When Wall Street Is Your Landlord
With help from the federal government, institutional investors became major players in the rental market. They promised to return profits to their investors and convenience to their tenants. Investors are happy. Tenants are not.
rSnapshotPhotos / andrea crisante / kai celvin / Shutterstock / The AtlanticALANA SEMUELS
FEB 13, 2019
TECHNOLOGY
In 2010, at the height of the foreclosure crisis, the federal government watched nervously as hundreds of thousands of families lost their homes. Empty houses blighted neighborhoods, their shades drawn, their yards overgrown. Without some kind of intervention, federal officials worried, the housing market would continue in its free fall, prices would keep dropping for existing homeowners, and the economic recovery, already tenuous, would be imperiled.
But who would fill these empty homes? Few Americans were in a buying mood, and for those who were, mortgages were harder to come by than they had been before the crash. So the government incentivized Wall Street to step in. In early 2012, it launched a pilot program that allowed private investors to easily purchase foreclosed homes by the hundreds from the government agency Fannie Mae. These new owners would then rent out the homes, creating more housing in areas heavily hit by foreclosures.
“There was this glut of foreclosed properties in parts of the country, and inadequate demand from the traditional home-buying population and even traditional investors,” Meg Burns, who was at the time the senior associate director of the Office of Housing and Regulatory Policy, told me. “We were trying to influence demand.”
It worked. Between 2011 and 2017, some of the world’s largest private-equity groups and hedge funds, as well as other large investors, spent a combined $36 billion on more than 200,000 homes in ailing markets across the country. In one Atlanta zip code, they bought almost 90 percent of the 7,500 homes sold between January 2011 and June 2012; today, institutional investors own at least one in five single-family rentals in some parts of the metro area, according to Dan Immergluck, a professor at the Urban Studies Institute at Georgia State University. Some of the nation’s hardest-hit housing markets were finally stabilized.
The investors argued that they could be good landlords—better, in fact, than cash-strapped small-timers. According to Diane Tomb, the executive director of the National Rental Home Council, a trade group established in 2014, single-family rental companies “professionalized” a sector traditionally run by mom-and-pop landlords, bringing with them 24/7 responses to maintenance requests and a deep pool of capital they can spend on homes.
They also projected they could make money, which no one had done on a large scale in the home-rental business. “We wanted to rescue these neighborhoods and create a long-term, permanent income stream for our shareholders,” says Frederick Tuomi, who was until recently the president of Invitation Homes, which is now the largest single-family rental company in the nation. (Tuomi is currently on a temporary leave of absence to care for a family member.)
Wall Street analysts and potential shareholders, however, were skeptical. Maintaining thousands of homes of different sizes, ages, and conditions across an entire metro area seemed like a logistical nightmare. “How can you operate and create scale in that situation?” Sam Zell, the billionaire real-estate investor, told CNBC in 2013. “I don’t know how anybody can monitor thousands of houses.” When the new rental companies started offering shares to investors on the public market in late 2012, the response was tepid.
But housing trends were on the side of the investors: America was becoming a renter nation. According to census data, between 2007 and 2017, the United States added less than 1 million households in owner-occupied homes, but 6.5 million in renter-occupied homes. Many families wanted to live in a spacious house in a good school district, but could no longer afford to do so as owners. The homeownership rate bottomed out at 62.9 percent in 2016, down from a high of 69 percent in 2005.
Read: The never-ending foreclosure
Of course, the trends that favored these new landlords were largely produced by a financial crisis that Wall Street had itself abetted. That some of the same investment firms that had played a part in the housing crisis were now poised to profit from it made for a dismal irony. But if the new companies could deliver on their promises of making home rentals easy, affordable, and worry-free, perhaps everyone could win: The companies could return a profit, the housing market could be shored up, and houses that had lain fallow after the crash could once again be happy homes.
That’s not what happened. I talked with tenants from 24 households who lived or still live in homes owned by single-family rental companies. I also reviewed 21 lawsuits against three such companies in Gwinnett County, a suburb of Atlanta devastated by the housing crash. The tenants claim that, far from bringing efficiency and ease to the rental market, their corporate landlords are focusing on short-term profits in order to please shareholders, at the expense of tenant happiness and even safety. Many of the families I spoke with feel stuck in homes they don’t own, while pleading with faraway companies to complete much-needed repairs—and wondering how they once again ended up on the losing end of a Wall Street real estate gamble.
