.

But what I’ll conclude with is the fact that roughly a third of the families that we serve have experienced or have accrued penalties and arrearages that have been a substantial impediment to ownership. So we tend to view those in a substantially similar way to the way that the payday lending industry operates, and that those penalties and arrearages are very much an intentional aspect of the revenue model. And so we extinguish them out of hand.

So for those families that have experienced this in our portfolio, on average, we have extinguished somewhere between $3,500 and $4,000 per family, which again, for those families was roughly three X their net asset. So again, a substantial hurdle to ever outright owning the home. So excited to join the discussion and look forward to your questions.

Sarah Bolling Mancini

Thank you, John, and thanks to all our panelists. So let’s dive into some discussion because there’s so much here to cover. Hal, I wondered if you could first help us understand a little bit about the prevalence of contracts for deed. What do we know about how common these transactions are?

Hal Martin

Sure. I think one of the biggest challenges here is, again, I mentioned recordation makes it a little hard to discern. So let me back up and explain what a couple of other folks have found. One study from a few years ago looked at responses to the American housing survey and backed out from that that maybe around 5% of homeowners who are responding to the survey had acquired their property using something like a contract for deed, which could be other financing arrangements. That was from the first decade in the 2000s, and that’s the last time the survey asked about it. So that’s one number that maybe provides a guidepost.

In our own data I will say that we do not see that many. We look at initiations of contracts for deed and having looked at some selective states, I can say it varies from state to state. The ballpark number is about one contract per deed per year over a thousand households, so about a 0.1% origination rate. But again, that’s just the ones that have been recorded and something that gets recorded has passed through the filter of whatever laws might require or incentivize recordation. So we don’t know too much about the ones that aren’t recorded and that’s hard to get ahold of.

There’s a couple of studies that have looked, one in particular that was undertaken in Texas and looked carefully at the colonias to figure out what is going on in that community with regard to contracts for deed, but that’s a very specific context that was, I think, vulnerable to contracts for deed being used, so it’s not generally applicable to the United States overall.

Sarah Bolling Mancini

Thank you, Hal. And you touched on this issue of recordation, the fact that some states require contracts to be recorded in the deeded records, and of course there’s mixtures of compliance levels there. Can you talk a little bit about why recordation is important?

Hal Martin

Yeah. Recordation is something that I like to think about this in comparison to mortgages. So when we think about mortgages, which is a very well regulated instrument for purchasing a home, you have federal regulators and state laws that not only govern what can be agreed to, but they provide essentially the script for what happens when something goes wrong.

So it’s well understood by all parties and there are fairly large protections for buyers who have defaulted in some way on the mortgage. We really, as you mentioned at the top of the hour, we don’t have that kind of protection in a lot of places. And in particular, it’s hard to even know that somebody maybe has a contract for deed so that there’s no regulator, there’s no party that can look and reach out and say, “Hey, you’re facing eviction or you’re facing forfeiture. We see you. And here’s a path toward the courts. Here’s a path towards someone who can help you assert your rights.”

So recordation can help with that. It can also help in particular with creating at least a record of the interest that the buyer has on the property so that a seller of contractor for deed doesn’t take out a mortgage of their own, which is going to supersede in terms of who has more lawyers in order to enforce rights on that property. If the seller falls behind on their payments, then of course the mortgage company is more likely to be able to foreclose on the property right out from underneath the contract.

So those are some of the benefits of recordation, I think, is that it makes it more visible to those who might regulate the market as well as protect the buyer from competition for debt and interest in the property.

Sarah Bolling Mancini

Got it. Thank you so much. So Eric, there was a question from the audience about Harbor portfolios, the eviction rate that your study found on those properties. And can you talk a little bit about, essentially the question was that that 40% of the contracts ending in an eviction relatively quickly seems like a very high eviction or foreclosure rate. Did that mean that they were losing money and what’s the status of that company and others like it at this point?

Eric Seymour

Certainly. So right, that’s 40%. That could either be a foreclosure, a tax foreclosure or an eviction. Detroit has an accelerated, Michigan has an accelerated tax reversion process where that it can occur within just three years. So that is indeed a very high failure rate compared to any other type of instrument you can think of. And many of these firms have really exited the space in these cities that they entered in after the foreclosure crisis.

And the contract for deed is really one prong of the overall business models of these firms that were like other types of investors buying lots of discounted properties and some of them they flipped to other investors. In fact, in some places that’s the majority of what they did. In some cases they rented them and some they offered them on contract for deed. So it was a piece of their overall model, but they’ve largely found their way out of it. I think that they got in over their head from their perspective, because I think that even they were unaware of truly how distressed the properties they were buying were.

Sarah Bolling Mancini

A good point. And of course, I think it’s true that we see fewer companies that are active in the contract for deed space right now, but we still do see quite a few that are doing lease option models and maybe not even quite such a distressed end of the market, but interesting to see that that model is still persisting.

John, I want to turn to you, there’s a question from the audience about Blackstar’s profit margins, and of course you talked about the fact that Blackstar is attempting to enter into a space not in a, not-for-profit model, but actually in a way that shows that profit can be gained without being exploitative. So could you tell us a little bit about how you thread that needle compared to the way the private actors that have been exploitative have operated?

John Green

Yeah, yeah, absolutely. So in directly comparing our profit margins to traditional actors, we don’t have enough information or insight to say with perfect clarity what their margins look like. What I would say is my strong sense is that our margins are not as strong as the margins of especially the actors who were able to acquire properties at extremely low REO basis following the wake of the global financial crisis.

