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Investors are snatching up foreclosed homes and looking for renters. Banks often prefer the cash purchases over the loan purchases most buyers would use.
The rental listing advertises a “gorgeous remodeled craftsman-style house” with three bedrooms, two bathrooms, a converted basement, a large deck and a backyard for $2,595 a month.
Eight months ago, this West Oakland home was owned and occupied by Theodros Shawl, a local chiropractor. Shawl bought the house in 2004, his first since emigrating from Ethiopia in 1990. Over the years, Shawl said, he rebuilt the home’s foundation and replaced its aging plumbing and electrical systems.
“I liked the fact that it was an older home, that I could repair and paint and fix there on the weekends. I was always at Home Depot,” said Shawl, 40. “I was living the American Dream.”
Last October, after being sidelined with a wrist injury, Shawl lost his home to foreclosure; in May, Bank of America sold it to a real estate investment firm, REO Homes 2 LLC, a company founded in 2010 by Bay Area businessman Neill Sullivan.
According to a report released today by the Urban Strategies Council, a nonprofit think tank, real estate investors have purchased – usually with cash – 42 percent of the 10,508 homes in Oakland that went into foreclosure between January 2007 and October 2011. Many of these investors are turning the homes into rental properties and charging rent that is significantly higher than the monthly mortgage payments many families would make if they purchased the homes.
“They are massive landlords in neighborhoods that historically have had high rates of homeownership, and very few people are aware of the investor activity that’s taking place under feet,” said Steve King, the organization’s housing and economic development coordinator.
The most prolific investor, the report said, was a company registered to Community Fund LLC, which bought 307 foreclosed homes and apartment buildings. The company is registered to Michael Marr, an Oakland real estate broker who declined to comment for this story. Community Fund paid, on average, $111,000 for a foreclosed home.
The homes Sullivan’s firms purchased accounted for the second-highest number of foreclosures now owned by investors. The Urban Strategies Council said at least 171 foreclosed Oakland homes have been bought by companies Sullivan founded. Many of those properties are like Shawl’s old house on 30th Street – detached single-family homes that were owner-occupied before foreclosure.
Sullivan’s firms paid an average of $139,000 for a foreclosed home. As of October 2011, those companies had sold 10 of the foreclosed homes they bought, the report said, retaining the balance, primarily as rentals.
“We’ve been a sleeping giant for a while,” said Jeremiah Brennen, a Sullivan Management leasing agent who is handling inquiries on Shawl’s former home.
Brennen said he is seeking tenants who would normally prefer San Francisco’s trendier neighborhoods, but who can afford to rent only a small apartment in the city. “We want to bring in good, productive people and really change the area,” he said.
But not everyone is welcoming that change.
“We have investors who are eating up our neighborhoods for their profits,” said Desley Brooks, an Oakland city councilwoman.
In an interview, Brooks argued that families that would want to buy the foreclosed properties with conventional financing are being squeezed out by investors who can afford to pay cash. Real estate investors are “taking away the notion of buying into the American Dream,” she said.
In neighborhoods hit hard by the housing crisis, it would be cheaper for many families to buy a foreclosed home than rent an apartment. The average price of a house in those neighborhoods is less than $150,000. Monthly payments on most 30-year mortgages at that price are usually less than $1,000, while rents on many West Oakland properties approach and exceed $2,000.
But banks have been reluctant to sell to buyers who purchase with loans, preferring the ease and speed of a cash transaction.
In its report, the Urban Strategies Council argues that banks and the government-controlled financial institutions Fannie Mae and Freddie Mac could be doing more to help families buy foreclosed homes. Among its recommendations: Expand programs that give owner-occupiers and nonprofits a “first look” at foreclosed homes before they go up for auction.
“It is essential that the opportunity to become a homeowner is not inequitably limited to middle- and upper-income families,” the report reads.
Real estate professionals counter that the large number of foreclosed homes purchased by investors are a temporary phenomenon, a sign that the real estate market has begun to rebound.
“It starts with investors’ rentals; that’s the first step,” said Paul Zeger, CEO of Pacific Marketing Associates, which markets residential properties on behalf of Bay Area developers. “As rents begin to rise, individuals and families start to see that buying a home makes economic sense.”
Theodros Shawl is still in the neighborhood, operating his chiropractic practice on nearby Market Street. He’s renting now, a two-bedroom apartment that he shares with his girlfriend.
With his credit ruined by foreclosure, Shawl said he’s given up on homeownership – at least for now. But he said he was surprised to learn that Sullivan’s company had been able to buy his old house for $154,000.
“I paid $335,000 for that house in 2004,” he said. “If they had been willing to reduce my balance to $300,000, I would have been able to afford to keep it.”
This story was produced by Bay Citizen, a nonprofit news organization in San Francisco and part of the nonprofit Center for Investigative Research.