November 24, 2012 in Business

Investors drawn to foreclosures

Homes are refurbished, rented as prices rise
Mary Ellen Podmolik Chicago Tribune

Leslie Mendoza uses a laptop as her father, Felipe, right, his nephew Aaron Carillo and Carillo’s son, Jayden, talk in the home they rent in Aurora, Ill., on Nov. 13. Investors are buying foreclosed homes and turning them into rental properties.
(Full-size photo)

The foreclosed home in Aurora, Ill., was an outdated, unkempt eyesore until crews arrived this fall, performing thousands of dollars of work to make it attractive and modern, inside and out.

But it wasn’t until workers walked across the street to ask for some water that neighbors Mario Cervantes and Oralia Balderas-Cervantes learned that a corporation, not a consumer, had bought the house, intending to turn it into a rental property. Despite being landlords themselves, the couple aren’t sure they like the idea.

“If it’s going to be a company that is watching out for the community, yes,” Cervantes said. “If it’s going to be a company that is watching out for themselves, no.”

Added Balderas-Cervantes: “I’d rather see a homeowner. A lot of renters don’t care. It’s like renting a car versus buying a car. It’s different.”

Well-capitalized, out-of-town private equity funds are scouring neighborhoods, paying cash for distressed single-family homes and renting them out.

The transactions are stoking fears among neighbors and municipalities about the long-term effect of large, private investors – including many that are operating under the radar – in their communities.

“This scares the hell out of me,” said Ed Jacob, executive director of Neighborhood Housing Services of Chicago Inc. “In this rush to say this is a new asset class, are we creating the next community development problem?”

The general strategy of the companies is the same: buy low, make the necessary upgrades, fill them with tenants and then sell the homes in three to seven years. With companies and analysts anticipating projected returns of at least 8 percent, there also is talk of creating publicly traded real estate investment trusts.

Two statistics increasing that appetite are the homeownership rate and rental rates. Foreclosures, tight lending conditions and wary consumers have pushed down the nation’s homeownership rate to 65.5 percent at the end of September, according to census data. Meanwhile, the percentage of vacant rental units has been on a steady decline since 2010 as more people opt for leases rather than mortgages.

Felipe and Mily Mendoza and their family have been renters since losing their home to foreclosure in 1998. Five weeks ago, they moved into a home in Aurora, Ill., close to an elementary school.

Felipe Mendoza doesn’t mind the $1,575 monthly rent because the home is in much better shape than their last rental, and he likes the two-year lease. He’s also participating in a program that rewards him with points for taking care of the property, paying the rent on time and repairing any credit problems.

At the end of the two years, accumulated points are credited toward a purchase of the home, something Mendoza would like to do, now that he’s gotten to know the neighbors. “Everybody told me, ‘We hope you keep the home,’ ” he said.

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