That said, I think that we have been able to craft a model that has objectively compelling risk adjusted returns. And I think that’s the sort of metric that institutional investors and any investors of scale are going to proxy. So comparatively, while there may be a case to be made that a more exploitative model may garner higher profits that these are acceptable profits, that’s first.

But to the point that Eric has sort of alluded to, and to expound on it a bit, part of what happened indirectly with the resurgence of this market following the global financial crisis is that more large capital providers moved into this space. And unintentionally what they invited was the scrutiny of regulators and litigation actions. And so that undesired attention has created an environment that’s made it more difficult for would be buyers to create this sort of product as unobstructed as they otherwise would have.

And so I think what makes Blackstar unique in many important ways is that we can operate in the light in a space that generally is characterized by a lot of fragmented shadow actors, and we can operate at a scale and efficiency that allows us to confront the problem in ways that most can’t. So we can buy hundreds or thousands of these sorts of properties. We can operate with the sort of operational wherewithal and the sort of capital efficiency we think that will allow for our approach to be scalable in ways that I think are increasingly challenged on the other side of the ledger.

Sarah Bolling Mancini

And John, just to follow up on that, so my understanding of your business model, which I think has so much promise, is that you are buying these contracts for deed from existing investors. And I’m assuming in order for there to be some reasonable risk adjusted return, you have to buy them essentially at a price point that’s below face value. Is that right? Can you talk about how the business model works financially?

John Green

Yeah, yeah, absolutely. So I can speak to both how it works and how that’s evolving in the current environment. So we are buying our properties at a pretty meaningful discount to the unpaid principal balance. And I think that discount is partially driven by the sort of chilled environment that there has been for would be buyers of this sort of product on the merits of some of the legal actions that have been pursued and some of the challenges to hold this sort of product on a long-term basis.

So we buy at a meaningful discount to the unpaid principal balance, which given the sort of multiples that you and others have described of the markup that the sellers have actually used as the prevailing price, the contract price for these still represents a premium to the basis that they’ve acquired.

So these sellers are selling to us at a premium. They earn a margin and they have earned strong cash yields over the course of their ownership. We’re able to buy at a discount to the unpaid principal balance, which in many cases as indicated by the equity transfers that we’ve provided to families, are at a meaningful discount to the value of those properties themselves today. So there is a margin of safety for us on these acquisitions.

And then working with the families, we absorb the cost of originating the mortgages. So those are all on our side of the ledger, the cost of funding escrows and so for the families, the premise is simple. They don’t pay a nickel in order to be a part of the mortgage origination process. They have to submit to the underwriting but from that point forward, the costs are ours. The benefits are ones that unilaterally benefit them.

I think that when we look in the current environment, part of what’s interesting and unique and we look to the NPL market as a little bit of a proxy is you have this environment where now after 11 rate hikes over the last 18 months and the sort of environment where in contrast to the wake of the GFC, you have so much equity that’s accrued the sorts of solutions and the sorts of pricing dynamics are starting to become distorted, certainly on the NPL side.

So you see, whereas typically NPL sales would have happened at a discount to UPB as well, increasingly you’re seeing those transactions happen at a premium to UPB, but at a discount to the total payoff and the basic gambit that buyers are making or that they can seize equity by seizing control of those properties. It’s an equity stripping motive. And so what’s happened in parallel with the CFD environment is that you have a lot of what we refer to as DNTs, did not trade transactions coming to market. So the bid ask spread has been widening over this sort of timeframe.

Fundamentally, this is bond math. It’s simple. When rates, these are fixed income instruments, when rates go up, the prices should come down. But you have, similar to commercial real estate and many others areas, today’s sellers want yesterday’s prices and so that bid ask spread is wide. And so increasingly you see the case being made that what you should really look to is the equity that’s in these properties. And so we do have a concern that more secondary buyers are operating with a rationale that says the equity stripping is the opportunity, and we look further into the market as kind of food positive of that. I’ll stop there.

Sarah Bolling Mancini

Thank you, John. So there was another question from our participants, and I’ll start this one off and then I want to ask some of you to chime in, but there was a question about why do we have laws and policies that allow and perhaps facilitate these problematic financial models, and is there any movement from government towards regulating these transactions?

So I’ll just say that from what the National Consumer Law Center is engaging in and aware of that there is some interest in attempting to put some stronger regulations in place, particularly in certain states where contracts for deed are more prevalent, including in the Midwest. And there’s some interest at the federal level as well. There was a hearing in a senate banking committee in July where Senator Tina Nelson, led a very thorough conversation about these types of transactions.

And so I think there is some interest by regulators and looking into it, but I think one thing that makes this very challenging is in many of these communities, these contracts for deed appear to be the only option to become a homeowner. And so many people of goodwill on the ground will say, “If you over-regulate and contracts for deed dry up or can’t be made, then the consumers in our community have nothing. They have no way to become a homeowner.”

And that’s a very powerful argument and I think what makes it difficult to evaluate the best course forward is our gap in understanding the outcomes of these transactions. So if the goal of a contract for deed is to be a pathway to home ownership, then how heavily we regulated should depend in some sense on does it actually lead to home ownership? What are those outcomes?