In 2011, rene and Erica Valentin were living with their two young children in a small two-bedroom apartment in suburban New Jersey. They had been saving for years to buy a house. But then Rene, now 42, was laid off as a district manager at Best Buy, and the couple decided that the only way they would ever be able to afford to buy was in a cheaper market.
Erica, now 34, applied to be an engineer at AT&T in an Atlanta suburb. When she got the job, the family picked up and drove south, moving into a two-bedroom apartment near the city center. They pinched pennies as Rene’s job search stretched into its second year. By the time he finally found a position in 2014—again at Best Buy—the family still couldn’t afford to buy. But their daughter, Sophia, was about to enter first grade, and the Valentins wanted her in a good school district and not to have to share a room with her brother. So they decided to rent.
A real-estate agent showed them around Lawrenceville, a sprawling suburb 30 miles northeast of downtown Atlanta, where the homes are large and the schools are good. Every house they saw was owned by the same company, Waypoint Homes, which they told me the agent explained was a professional rental company, with 24/7 maintenance, quarterly check-ins, and deep pockets to spend on repairs.
They settled on a 2200-square-foot house on a quiet street. From the outside, it didn’t look like much—vinyl siding, black shutters, brick detailing. But it had three bedrooms, two bathrooms, walk-in closets, and a large, fenced-in backyard, all for just $1,373 a month. Soon enough, they were installing a tire swing in the backyard, hanging art on the walls, and putting up curtains in the kids’ bedrooms—dark blue for Antonio, light blue for Sophia. They paid their rent using Waypoint’s online platform, impressed by how far technology had progressed from the days of dropping a check in the mail. The property wasn’t theirs, exactly, but they finally felt like they could settle down.
As the valentins were nesting, America’s new corporate landlords were looking for efficiencies. The companies set about standardizing flooring and appliances, which would, in theory, lower costs and make life easier on maintenance workers. They established centralized call centers to handle tenant communication, and installed smart locks so that potential renters and maintenance staff could let themselves in to look around or do repairs.
At the same time, the industry was consolidating. Investment groups created companies to manage the homes: Blackstone established Invitation Homes; Cerberus created FirstKey Homes; Colony Capital created Colony American Homes. And then those companies started merging.
In 2015 alone, Colony American Homes merged with Starwood Waypoint Residential Trust, Cerberus Capital Management acquired more than 4,000 homes from BLT Homes, and American Homes 4 Rent said it was acquiring American Residential Properties in a $1.5 billion deal. By 2017, two major players, Invitation Homes and American Homes 4 Rent, controlled nearly 60 percent of the market.
On calls with investors, those two companies touted their cost-cutting measures, which often involved pushing responsibilities onto tenants. In 2016, Jack Corrigan, the chief operating officer of American Homes 4 Rent, told investors that the company hoped to reduce spending on repairs, maintenance, and “turn costs”—preparing a home for a new tenant—from $2,500 per home to $1,600. That same year, Colony Starwood cut property-management costs 25 percent from the previous year; one of its money-saving innovations was to use videos and chat software to show tenants how to fix minor problems, so they wouldn’t have to request repair staff for a clogged garbage disposal or a leaking toilet.
The obligation to repair their own rental wasn’t the only responsibility passed on to tenants. I reviewed one Colony Starwood lease from 2016; it was 34 pages long and specified that tenants were responsible for landscaping, “routine insect control,” replacing air filters in their central air systems once a month, repairing broken glass (regardless of how it was broken), and repairing and maintaining sewer and sink backups. American Homes 4 Rent started levying “trip charges” if maintenance staff were sent out to homes to assist with repairs that the tenants should have performed themselves, David Singelyn, the company CEO, explained at a 2015 investor forum. Some companies began requiring that tenants buy renter’s insurance to cover the property itself, rather than just their belongings, a clause lawyers in some states say is unenforceable.
As the industry started to grow, the major players all described their desire to standardize and improve the business of being a landlord. But even to the companies’ employees, the effort to become more efficient started to look more like craven attempts to squeeze tenants. “It shouldn’t be just about making money, but that’s what it turned into,” Shanell Hanson, who was a property administrator for Colony American Homes in an Atlanta suburb from 2014 to 2016, told me. Hanson said the company had six maintenance workers for 2,100 homes in the area she managed. Residents would frequently call with substantial problems: Sewage was overflowing, or the house was full of mold. But with such a small staff, Hanson could rarely deal with the problems quickly. And the law was on the corporations’ side: If tenants want to seek financial remedy for a landlord not keeping the property in adequate condition, under Georgia law, they have to take the landlord to court, a costly and lengthy process. “It’s almost impossible to do without an attorney,” Lindsey Siegel, an attorney at Atlanta Legal Aid who works on housing issues, told me.
