The foreclosed home on Kenmore Street in Aurora was an outdated, unkempt eyesore until crews arrived this fall, performing thousands of dollars of work to make it attractive and modern, inside and out.
But it wasn't until workers walked across the street to ask for some water that neighbors Mario Cervantes and Oralia Balderas-Cervantes learned that a corporation, not a consumer, had bought the house, intending to turn it into a rental property. Despite being landlords themselves, the couple aren't sure they like the idea.
"If it's going to be a company that is watching out for the community, yes," Cervantes said. "If it's going to be a company that is watching out for themselves, no."
Added Balderas-Cervantes: "I'd rather see a homeowner. A lot of renters don't care. It's like renting a car versus buying a car. It's different."
Similar scenarios and concerns are unfolding across Chicago and in other markets hard-hit by the housing crisis. Well-capitalized, out-of-town private equity funds are scouring neighborhoods, paying cash for distressed single-family homes and renting them out. The opportunities are plentiful, enabling investment groups to profit from low home prices, rising rents and an increase in the number of potential renters.
The transactions are returning vacant properties to active use. But they also are stoking fears among neighbors and municipalities about the long-term effect of large, private investors — including many that are operating under the radar — in their communities.
"This scares the hell out of me," said Ed Jacob, executive director of Neighborhood Housing Services of Chicago Inc. "In this rush to say this is a new asset class, are we creating the next community development problem?
"You talk to them and it's all about neighborhood recovery. They all have the narrative down."
In April, housing research firm CoreLogic named the Chicago area one of the better housing markets for institutional investor funds. It cited the area's large number of foreclosures, which will increase the number of vacant homes, and the estimated rental income relative to the low cost of acquisition.
The general strategy of the companies is the same: buy low, make the necessary upgrades, fill them with tenants and then sell the homes in three to seven years. With companies and analysts anticipating projected returns of at least 8 percent, there also is talk of creating publicly traded real estate investment trusts.
"What this reminds me of is the dot-com boom," said Rick Sharga, executive vice president of Carrington Mortgage Holdings LLC, a California firm whose asset management arm is actively looking in the Chicago market. "That's what this feels like. Every investor in America wants to buy foreclosures and turn them into rentals."
Two statistics increasing that appetite are the homeownership rate and rental rates. Foreclosures, tight lending conditions and wary consumers have pushed down the nation's homeownership rate to 65.5 percent at the end of September, according to census data. Meanwhile, the percentage of vacant rental units has been on a steady decline since 2010 as more people opt for leases rather than mortgages.
Tighter inventories are pushing up rents. As of October, annualized rents in Chicago were up 7.7 percent, more than the national increase of 5.1 percent, online real estate site Trulia found.
But investors aren't flocking to all neighborhoods equally. Most want homes in desirable neighborhoods with strong area employment. They also look at the strength of local rules protecting landlords in disputes with tenants.
After vetting the tenant and securing a lease, property managers say they routinely drive by the homes and sometimes schedule inside inspections to protect their investment.
Weighing risks, rewards
It remains to be seen whether their expectations will be met. One problem with the business model is there's no performance track record to speak of. And as housing prices slowly recover, acquisition costs also will increase and cut into returns.
There also isn't any history on property management firms tasked with overseeing so many scattered-site rental properties. Any well-publicized mistakes involving poorly maintained properties or wronged tenants could taint investors' reputations.
That's one reason why big-name players are likely to avoid buying in neighborhoods where they fear a greater chance of eviction proceedings occurring.
"You make one mistake in those properties and you'll be toast," Sharga said.
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