Racing to Buy Homes Sight Unseen
Residential
real estate to be the next frontier for speed-based investing
TIMOTHY W. MARTIN
April 13, 2015 11:53 a.m. ET
ATLANTA—It took Akuansa Graham seven
minutes on a recent morning to craft a $124,000 bid for a three-bedroom Buford,
Ga., home he had never seen.
The Starwood
Waypoint Residential Trust executive went to public auctions in the years
after the financial crisis looking to buy homes lost to foreclosure. Now the
38-year-old crouches over a computer and relies on algorithms that evaluate
home values, proximity to schools and crime rates to outrace rivals for any
remaining bargains offered by real-estate agents.
“You can’t see your competitors now,
so it’s important we move before everyone else does,” said Mr. Graham, a
regional director based in Atlanta.
With
the low-hanging fruit from the housing bust mostly picked, Wall Street-backed
buyers of real estate are increasingly turning to quantitative data analysis as
a way of accelerating their search for a dwindling supply of available homes
that can be transformed into rental properties. Math-driven models powered by
historical patterns can size up homes sight unseen and calculate future income
in minutes, allowing private-equity giant Blackstone Group LP, the
Alaska Permanent Fund Corp. and other bulk purchasers to skirt neighborhoods
with softer rental demand or properties that need costly repairs.
Advances in how companies use
technology to evaluate mountains of data has quickened everything from stock
trading to student test-performance evaluations to patient care. Behind the new
speed in real estate is a change in how big buyers find most of their
properties.
In the aftermath of the 2007-2008
housing crash, large investors mostly competed for deals face to face at public
auctions. In 2009, homes acquired after foreclosure or for less than the amount
owed on the mortgage—also referred to as a “short sale”—accounted for about
half of home purchases in the nation, according to Jade J. Rahmani, an
analyst at Keefe, Bruyette & Woods Inc.
As those fire sales slowed, Wall
Street-backed buyers shifted their focus to mainstream real-estate listings as
a way of satisfying their investors who wanted increased exposure to real
estate. By 2014, foreclosures and short sales fell to 31.2% of all purchases as
single-family home sales to institutional investors and all-cash buyers hit
four-year lows, according to RealtyTrac.
“The first phase was distressed
homes,” said Justin Chang, chief executive of Colony American Homes Inc.,
one of the largest single-family rental companies. “The second phase is
acquiring homes in a more regular way.”
When new listings become available,
Blackstone Group’s Invitation Homes now taps a database of more than 42,000
homes it owns nationally to pinpoint how much renovation a property for sale
may require based on its location, square footage and age, among other factors,
said Dallas Tanner, the firm’s chief investment officer. Invitation
Homes is the biggest owner of single-family rental homes in the U.S., according
to real estate data tracker RentRange.
Silver
Bay Realty Trust Corp., which owns about 9,200 homes, learned from its
models that not everyone in Phoenix wants a swimming pool—some found the
amenity too expensive to maintain or a hassle, Chief Executive David N.
Miller said. Silver Bay has since only targeted homes with pools when it
can charge higher-than-average rents.
Competition for conventional
real-estate listings is particularly fierce in Atlanta, where the six largest
institutional buyers own more homes than in any other market, according to
RentRange.
Oakland, Calif.-based Starwood
Waypoint, one of the six, said it has cut the time it takes to calculate a
first bid on a house to eight minutes. “We encourage our guys to make an offer
before they see the house,” said Ali Nazar, Starwood Waypoint’s chief
experience officer. “I don’t want to wait for anyone else. Our competitors are
also fast.”
One local Atlanta real-estate agent
said bulk purchasers are making it more difficult for individual home buyers to
compete for new listings. Home prices in Atlanta have jumped 22.5% in two
years, according to the S&P/Case-Shiller Home Price Index’s data through
January.
“They’re outbidding all of us,” said
Brian O’Neal, a Realtor based in McDonough, Ga., a southeastern suburb of
Atlanta.
Operating from the firm’s largest
branch office at a former meatpacking plant in Atlanta, Starwood Waypoint’s
acquisitions team evaluates potential purchases with a data map that ranks the
“livability” of local neighborhoods according to information provided by local
employees of the firm who frequently visit the area. Factors include proximity
to retailers and how noisy the neighborhood is.
Employees ultimately weigh about 15
variables when calculating a bid price, the monthly rent and renovation costs.
Employee bonuses are based on the accuracy of their home bids and rental
estimates.
After submitting a bid, Starwood
Waypoint employees visit the home with iPads and take it through a 45-minute
inspection, marking what renovations need to be made. The results—labeled
“satisfactory” or “unsatisfactory”—get shared on the company’s internal network
and are used to keep tabs on all of the roughly 2,700 homes Starwood Waypoint
owns in the Atlanta area.
On a recent visit to a suburban
Atlanta home that Starwood Waypoint owns, David Zanaty, a senior vice
president, walked into a four-bedroom home available to rent and glanced at his
smartphone. “Our guy was here just yesterday,” said Mr. Zanaty. “And there
aren’t any unsatisfactory notes.”
Mr. Zanaty inspected whether, as
instructed, the thermostat was left at 67 degrees; it was. He opened the
dishwasher to verify it had been run recently. He examined the second-floor
bathroom, where silver faucets were offset by walls painted in a “toasted
almond” color, a pairing seen in many Starwood Waypoint homes because the firm
purchases those items in bulk.
“This is a good house,” said Mr.
Zanaty, glancing at the living room blinds to confirm they were pointed upward,
not downward.