And so I wanted to ask Eric, and then Hal to chime in on that issue of why it’s so difficult to dig into the outcomes and just to say a little bit more, Eric, in your case about what you have found so far when you talked about that 35 or 40% failure rate early on, but then there’s a number of these transactions that are still in process. So talk to us, Eric, a little bit more about what you’ve seen on the outcomes, and then we’ll go to Hal.

Eric Seymour

Sure. And so when I’m talking about foreclosure and eviction rates, I mean some of these contracts that fail will often have another participant, another buyer come into the property. And so this can’t be the business model is that you actually make more money by, and you had mentioned this, Sarah, turning people over because you get a large down payment. And so some of these properties might work themselves out. If they go through tax foreclosure that’s going to the county.

And so I’ve mentioned the about 40% failure rate for a Harbor portfolio and for vision. And looking at the internal records for Harbor nationally, they do have about a 45% failure rate. So it’s very difficult to look at these outcomes. And I’m focusing on failure because different firms have different contract periods and trying to make the determination about whether there was a successful transfer, perhaps your observation window isn’t quite long enough to have that. But there’s a very high rate of failures in the near term.

And just on the policy side, I very much have been looking at places with very distressed housing markets and the kind of inventory that’s available can often be the type that would put somebody in a negative equity position if they were buying it, and that’s not going to be the case everywhere. And so I think that if you’re able to perhaps get ahold of those pipelines of properties that are being leveraged by these firms, and you can steward them with the types of actors, whether it’s a land bank or other type of entity that could perhaps be involved in issuing contract for deed on terms that are more salutary for the buyer and using properties that should be offered in that case.

Sarah Bolling Mancini

That makes sense. And so Hal, I’d like to turn to you. Anything you’d like to share about outcomes and also the market failures that are at play here.

Hal Martin

For sure. Yeah. And I want to tie this back to the regulations that exist out there among the states. This is something that more is a state by state level in terms of regulation. And recordation is not the only regulation out there that kind of says, “Hey, these should be recorded.” But there are other regulations that try to instantiate more protections, more features that essentially say, “Hey, if you’ve got a contract for deed, it must behave in this aspect or in that aspect,” kind of like a mortgage, even if the terms of the agreement explicitly forbid that.

And I think what that points to is the idea that if a contract for deed can be a viable path to home ownership, and certainly there are some people who acquire a deed through a contract for deed, then it should essentially function in that way and so that’s one of the reasons why we’re excited to measure the outcomes so that we can understand what are the mechanisms that are more associated with failure or the mechanisms that seem to be more associated with success.

And that’s across both the credit and the housing market space. So this is, in one version of the story, this is a place where economists refer to this as a lemons market. It’s where the poorest quality borrowers might come looking for home ownership, and they might find it amongst the poorest quality housing, and they might find it in a market that’s relatively concentrated in which the sellers have market power.

We want to understand the relative impact of each of those kinds of margins because they do point to different targeted legislation remedies if you want a remedy the failure rates. So understanding that better would help policymakers understand what to target without over-regulating. Because I do want to put in a plug for at least the idea that there are models out there that are non-mortgage products. It could be nonprofits that help facilitate people who are on the margin, but they build in these protections to their contracts so that there is an understanding of shared equity and that sort of thing.

So finding a way not to throw out the baby with the bath water, I understand that concern, but I would say that the broad picture is we suspect there’s a lot of failure out there. We’re working on getting the numbers down on it, and I think Eric’s numbers certainly seem reasonable for me in terms of what we expect.

Sarah Bolling Mancini

Thank you, Hal. So we only have about two minutes left, and I do want to close with this question about which communities are most impacted by these practices. There was a mention from one participant about Somali Muslims in Minnesota who are sometimes targeted for contracts for deed in part because of their religious beliefs around the charging of interest. We’ve heard of immigrants and Spanish speakers being targeted, and of course Eric’s maps showed a geographic concentration of these transactions in certain cities in communities of color.

And so we know this is a racial wealth gap issue. And John, I wanted to ask if you would close out our panel by giving some thoughts about equal access to home ownership and how we address these problems in ways that puts racial equity and focus.

John Green

Sure. I think home ownership in the United States is inherently a question of racial equity and the disparate access to finance has been well documented. It has been a part of American history. And so the solutions to it will necessarily have to involve the same, I think partially to confront this issue, not just the initial ownership, but as Eric has really underscored the issue of the property, the need for further investment to make these homes habitable and to have them be at an acceptable level of quality is going to require some level of incentives and some additional prodding.

These are practices that have existed for well over a hundred years and they’re not going to undo themselves organically without some direct intervention. And so we think that the private markets have a big part to play in that, but policy will absolutely need to be a big part of it. Calling out those bad actors and bad actions and find ways to root them out in many of the sorts of things that we’re talking about, not just with contracts for deed, but similar practices amongst lease options. Landlords where typical landlord obligations are foisted onto tenants. These sorts of things simply have to be pulled.

So we think that these issues exist most prevalently in places where there are weaker consumer laws at the state level and where there are lots of lower cost properties. But the converse of that is we think these present tremendous opportunities because this is a more direct way of solving and confronting the need for affordable housing in this country. It’s gotten more expensive than ever to deliver multifamily rental, which has been the primary way of addressing affordable housing problems in this country. And so this is an important compliment to that driven by families who can much more often than they’re given credit to afford these properties to the extent that they’re giving opportunity to finance it. So we’ll stop there. Thank you all so much for allowing me to join.

Sarah Bolling Mancini

Thank you, John, Eric, and Hal. And I’m going to turn it over to Libby Starling from the Minneapolis Fed to kick off our next panel. Libby?