Hanson said she was instructed by a supervisor not to answer the phone when certain tenants called. “Her response would be, ‘We’re not fixing that, just don’t call the tenant back,’” Hanson said of the supervisor. Hanson said she was fired when she reported the company to OSHA because she worried that the homes were in such poor shape that the conditions for the maintenance staff she supervised were dangerous.
In 2017, Invitation merged with Starwood Waypoint, the company that itself had merged with Colony American in 2015. Invitation said it could not comment on individual employees (or the alleged OSHA complaint), but that company policy protects whistle-blowers from retaliation, and that the company does not tolerate unsafe working conditions for maintenance workers. A spokeswoman added that the events Hanson alleges occurred when the company was under different ownership. (Fred Tuomi, the longtime Invitation CEO, was a senior executive at Colony American beginning in 2013, and headed the company as it merged with both Starwood Waypoint and Invitation.) Invitation also said that any employee not returning tenants' calls was not following its company policy.
Many other single-family landlord companies were cutting corners on maintenance and repairs. “As the corporation got bigger, it just got worse, in terms of what we had to work with and how we had to deal with problems,” a former Los Angeles leasing agent who worked for Waypoint between 2015 and 2017 told me. (She spoke on the condition of anonymity because she still works in real estate.) Regional teams received bonuses for keeping costs low, she said, which incentivized them to skimp on spending. Instead of responding to tenants personally, supervisors would send calls for maintenance to out-of-town call centers—which would in turn assign maintenance workers dozens of repairs in a day, not realizing that Los Angeles traffic could mean that relatively short distances could take hours to traverse.
Another former Waypoint leasing agent, in Florida, who also spoke on the condition of anonymity because she is still in the real-estate field, told me that the company stopped replacing shower-curtain rods and changing locks when tenants moved out. When Waypoint learned that it was spending $5 million annually on paint, local managers were told to just touch up the walls rather than repaint them, giving the interiors a splotchy, unfinished appearance, she said. At one point, a mandate came down from a field manager that the company was going to do everything it could to not to return security deposits to tenants. “It wasn’t a company policy, and you will never find it in writing, but it was a verbal thing passed down to field project managers,” she said.
Charles Young, who was named the chief operating officer of Starwood Waypoint in 2015 and now serves in that position for Invitation Homes, told me that the company never told staff to avoid returning security deposits. Tuomi, of Invitation, said that while the companies may have been “horribly inefficient” at first, they’ve gotten better at responding to problems as they’ve gotten bigger, with the help of technology and more experience. Invitation launched an advance-scheduling and route-optimization program last year to improve the efficiency of its maintenance staff, according to Kristi DesJarlais, an Invitation Homes spokesperson. The company told me repeatedly that complaints about the early days of the single-family rental industry are no longer valid.
Rene and erica valentin’s problems with their rental home began almost immediately. Their pipes would periodically break, sending a stream of water onto their living-room carpet. Sometimes the water would be boiling hot—their kids once stepped in it and burned their feet, they told me. Getting someone to come fix the pipes was always a production. Erica said she would call, or file a complaint online, and it would take days, sometimes weeks, before she received a response. Repair workers would come and replace small sections of broken pipe, but Waypoint never investigated why the problem persisted. They didn’t replace the soggy carpet, either; a faint mildew smell started to permeate the house. The contractors Waypoint sent seemed, to the Valentins, unqualified—one didn’t have a car and had to call his mother to drive him to Home Depot to pick up a part. “You would expect this type of behavior from a one-person landlord who’s a jerk, but a big multimillion-dollar company—how do you treat your tenants like that?” Erica said. “They have the money to fix things.”
The Valentins thought about leaving, but moving is expensive, and they were still saving up to buy a house. They also worried that breaking a lease would ruin their credit. So they stayed, and the problems mounted. Their air-conditioning stopped working; the family waited eight sweltering Georgia summer days for a repairman, who told them that the
