A soon to be announced pilot program from Fannie Mae and Freddie Mac will focus on Bulk Sales of REO to Investors requiring properties to be rented, according to the Obama administration. This new approach is welcome news with a huge amount of private investor money waiting on the side lines for program details, property geographic location and pricing parameters.
The FHFA, Obama administration and Federal Reserve see a government-facilitated REO-to-rental program of having the potential to sell the ever increasing REO inventory levels while helping to revitalize neighborhoods and provide price support for housing.
The expectation is that bulk investors build out a rental organization including a management company to run hundreds if not thousands of rental homes purchased through this new REO program. Private bulk investors we have spoken to have no reservations with investing and finding financing for the bulk purchases. Some private investors expect some financing to be provided by the Seller, but it is unclear what that financing offer will actually be. The bigger issue for bulk investors is executing the required rental aspect of this new program. Establishing a property management structure for rental properties is costly and may discourage buyers. To make the investment returns work for a management company, bulk investors need to purchase large numbers of properties to leverage the cost of a property management organization – investors want and need thousands of properties with clusters in geographical areas where their management organizations are.
Fannie Mae and Freddie Mac officials are seeking private capital to help support conversion of REO to rental units. For this to work, investors will need to get a grip on establishing management organizations clustered around a critical mass of REO purchased properties to ensure investor returns are attained. The private sector is well positioned to support this effort of providing property management and maintenance resources, given the huge over-capacity in the construction / contracting industry.