Libby Starling

Thank you Sarah, and good afternoon all. It is my honor and my pleasure this afternoon to moderate our second panel. This panel will focus on how investor ownership of single family homes both expands and constraints opportunity for lower income families and communities. Since the Great Recession, we’ve observed an increase in investor ownership of single family homes across the country, raising many questions about the impacts on neighborhood quality of life, opportunities for home ownership, as well as housing supply broadly. We’ve seen interest in this topic from popular media sources like the New York Times just last month and the Washington Post. And my colleagues and I at the Minneapolis Fed are observing curiosity and concern about investor ownership of single family rentals from both state legislators and local city councils. I’m pleased to welcome our panel today, who will ground us in research on the benefits and challenges created by investor ownership of single family rentals. To start us off today, I’m pleased to introduce Kyle Mangum from the Philadelphia Fed.

Kyle Mangum

Thank you, Libby. I’m in the economic research department at the Philly Fed. I’ll speak today as a researcher and not on behalf of the Federal Reserve. First slide please.

So some of my discussions can be based on an article I wrote in the Philly Fed magazine, Economic Insights on The Pros and Cons of Housing Market Investors. So I’m going to try to start this panel by taking a wide angle view of who is a housing market investor and what do they do. So I’m going to start with this broad definition of an investor is just a person, an entity who owns a home but does not live in it, therefore has financial motivations. Next.

And I was asked, are these good or bad for the housing market? And being a two-handed economist, I said, “it depends. There’s some good and some bad.” So on the buying and selling side, we can think of them as destabilizing or stabilizing markets depending on whether they’re acting pro cyclically or counters cyclically. So they could be amplifying cycles, they could be dampening cycles, they could be more of intermediaries facilitating trade between two parties.

Much of this panel can be focused on the ownership then of these properties. So on the ownership side, we can think of them as suppliers, the landlords, the owners of capital who provide housing services. Or perhaps actually the deniers who remove capacity from the market perhaps to speculate on it and perhaps using market power to extract excessive rents. Next, please.

Why do we ask this? Well, in case policymakers want to regulate, and there are a number of regulatory tools, various forms of taxes, mortgage regulations, and pricing, a lot of these are already in place. We could do more, we could do less. And I discussed in the article a number of implementation challenges here. One, we need to differentiate who the good guys and bad guys are, which is not so simple. We’ve already had some discussion about that. And then even if we can identify them, we need to be able to target the bad guys, target the investors without the policy being too easy to game, let them misrepresent themselves and without coincidental damage on good investors or owner occupiers. Next, please.

So it’s helpful for me to do a taxonomy. Let me just again step back. What’s a broad angle view of who are housing market investors? So I can classify them by function and by identity. And by function, I essentially mean how do they make money? Landlords who make money off of an income stream or flippers who make money off of capital gain reselling the properties, perhaps rehabilitating them in the meantime, perhaps not.

Identity, this could be individuals who have just a few properties, perhaps individuals who have many properties. So these are individuals who use their own name when they buy and sell, or businesses organized as LLCs or a corporation. Next.

So this is a research seminar. Let me give you a preview of some ongoing research where I’m taking real estate data, both transactions and tax assessment records, to just ask who are these investors and what are they doing? So the literature essentially has three ways of doing this by owner occupancy flags, by naming flags for business entities and multiple ownership, so people who own multiple properties at the same time. In this research, I’m trying to do all three. Next please.

So I’ll give you a preview. This is some early results from this work. This is a market share plot of activity by these different classes of owners. So the bottom line, which I won’t focus on today, are very small. It’s the public and nonprofit sector, and then followed by family trust. The big orange bar in the center is owner occupancy. So we can see during the housing crisis, the market share of owner occupants decreased and it has recovered somewhat since then. That decrease was accompanied by an increase in the activity of investors, corporations, LLCs, and individuals. So since the housing crisis, LLCs have increased in their prevalence at the expense of individual investors. Next, please.

Of course there’s a lot of spatial heterogeneity in this. So different cities do different things. The black bar in the middle is an average, and I conveniently picked four Fed District metro areas that are represented on this call. The gray lines are then those districts. So at the very bottom we see Minneapolis has the lowest share of investor activity. Cleveland has the highest according to the metrics I’ve been using. Maybe this is surprising to you, I wasn’t anticipating that, but my point is just that different cities have different amounts of prevalence of these. Next please.

So you’ll be hearing a lot more about business ownership of investment properties. Let me look at individuals. So this is people who use their own name and go out and buy properties. This is the market share of people who own two or fewer properties, three to five or six or more. And this is not the count of people, this is the count of property. So what this graph is showing is that the fraction of property held by people who own two or fewer investments is actually the dominant share of the market. You can essentially think of these as small businesses or maybe side hustles. Next, please.

The last thing I’ll show you is their use of mortgage financing. The top bar is a benchmark owner occupants who use mortgage financing about 80% of the time. And then you can see these levels that you walk down the different lines here, we’re seeing small-time investors, slightly larger investors, slightly larger, and then corporations and LLCs use different forms of financing, not mortgages on the sale. Next.

So let me kick it to Brian and end with an appeal. I’m a researcher. I’m going to ask for more research. To answer these big questions about effects of investors on the market, we need to understand their behaviors and who they are so we can evaluate policies and implement them effectively. Thanks.

Brian An

Okay, thank you Kyle for setting up a really excellent foundation for us to build on. Next slide.

