Large-Scale Investors Become Landlords, Evict Tenants to Maximize Profits

Investor funds were used to help stabilize the housing market, but evictions may be destabilizing it again

Large-Scale Investors Become Landlords, Evict Tenants to Maximize Profits
Image: Pixabay
January 3, 2017

A move made by private equity firms to help stabilize the housing marketing after the 2008 crash may now be destabilizing it and leaving scores of tenants in the lurch.

Empty foreclosures were taken over by hedge funds, big investment firms, and private equity companies, says Bloomberg, and then were turned into occupied rental properties. These companies are now counted among the largest landlords in the country, and they are increasing the rate of evictions in attempts to maximize profits and returns for investors.

A new study from the Atlanta Federal Reserve has found that big companies like these are up to twice as likely as smaller landlords to file an eviction notice in Fulton County, GA. Atlanta is one of the places being hit the hardest by this trend.

"My hope was that these private equity firms would provide a new kind of rental housing for people who couldn't—or didn't want to—buy during the housing recovery," said Elora Raymond, lead author of the report. "Instead, it seems like they're contributing to housing instability in Atlanta, and possibly other places."

According to Ben Miller, co-author of the study and professor at Georgia State University, American Homes 4 Rent—one of the biggest landlord-companies in the U.S. —and HavenBrook Homes filed an eviction notice at one fourth of its houses. Colony Starwood Homes started legal proceedings for one third of its properties—the highest amount for any large real estate company. Smaller landlords for single-family homes, meanwhile, filed notices for an average of only 15 percent of their properties.

Diane Tomb is the executive director of the National Rental Home Council, an organization that represents institutional landlords. Tomb says that the members of the Council offer flexible payment plans to residents who fall behind on their payments and that the high cost of eviction to the landlord makes it "the last option." The Fed, she says, examined notices rather than actual evictions, which are rarer.

"We're in the business to house families—and no one wants to see people displaced," Tomb said.

Statistics from a report issued last year by the Harvard Joint Center for Housing Studies show that 21.3 million renters—a record number—spent more than one third of their income on housing costs in 2014, and 11.4 million spent more than half of it. The rate of homeownerships has fallen to almost a 51-year low as credit has tightened.

Ben Bernanke, former chairman of the Federal Reserve, urged investors in January 2012 to spend funds to stabilize the housing market and to rehabilitate—or "flip"—empty single-family properties that hurt neighborhoods and property values. Now, however, research from the Atlanta Fed suggests that big landlords' eviction practices be also be destabilizing to that market, as eviction notices can ruin a family's credit and make it harder for them to either rent someplace else or to qualify for public assistance.

Evictions are much less trouble on landlords in Atlanta, not to mention cheaper. According to Michael Lucas, co-author of the report as well as deputy director of the Atlanta Volunteer Lawyers Foundation, evictions costs around $85 in court fees, plus another $20 to have the tenant removed. Since Atlanta has few of the tenant protections found in places like New York, it can take less than a month for a tenant to become homeless.

Interviews and court filings show claims made by renters and housing advocates about the impersonal and unresponsive nature of some investment firms. The companies, they say, take a long time to make necessary repairs, and they have little hesitation to evict tenants who withhold rent until such fixes are made. The researchers said that there are some landlords that use eviction notices as a kind of "routine rent-collection strategy."

"They want to get them out quickly if they can't pay," said Aaron Kuney, former executive director of acquisitions at HavenBrook, now CEO of Atlanta private equity landlord Piedmont Asset Management. "Finding people these days to rent your homes is not a problem."

Researchers have found that, in Atlanta, the evictions made by every type of landlord are concentrated southwest of the city in poor, mostly-black neighborhoods. However, the study showed that the company-landlords evicted tenants at higher rates even after the demographics of the location were taken into account.

According to Tomb, these landlords sometimes buy big blocks of homes from other landlords, inheriting tenants who are unable to afford the rent. They also purchase homes that have been foreclosed on and whose occupants may refuse to leave or to sign a lease. Cases like these, says Tomb, make the rates of evictions seem higher for institutional landlords than for smaller ones.

However, not all of these companies file evictions at higher rates. For instance, Invitation Homes sent a notice on only 14 percent of its properties, a rate that records show is about the same as that of smaller landlords. The company works with Fulton County residents to resolve 85 percent of cases, says spokeswoman Claire Parker, and less than four percent end in eviction.

The Atlanta Federal Reserve does not give a reason for the higher eviction rates associated with institutional landlords. It is possible that their size makes them able to negotiate legal rates that are less expensive and to find other renters faster than smaller landlords can.

"Lots of small landlords, when they have good tenants who don't cause trouble, they'll work with someone who has lost a job or can't pay for the short term," said Brooklyn Law School professor David Reiss.