In a number of cities, especially those hard hit by the recession, investor groups have swooped in, buying up hundreds of REO properties as quickly as they can be located. To some observers, this appears to be problematic, because the new owners won’t be living in those houses and renters can destabilize a neighborhood.
Then there is the issue of whether investors are simply being predatory, stealing away these busted residences before anyone else might consider a purchase because they have raised the capital and pretty much can call the shots.
I’m not going to say the critics are wrong, but I will make the case that investor groups are doing a service to the lenders by putting the homes back into private ownership. They are resurrecting neighborhoods, because when investors purchase they reinvest in the homes (some of which have been trashed), making them market-ready.
There is a third argument in favor of the investors. Thousands of contractors who have lost their jobs or are suffering reduced income because of the collapse of the homebuilding industry are being employed by home investors, as there is millions of dollars in rehab work to be done.
To illustrate this last point, I’m going to spotlight just one investment company that, through a tremendous amount of contractual business, has become a major economic stabilizer in its local marketplace.
Memphis Invest GP is, as the name implies, a Memphis, Tenn.-based real estate investment company. It’s also one of the largest, if not the largest, companies involved in what is sometimes called the "turnkey model" of investment in single-family residences.
What that means is, the company buys single-family homes, rehabs the properties, finds long-term renters, manages the rental program, and then sells that home-plus-rental package to individual investors.
In other words, investors who want to own single-family homes but don’t want to bother with the hassle of being a landlord will turn to companies like Memphis Invest.
"They buy a passive investment from us," said Chris Clothier, a principal and head of sales and marketing. "The investors will realize some appreciation, but this is much more about purchasing at such a price point that the rents not only allow the property to be paid down, but earn a cash flow, basically a dividend on the investment."
In 2009, Memphis Invest acquired 221 properties locally; in 2010, 196 properties; and last year, 317 single-family residences.
The average cost to renovate all the acquisitions now stands at $16,700, and that includes new flooring, painting, fixtures, updating the electrical, and replacing or upgrading all systems — furnaces, water heaters, air conditioning coils and blowers.
"This year we replaced more roofs than at any time in the past," Clothier said.
That’s a lot of work and because Memphis Invest has only four project managers and no on-site workers, it outsources all that work — and that’s a lot of money flowing through to small businesses.
In 2010, the combination of maintenance costs for acquired homes and rehab expenses for new purchases came to $4 million. In 2011, the company spent $774,000 on maintenance for about 1,000 units, while the rehab expenses for more than 300 acquisitions came to $5.35 million.
In 2011, Memphis Invest handed out paychecks to 80 different contractors, mostly mom-and-pop shops, although Clothier noted that "about 45 contractors are really the stalwarts that we do business with all the time."
Some of Clothier’s stories are heartwarming. "One gentleman that used to rent from us had lost his job and was looking for work as a handyman," Clothier said. "He said to us, ‘I’ve got a truck, I’ve got a trailer and I’m willing to work.’ We used him to do cleanups and trash-outs, paying him $10,000 on the renovation side and $28,000 from the property management side."
Almost 50 percent of Memphis Invest’s contractors are minority firms. And, with so much work needed, some contractors are making major money. One locksmith did more than $140,000 in business with the company. Even that pales with a heating and air conditioning contractor that billed more than $450,000 with Memphis Invest.
I spoke with two of Memphis Invest contractors.
One, Tony Scott, owns with his wife The Lock Man in Cordova, Tenn. They and two technicians are the company’s only employees.
"Plenty of work? That’s an understatement. It’s a tremendous amount of work. They are the biggest company I work for," Scott said. "And they are the best company I work for because of their integrity, the way they treat vendors and the way they pay on time."
Steve Matlock, president of Southern Comfort Air, Heating and Plumbing in Memphis, has worked with Memphis Invest for about six years. "They provide a lot of work and always pay on time. You turn your invoices in on Wednesday and you get paid on Friday. That kind of certainty is unheard of in this industry."
Memphis Invest plans a huge increase in acquisitions this year, to somewhere around 450 to 480 properties. That will mean a huge amount of renovation work, and Scott and Matlock are gearing up.
Scott’s company runs two vans, but as he told me, "I’m in a position to buy a new van."
Matlock has his eye on two more trucks. "Memphis Invest said it is going to do a lot more work than it has in the past, so we are ready to gear up," he said.
"We are like the engine at the front of the train," said Clothier. "As our business has grown, everyone that comes along has grown. If they provide good service, quality work and stand behind their work, we can do a lot of business together."