Let me start with an overview and the review of the existing literature regarding the evidence-based studies regarding what we know and what we don’t know regarding institutional investors. So first, location and property characteristic wise, we know that large corporate investors own between two to three or even 5% of single family rental housing stock nationwide. We also know that they are highly concentrated in certain metropolitan areas, especially in some bank states. And I have a couple of thoughts about that, but I will talk about that later. And we have some mixed findings about their neighborhood location, but we have more evidence on the concentration in minority and low income neighborhoods. And also it seems that they tend to purchase newer homes, but cheaper homes or at a discounted price. But if you consider the cost they spend on repairs, it is not necessarily cheaper prices.

Regarding the impact on communities, I think we have more than a dozen of studies, either working papers or peer reviewed studies. First, we know that they shrink housing availability for owner occupancy, raising housing price in the surrounding neighborhood, making it harder for people to buy homes. And that really reduces home ownership. And we have some clear evidence, preliminary evidence that these large institutional investors systematically file property tax appeals and pay less property taxes.

But on the other hand, we also know that they increase the supply of renter housing, but we have mixed resource on rent, how much it would increase or decrease. Some people argue that because of their market power concentration, the rent should increase, whereas others argue that because of increased supply of rental housing, the rent should decrease. And we have mixed findings. And we also know that many of these large corporate investors, landlords, they file higher rate of evictions than similar scale landlords. But we have some narratives about problems associated with building permits and their code violation behaviors, but we don’t actually have evidence in the literature. Lastly, we will also have additional evidence that they tend to decrease crimes in the surrounding neighborhoods. Next.

One thing we should keep in mind is that even though their national presence is only about two to 3%, they are highly specially concentrated even within a given metropolitan area such as Atlanta. So this picture, these graphs, these pictures shows the transactions or ownership of large corporate investors, although the definitions could slightly differ across studies. In 2013 in the first figure, 2018 in the second panel, in 2021 in the third panel. And you can see that there is a great spatial overlap. So it seems that the same kinds of neighborhoods are getting targeted by institutional investors’ investment. And my study shows that their market entry growth and spatial concentration, when you consider all these things, they explain for about 25% of weakened decreased home ownership in Atlanta metro between during 2007 to 2016. And especially these neighborhoods where the Black and African-American families experienced the loss of home ownership and they experienced three times larger decreased home ownership effect. Next.

So far, many researchers have used proprietary datasets and really used labor intensive efforts to identify who these large institutional investors are and how many properties they own. But we have some methodological innovations in measurement in recent years. Especially, this is based on my working paper, Who Owns America? Methodology for Identifying Landlords Ownership Scale and the Implications for Calculated Code Enforcement. Here we use open source freely available natural language processing software called OpenRefine. It doesn’t require even a single line of coding knowledge, and it just works with publicly available county text parcel accessor data. And here in the table, the first column shows what you can easily get regarding the number of properties owned by largest single family property owners in Fulton County, Georgia. In the second column, if you can spend a little more time locating other properties with different names, but the same mailing addresses, then you can really see a large bump in the number of properties they own.

And the last one is usually what most scholars use. They use external data sources such as business registry and SE filings. You can see that the coverage presented in the parenthesis very much close to the quite universe reporting in the third column. The bottom line is that now state and local planners and policy analysts can use the data that they have in their government and they can use free open source software and they can efficiently and more accurately identify these large corporate investors. Next.

For policy approaches, we all agreed that we really need greater property ownership transparency. So state and local governments should establish rental registry and ownership data which are nearly missing in many jurisdictions. They could use other policy terms such as certification for building codes and rental inspections and business license. And more fundamentally at the fundamental level, the reason why these large corporate investors are so concentrated in some belt metropolitan areas are likely due to weak tenant protections in state and local landlord tenant legal regimes. So enhancing broad-based tenant protections could address many of underlying issues.

Lastly, some people have argued that we should put some restrictions on the number of purchases these corporate investors have, but those approaches could generate side effect on the renters who might pay for SFR, single family renters or the homeowners who would like to sell their properties to these large corporate investors. So holding them to higher standards like holding inspections, property management, business license, or even other tours that from transactional perspective, which load will cover could be alternatively considered. Now I’m finishing my presentation and passing it onto Laurie.

Laurie Goodman

Thank you very much. I’m very indebted to both Kyle and Brian who went before me and did a great job setting the stage. I’d like to pick up some of the points that they made. In particular, next slide, please. It’s important to realize that single family rentals aren’t new. They’ve always been a little bit over about a third of all rental properties. They went up a little bit just after the great financial crisis, and it’s now back to about 34%. What’s new, as Kyle pointed out, was the decreased presence of smaller investors and the increased presence of larger investors in the market. I’m going to focus most of my comments on the mega investors, which are the 32 investors, which I define as those who own at least 1,000 properties and operate in at least three markets. As Brian mentioned, they comprise about 3% of all single family rentals.

However, they are highly concentrated. They own 27% of the single family rentals in Atlanta, 22% in Jacksonville, 20% in Charlotte, 16% in Tampa, and 15% in Phoenix. They definitely tend to buy newer properties in the markets in which they’re concentrated. That is the average year built for the mega investors is 1993 versus 1979 for all rentals. It’s important to realize that the institutional SFR properties tend to be larger than other single family rentals. 37% of single family properties nationwide had two or fewer bedrooms. Only 4% of those owned by the mega operators had two or fewer bedrooms. Next slide, please.

