Housing downturn spurs a boom in foreclosure-to-rental conversions

Gene Richards is a lifelong Vermonter, but on a recent weekday afternoon he found himself back on Florida’s west coast, scouting foreclosures to add to the collection of rental properties he has amassed in the wake of the housing crisis.

“I just started buying them and I haven’t stopped. I have 15 right now, and I’d buy another 15,” said Richards, 51, who runs a mortgage company and also owns rental properties back home in Burlington, Vt. “This to me is a no-brainer of an investment.”

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Home prices hit new post-crisis lows in nine cities, according to Case-Shiller report: Home prices fell in January in 16 of the 19 metropolitan areas measured by the Case-Shiller Home Price Index. See how your city fared.

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A look at the state of foreclosed homes.

With home prices at historic lows and rental rates on the rise, Richards and a growing number of investors with cash to spare are seeking lucrative returns by gobbling up foreclosures in distressed markets across the country and turning them into rentals.

“The investors are seeing bargain opportunities,” said Lawrence Yun, chief economist for the National Association of Realtors. “The numbers are just very attractive, given the alternatives.”

The real estate data firm CoreLogic estimated in a report this month that the burgeoning foreclosures-to-rental business could become a $100 billion industry this year as bigger investors get involved in hard-hit markets from Florida to California to Arizona to the Midwest.

Yun cited a recent NAR survey that shows sales of investment homes soared nearly 65 percent in 2011 over the previous year. By contrast, the number of purchases by owners who intended to occupy the homes fell more than 15 percent.

Those numbers reflect the fact that investors often have the ability to purchase in bulk and with cash, bypassing the need to rely on credit approval from banks. But the survey also suggests that the combination of bargain prices and a steady stream of rental income seems more attractive to many investors than having their money languish in banking accounts or bonds.

Of course, the speculators who furiously acquired properties and flipped them in search of quick profits played a key role in fueling the housing bubble that wrecked the U.S. economy. But for the moment, Yun believes, the current investor boom in turning foreclosures into rentals could actually help to heal the ailing housing market.

“In the current market situation, I would say the investors are very helpful. . . . We don’t want to see foreclosed properties linger. The investors are clearing this inventory out of the system,” Yun said. “Investors during the bubble years were not helpful; they were just adding fuel to the fire. But now they’re playing a stabilizing role.”

In the past, the investors willing to buy bank-owned, single-family homes and turn them into rentals predominately were individuals or mom-and-pop outfits with only a handful of properties. They’re still in the mix, but larger players have entered the business, and even larger ones — including hedge funds and private equity firms — have said they plan to invest hundreds of millions of dollars in such properties.

California-based Waypoint Homes has amassed about 1,300 rental houses in California since the business began in 2008 and has begun expanding into Phoenix.