The Rise of the New Land Lords 

After gobbling up foreclosed homes in Oakland and other communities, wealthy corporate investors are now creating what Wall Street calls the "rentership society."

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Waypoint's leaders say their business strategy is underwritten by socially conscious goals. "We want people to have a different experience with us," Waypoint's CEO Gary Beasely told me. "Our relationship is about respect because a lot of our tenants have been through the ringer."

Beasley said Waypoint's home buying has helped stabilize neighborhoods, and that his company is out to prove that it will be the best landlord possible. "I would argue that institutional landlords will be more responsive than the mom-and-pop landlords," he said. "A lot of smaller landlords are actually absentee, they don't use a good management company, and it's hard for tenants to get work done. We, on the other hand, have a brand that we're trying to grow."

Beasley also points to the capital that big investors like Waypoint have injected into housing stock as a positive contribution his company has made to hard-hit communities like Oakland. Waypoint, which has been financially backed by Columbia University's endowment and a Menlo Park private equity firm called GI Partners, has spent about $800 million acquiring homes in California, Arizona, Georgia, Illinois, Florida, and Nevada. Of this total, Beasley estimates that about $150 million has gone toward repairing and renovating the homes — capital invested straight into local communities hard hit by the foreclosure crisis. In Oakland, Waypoint has spent about $20 million buying up distressed homes, and about $3 million of this went toward renovations. In Contra Costa County, Waypoint is a dominant player in the market for single-family homes, having bought up seven hundred houses since 2009, investing yet more money in the local economy.

"We needed the capital to flow in from somewhere, whether from private capital or the state," said Schafran about hard-hit communities like Antioch and East Oakland, where neighborhoods and real estate prices were threatened by rows of empty houses. "Capital came in. Waypoint is providing a product that's useful in the market," he continued. "They're pulling a big chunk of housing out of disrepair and making it available in in-between ways."

Oakland's Waypoint just completed a merger with a spinoff of a larger real estate corporation called the Starwood Property Trust. Beasley said the deal, which allows the newly named Starwood-Waypoint Residential Trust to tap investor capital through the New York Stock Exchange, will allow Waypoint to expand with even more home purchases in Florida, Texas, Atlanta, and Chicago. The merger essentially creates a Wall Street-backed company with virtually unlimited capital.

"There's still opportunity to deploy capital in those places," Beasley said about markets in Arizona, Georgia, Florida, and other states. "The market has slowed down in California though, with homes that sold for $150,000 now selling in the $200,000 to $250,000 range."

"Yields are considerably lower," Beasley said about the opportunity for more home-buying in the East Bay, especially in Oakland.

Yield, in business-speak, refers to the income that an investment generates for its owner. In real estate, this is usually the rental income a landlord receives from a tenant, expressed as a percentage of the property's original purchase price. In the world of multi-hundred-million-dollar real estate acquisitions, calculating yields on rental properties can be complicated. But for companies like Waypoint and Colony Capital, the yield on their investments in single-family homes will basically be determined by how much they can charge their tenants in rent minus the average cost of acquiring and fixing up the homes, and managing them as rental properties.

When you do the math, the profit looks substantial. For example, take 4711 Fairfax Avenue in Oakland, a single-story home with a detached garage two blocks off High Street. A family bought the house for $400,000 in 2004. They lost the home to JP Morgan Chase, the nation's largest bank, in 2011. Waypoint acquired the house in July 2012 through its Dallin, LLC subsidiary at an incredible discount of $170,000, according to assessor's records. The home was briefly listed on Waypoint's website renting for $2,249 a month. Before deducting expenses related to the purchase, renovation, and management of the house, Waypoint's yield on the investment is about 16 percent a year. Waypoint representatives say the company has developed several proprietary algorithms that crunch data, including a home's purchase price, expected renovation costs, and neighborhood attributes, to instantly determine the maximum bid they're willing to make in auctions for foreclosed housing. The company also has a secret "screening algorithm" to select its tenants.

But yield isn't the only profit sought by major housing investors like Colony and Waypoint. The houses they've been buying have rapidly appreciated in price over the last two years, especially in the East Bay. For example, the average home price in Antioch peaked in 2006 at just over half a million, but then in 2009 collapsed to around $180,000 where it lingered until about May 2012. Since then, Antioch's average home price has climbed back up to about $260,000. Buy low, sell high, and harvest the difference as a capital gain — that's what big investors are also counting on doing when they purchase distressed single-family homes.

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