Mega investors tend to target neighborhoods with above average renter income. The median renter income of the top 20 MSAs where the mega investors were the most active was just over $45,000. It was over $53,000 in the census tracks within the MSAs where the mega investors were the most active. That is they don’t target the lower income rental tracks, they tend to target the upper end of the range.

Now, here’s where Brian and I are going to disagree slightly, although I think our disagreement is more nuanced. The mega SFR operators generally operate in neighborhoods with the racial composition that mirrors the MSAs in which they’re located. The MSAs in which they’re located do tend to be more heavily Black than the United States as a whole. And rental neighborhoods tend to be more heavily Black than the United States as a whole. Nonetheless, they do tend to be marginally overrepresented in Black neighborhoods and marginally underrepresented in the Latino neighborhoods. I think this may reflect a high initial share of distressed sales at the time when the mega operators were first getting active in 2011, 2012. Mega SFR operators tend to target homes that need repair. And Brian mentioned this point as well. Invitation Homes spent an average of $35,000 repairing each home they purchased in 2021. American Homes for Rent spent $20,000 to $40,000. The average new homeowner, I figure, spends about $6,300.

Do they take homes away from first time home buyers? Well, Amherst has estimated that about 85% of its renters would not qualify for a mortgage due to either credit score or income constraints. Next slide, please.

Let’s look at a couple of facts about mega investor behavior. It’s hard to tell what the impact is on home prices and rents in the area because mega investors tend to target fast-growing areas for better returns. So these are areas in which prices and rents would’ve increased more than average, and it’s hard to determine how much they’ve actually contributed to home price appreciation or rent appreciation in the area. It’s just very hard to disentangle the fast growth from the fact that these guys are benefiting disproportionately.

In terms of management of delinquent tenants, it’s very clear that mega investors tend to send out more eviction notices, but they do this as a rent collection technique. It’s not clear if they evict more. So all of the studies that have been done on eviction look at eviction notices and not evictions themselves. Given that the tenants are more affluent, it’s not clear that they evict more and they actually may evict less. It’s a rent collection technique.

Mega investors tend to rely more heavily on screening algorithms rather than gut feelings. They’ll check previous evictions, criminal history, and often credit score. They rarely meet the tenant. And then as Brian mentioned, there’s no data on whether larger landlords do a better job on maintenance. They tend to rely on in-house property management operations. They have a staff available 24/7. They’ve incorporated technology in the maintenance process. So they’ve got a truck that comes around that can do like 80% of the repairs on the spot. However, the lack of a personal connection may make it harder for the landlord to understand the tenant’s needs or for the tenant to hold the landlord responsible. So I think there’s a lot of mixed evidence on this. There’s a lot of mixed narrative and not a lot of evidence. On this. Next slide, please.

Do mega investors raise rents more? This is actually a DBRS Morningstar slide. The blue line is the blended rent change on the properties the mega investors manage that are rated. And that’s compared to the orange line and the black line, which are three and four bedroom units from RentRange. The average price increases for the mega investors since 2015 are 5.2%. For RentRange three bedrooms, it’s 4.7%. RentRange four bedrooms, 4.4%. So yes, they do seem to be. And what the chart shows is that they are more responsive to changes in market rents. They’re a little bit better at optimizing, so there is no surprises there. Next slide, please.

Public policy implications. Like Brian, I believe you need transparency as to ultimate ownership. Rental registries would be very helpful. I’m firmly in the camp that you really want larger investors to do more because of their scale if they can. So for example, rent reporting to credit bureaus. Well, once you’ve set it up and it applies to 80,000 renters, it’s much more worth the fixed cost of setting up than applying to two renters. So rent reporting, accepting housing choice vouchers, accepting security deposit insurance in lieu of security deposits, disclosing fees in a more transparent manner before the before the borrower signs a lease, giving tenants notice prior to an eviction filing. These are all things that large landlords can do more easily than small landlords, and they should be held to a higher standard because of the scale.

Finally, we keep on saying, “Bad investor, you shouldn’t be taking these properties away from homeowners.” What we’re not looking at is what properties they’re taking away from homeowners. If I walk into a house and I imagine my curtains on their windows, that is not the house the institutional investors are buying. They tend to be buying houses that need repair. The question is, why are they so able to buy these houses? Our renovation financing system in this country is extremely weak. We need to improve the renovation financing system for owner occupants to put them on a more equal footing. Rather than saying, “Bad investor,” we should be looking at the renovation financing system for owner occupants. Thank you very much. With that, let me pass it back to Libby.

Libby Starling

Thank you, Laurie, and thank you to all of the panelists for your introductory remarks. At this point in our event, what I’d like to do is ask the same question of each of you to see how your different backgrounds and context on these questions lends to different perspectives. Kyle mentioned that he is an economist and looks at things on two hands, both the good and the bad. Starting with Kyle, I’d like to ask each of you for the on-net, what is the impact of investor ownership of single family rentals on lower income families? Kyle, on-net?

Kyle Mangum

On-net, yeah, start me with the tough one. I think what makes that tough is that it’s perhaps different parties who are winning and losing. You’re essentially weighing one group of people against another, and that’s why the net calculation is difficult. I think my work finding that a lot of the investors are actually mom-and-pop arrangements. If I’m including them in the count, I would say on-net’s positive. If we’re looking at only the institutional kind, I don’t know, I’d like to hear Brian and Laurie fight it out maybe a little bit more. I think including the totality of investors on-net, slightly positive.

