PERSON OF THE WEEK: Charles Chacko is co-founder of OS National, a nationwide provider of title and settlement services delivered via a high-touch, boutique service model. The company served as the lead title agent on the first single-family rental (SFR) single-borrower securitization deal led by Invitation Homes in 2013. As such, MortgageOrb recently interviewed Chacko to learn more about developments in the SFR market, which is expected to see further consolidation this year.
Q: There has been a lot of talk recently about the SFR market. Can you provide a little bit of background and history?
Chacko: The SFR industry has been around ever since property owners began renting out individual houses to tenants. However, the entry of institutional money in this space is new. After the housing market collapse, institutional investors began looking to buy large numbers of rental properties in key geographic markets. This phenomenon coincided with demographic changes and the increase in the number of potential tenants. Although the institutional SFR market in the U.S is fairly new, the idea has been around for a while. There have been institutional SFR investors in the U.K. for years, where it is known as the private rented sector.
Q: Who are the major players in this industry?
Chacko: Some of the major players include Invitation Homes, American Homes 4 Rent, Colony American Homes, Progress Residential, Starwood Waypoint, Silver Bay and Tricon American Homes. Altogether, my guess is that these larger players have bought more than 100,000 homes in the last three years.
Q: Where do you see the most activity in the SFR market?
Chacko: Most of the buying activity has been in the Southeast, specifically Florida and Georgia, and in the West, primarily in California, Arizona and Nevada. There has also been a fair amount of activity in North Carolina, South Carolina, Ohio, Illinois and Washington. Although the institutional players have been active in these areas, there are regional and local players who have a significant presence in smaller markets and other states.
Q: What are some of the more significant activities that you have seen in the SFR market recently?
Chacko: The two most significant activities have been the emergence of the SFR securitizations – both for single borrowers and multiple borrowers – and the birth of the SFR lending market. The watershed moment, if you will, for the industry was the Invitation Homes securitization in 2013, which was the first SFR single-borrower securitization. OS National served as the lead title agent on that deal. That deal opened the floodgates. In 2014, we saw 12 securitizations totaling approximately $7 billion in issuance, involving more than 47,000 properties altogether. So far, 2015 appears to be a blockbuster year as well, with three securitizations in the first quarter already. This year will also be the maiden voyage for multi-borrower securitizations – with deals already launched by key players such as B2R Finance and First Key. It's a pretty exciting time for our industry.Â
Q: Why all the hype in the SFR lending market?
Chacko: The market potential for SFR lending is enormous. First, there is the sheer number of properties to consider. According to a recent New York Times article, there are nearly 14 million U.S. single-family homes currently being rented. Of that number, approximately 100,000 homes are owned and operated by the institutional parties, rather than individual mom-and-pop landlords.
There's also a huge demand for institutional money. Prior to the housing market collapse, individual mom-and-pop landlords could use conventional mortgage financing to buy rental properties. Since the collapse, however, that financing has dried up. Now, one needs either cash or bridge financing. This has prevented many mom-and-pop landlords from capitalizing on discounted home prices around the country. The entry into this space by players such as B2R, First Key and Colony allows mom-and-pop landlords the opportunity to access inexpensive financing to buy more properties or to do cash-out refinances.
Q: What challenges do you see in the SFR industry, and are there solutions to some of the problems?
Chacko: Two of the biggest challenges are property acquisition and ownership challenges. A lot of players in this industry bought properties at foreclosure auctions or through similar means. In many cases, however, they did not perform sufficient due diligence, which has led to unwelcome surprises later. Most of these issues can be mitigated ahead of time by partnering with title experts who know the market and understand the unique jurisdictional challenges and are able to provide appropriate guidance.Â
Q: What trends do you see playing out in the SFR industry this year?
Chacko: I think we are going to see more consolidation. Certain players will exit the market to capitalize on home price appreciation or because they're unable to scale up sufficiently. We have seen public disclosures in 2014 of American Homes 4 Rent acquiring assets of Beazer Rental Homes and Ellington; and already this year, we saw the acquisition of Atlanta-based The American Home by Minneapolis-based Silver Bay. We expect this trend to continue through this year. Given that the capital markets seem to be cooperating, I think we will see more single-borrower and multi-borrower securitizations, too.