Libby Starling

Brian, you have a segue.

Brian An

Yeah. This really speaking hard to answer question because it really depends on from which vantage point of view you are assessing their impacts, right? I can say from my research and other recent studies, I can say that they are most likely to be home buyers because they make it harder to purchase homes for other types of buyers, including individual owner occupiers. Also, they could harm existing homeowners and local governments if these corporations pay less property taxes than they should through the property tax appeal. The reason why notion, I don’t know how much Laurie would agree, but the big corporations are not interested in investing in the local communities. We have many narratives about code violations, building permit issues.

On the other hand, institutional investors are most likely to help the renters who prefer single family renters and not really interest in ownership at the moment, or using that as a pathway for event homeownership, including certain millennials or empty nesters. It could address the shortage of housing crisis, definitely and the recent movement toward build to rent could be especially helpful on that front. I guess the question more boil down to, what are the vulnerability of federal, state, and local governments administrative systems and regulations in the face of emerging B2R, built to rent movement? What policy approaches we should situationally consider?

Libby Starling

Laurie, your thoughts?

Laurie Goodman

I’m going to not surprisingly say it is positive on balance. It gives renters who would not have the opportunity to be homeowners either because they don’t have the necessary income or because they don’t have the necessary credit score, the ability to live in the communities they want to live in, which is unambiguously a positive. I would argue that LMI borrowers are not the natural clientele for the mega investors. They’re actually targeting a higher income group. They tend to buy larger properties, nicer properties, sink a lot of money into those properties. I think you have to look at who the various investors are in each segment of the market as well. I think it’s giving renters an opportunity to live in neighborhoods they wouldn’t otherwise be able to live in.

Libby Starling


Brian An

Yeah, I definitely agree in an ideal word, but the fact that many of these mega investors are so heavily concentrated in some better metropolitan areas are likely because of a combination of several factors. One, obviously in these metropolitan areas, home vendors are rising, jobs are growing, and they tend to have lower cost of living, but they have very weak tenant protections. If anything, tenants are more likely to see disadvantages of these large scale management. The property maintenance may not be responsible, may not be timely, and they could see some improper fees added in. Also, these are where many minority populations reside, and we know from the research that they have weaker access to mortgage markets compared to more higher income or white mortgage applicants. We know that from the research. If we consider all those existing surrounding the environment, even though it increases rental supply, these gigantic management scales and associated problems that are often reported in the media, which also need to be studied by researchers, huge concerns.

Laurie Goodman

I’d just like to mention that if Invitation Homes has a couple of homes that are inadequately repaired, it makes the front page of the New York Times. Brian, if you were a landlord and one of your three homes needed repair, the New York Times just wouldn’t care.

Brian An

It has been by Washington Post that in California specifically Invitation Homes, and I don’t have exact numbers I can pull on later and share the link, they have been found broker properties they owned, they did not even apply for building permits and just did renovations. That has been already reported by the mainstream analyst such as Washington Post.

Laurie Goodman

I know, but you don’t have the comparison group. You can’t say in a group of smaller investors, “Here’s their performance in terms of maintenance issues.” You don’t have the comparison group. I just don’t think we have the information to say anything because we just don’t know what the comparison group looks like.

Libby Starling

I’m going to pull us back for a moment. Kyle is sitting back. Re-engaging all of you, the question that has come in from the audience is looking at regulatory tools. Again, a question for each of you, starting with Kyle, are there examples of states or localities that have implemented what you see as a good regulatory tool or a positive policy intervention? Kyle, let’s start with you.

Kyle Mangum

Sure, thanks. Yeah, I asked for an argument and we got it. I can think of some research that has looked at transaction taxes, which sound like a good way to stop people from buying up homes or entities from buying up homes. Generally they found perverse effects. I mentioned that you can sort of game the system sometime. You would have, for instance, speculators are not landlords necessarily, but if there was a timing restriction, like a graduated tax schedule and then as soon as the day is up, then they sell to avoid the tax. There’s going to be ways that they’re going to try to get around stuff like that.

There’s misreporting of owner occupancy. People say they’re owner occupants of 3, 4, 5 houses. Even basic stuff, I think tends to fail because maybe the enforcement’s lacking or because we haven’t thought through all the ways that a savvy investor is going to try to skirt those rules. I would like to see a little bit more in the financial regulation space. There’s a lot of capacity for regulating financing. We already have lots of regulation on that stuff. We have institutions that do that, right? I think that might be a pathway to do a little bit more.

Libby Starling

Laurie, let’s go to you next.

Laurie Goodman

Same question or what significance?

Libby Starling

Same question. Policy interventions that you think work and should be replicated.

Laurie Goodman

I think there are a lot of policy interventions that we haven’t done that we could do. One of the questions was what’s the significance between mega investors sending eviction notices to renters versus evicting renters? Obviously eviction has a hugely negative impact, but even an eviction notice has a negative impact. Maybe you want mega investors to have to give more notice before they send that eviction notice because when you’re screened for a rental unit, sometimes people do look at the eviction histories. In particular, the mega guys look at eviction notice histories. That in itself has a detrimental effect. Maybe you want to do something there.

Taking housing choice vouchers, some localities require it, some don’t. It’s a hassle for a smaller investor. Larger investors should be required to do it. I think there are certain responsibilities that come with scale that have been highlighted in certain areas. In certain areas, larger investors have to offer security deposit insurance as an option in place of providing security deposits. That’s a very good thing. I think looking at places where scale can make a difference and improve the tenant experience.

Another example, leases where there’s a one-page summary where you list all the fees. That should be an absolute requirement. If you’re doing a lot of properties, damn it, you can make the investment in a one page, “Here’s a summary of fees.” There’s a lot of things that could be done, some of which have been done, like no source of income discrimination, the security deposit insurance, and there are other things that haven’t been done, but they could be done and that’s what we should be thinking about.

Libby Starling

Brian, same question to you. Are there examples of states and localities that have implemented what you would identify is a good regulatory tool?

Brian An

Yeah, I can provide one specific example which I found this morning. The city of Forest Park in Atlanta metro area is located in the Clayton County. As far as I know, the county has experienced lots of institutional investment activities over the past few years. The city of Forest Park has adopted local ordinance that mandates rental registry for not just multifamily, but also single family landlords. Also, they have to do business license and they have to do self inspection of their properties for building codes and maintenance conditions and they should accept any inspections from the city authority.

I think these measures really strengthen the accountability of the transparency of property ownership and also the property maintenance. I think this is a really excellent example. This can be done in other cities and counties or even could be considered at the state level. I think personally from my perspective, that would be more effective than any targeted approach that Kyle gets. Large institutional investors have been exercised more than 100 millions as discussed as was proposed in house representatives in the house because there could be side effects. I think these regulatory monitoring systems and building real time basis, could address the fundamental underlining issues where these problems we see from large institutional investors grew, when they were not addressed in the beginning.

Laurie Goodman

I agree with Brian 100% on everything he just said.

Brian An

Thank you.

Libby Starling

We have about five more minutes left. I’d like to ask each of you, I’ll start with Laurie this time in reverse. What are the pieces that you would most like to know in terms of adding to our research and knowledge base about investor owned single family rentals?

Laurie Goodman

There are a couple of things I’d like to know. First, on the repair side, I’d like to understand how much investors really do, how much of these repairs are strictly necessary now versus lower cost down the road. That is, I want to know the composition of the 35,000 that’s put into a home to better understand whether these are homes that might have otherwise gone to homeowners. My default position is that they probably wouldn’t have gone to homeowners, but I would like to know that more definitively.

The second thing I would like to know is actually something that Kyle actually showed in his slides, and that is he showed in terms of changing composition of ownership, the decline of institutional invest, the decline of individual investors, the rise of institutional investors. I’d like more transparency on the sort of smaller segments of that market. That is, are some of those individual investors just turning themselves into LLC so that Libby, when you slip on a banana peel on my front porch, I don’t get sued? Are they legitimate? To what extent is this transformation actually happening? I know that there’ve been some efforts to do it, but most at the lower end of looking at sort of, and I think there’s been a lot of study of the larger guys, but sort of getting further down that spectrum and really understanding the composition of the rental investor base would be very valuable. Thank you.

Libby Starling

Thank you. Brian. Let’s go to you.

Brian An

Yeah, there are many questions, but I think the most outstanding question I would like to examine, would it be the impact of this emerging build to rent business model. According to recent Wall Street Journal, American Homes 4 Rent said they’re going to aggressively set their existing portfolio and shifting their business model to build rent because that would provide higher yield rate. I think what we saw from Kyle’s trend, likely suggests that movement on the ground. The great thing about built to rent business model is that it doesn’t necessarily displace existing homeowners or would be home buyers, even though there could be a debate about whether that land should have been developed for owner occupancy, single family homes versus others. I think we really lack the understanding of this recent movement. That would be my priority to examine. Also, when these local governments launch innovative programs such as rental registry, code inspections, et cetera, do we actually see any notice noticeable difference in terms of the property management done by large institutional investors owners? That would be also subsequent question I’d like to examine.

Libby Starling

Kyle, what about you? What would you like to know?

Kyle Mangum

Yeah, Laurie mentioned a few things that are already on the agenda. I hope to shed some light on that someday. It’s going to take a little bit more work. I mentioned mortgage financing before. Part of my impetus for starting this project was trying to understand more where the financing of these purchases is coming from. Money’s going to talk and what project is profitable for which kind of firm or which kind of individuals, comes down a lot to where the financing’s coming from. I think understanding that is important.

Then lastly, I’ll say I’ve pushed for measurement. Each of the panelists has pushed for better measurement, better registration, and on the research side, measuring these things better through that registry. I also think we could step back and measure more or think in the abstract on the macro side, if we start imposing regulations, what’s the alternative? If there are fewer institutional investors or fewer individuals, what’s going to happen? Is that going to become more homeownership, changes in housing prices, and mortgage underwriting? It’s not obvious that that’s the case. It may be, but I think that’s something that at the broad perspective needs a bit more analysis.

Libby Starling

Thank you and thank you to all three of the presenters for your engagement and active discussion this afternoon. At this point, I will hand it over to Jennie Blizzard from Fed Communities.

Jennie Blizzard

Thanks so much Libby, and thanks to our panelists for sharing their time and expertise. As far as next step, after today’s session, you’ll be sent a survey. We ask that you fill that out to help us inform future sessions. A reminder that the session will be recorded and available on fedcommunities.org within two weeks. Finally, we also invite you to register for the final session on November 13th from 1:00 to 2:30 Eastern Time, Renting, Owning, and Implications for the Racial Wealth Gap. This concludes today’s development research seminar series and enjoy the rest of your day.