Dan Noma, Jr. started out as a typical commercial real estate agent. But all of that changed about 12 years ago when a client of his, Dallas Tanner, now president and CEO of institutional investor Invitation Homes — one of the largest owners of single-family rental homes in the United States — came to him with an idea for turning single-family homes into publicly traded real estate investment trusts (REITs).
“At the time, we had no idea what a REIT was and had no idea single-family homes that could be put into these things,” recalls Noma. “So we started putting a model together.”
Noma said it took a lot of trial and error to learn how to apply multifamily scaling metrics to single-family homes. But eventually, Noma and his co-broker, who worked together for Invitation, learned what they were doing and got Invitation Homes’ first set of acquisitions off the ground.
In 2009, the small team bought 2,000 homes, and that became Invitation Fund 1, Invitation Homes’ first REIT. Since then, they’ve repeated the process seven times.
Noma continued to work for Invitation Homes for a few years and went on to do acquisitions for other institutions like Progress Residential and FirstKey. Today, he’s a designated broker for brokerage and advisory firm Venture REI and co-founder of the iReal Estate Pro Certification, an online certification program that helps agents learn how to work with iBuyers.
Noma primarily helps institutional investors, or companies that invest in real estate or other assets, purchase properties in bulk, often with the goal of renovating and flipping those homes into rental properties. His brokerage also searches for and purchases off-market properties, which they frequently end up selling to the very institutions they work with — a win-win for everyone.
As institutions ramp up their buying in 2021 — they bought nearly 16 percent of all homes purchased in the U.S. during the second quarter of 2021 — Inman spoke with Noma about what it’s like to work with institutions right now. Here’s more of the conversation, edited for brevity and clarity.
What are the goals for institutional investors today?
It used to be that the institutions all wanted to be like the Invitations and the Progresses of the world, where they’re fully vertical, they manage their own acquisitions, they have their own in-house construction, in-house maintenance, in-house property management.
Now we’re seeing a new generation of capital coming into the market that is just capital and they want nothing to do with operations, and for them it’s about playing the capital. In Phoenix today, we buy about 400 homes a month, so we’re pretty active.
What was it like transitioning out of the commercial world into institutional investing? Has the market been crazy busy lately?
Honestly, for me, it was an easy fit. I never was a good real estate agent, traditionally, because I couldn’t wrap my mind around the idea that I’d walk into a house and a customer would tell me they didn’t like the kitchen or something.
My mind was always thinking of math and numbers. I was like, “Yeah, but if you just renovate the kitchen it’s going to cost you $10,000 and then the house is going to be worth X. This is a good buy, you should just buy this, this all makes sense.”
So the emotion of traditional retail real estate wasn’t my bread and butter, but the fundamentals of the math and all the things we use in analysis — how we come up with valuations, how we figure out which properties we’re going to buy — that was super interesting to me and has evolved into kind of what we are today.
I also just really enjoy doing new stuff. I’m a serial entrepreneur, so not having a playbook for this excited me. Listening to a curmudgeon broker stand there in a suit and tie and give me a sales presentation — that just wasn’t my thing. I wanted to see something different.
So it was a good fit and I think we’ve learned and failed and we continue to learn and fail. And now we’re starting to see the next evolution of what else is going to be institutionalized. People are talking about short-term rentals being the next place that we’ll start to see institutional capital fly into. We’re seeing evolutions in the space that I didn’t think we’d ever see.
Even now that you’ve built this other arm to your company to bring in off-market properties, is it hard to keep up with institutional investor demand?
Yeah. One thing we’ve had to swallow is when you work for institutions, you fail every day. There is no win. Anytime they set a [quota] for us, they’ll say, “Ok we want to buy 100 homes this month.” It sounds like an easy task, right?
But think about the bandwidth it requires to get 100 assets to the finish line. It’s a lot of moving parts, a lot of moving people. It’s also translating institutional Wall Street lingo to the mom and pop real estate agents that are listing a house. That transition is not easy and getting all that to flow without looking like we’re some big bank is not always as easy as it seems.
But retail business has been great. For us this is our public-facing team. They market to potential homesellers using EasyStreetOffers.com and the message to the homeowner is that we will get you an instant offer on your home for our institutional clients to compare to iBuyers and your go-to market option so you can be an informed seller and make your own decision.
We’ll never find enough doors, if that makes sense. We just won’t — the demand is really, really high and I don’t think we’ll ever see the finish line. As we get closer to the finish line, they just raise more money and raise our [quota].
Not being able to keep up — that’s tough. What sorts of things are institutions looking for in a property that they want to buy, typically?
They typical buyer is single-family detached. The detached piece has to do with the fact that things like HOAs and any kind of attached product tend to diminish our yield. So we don’t typically buy a lot of attached product — we can, but most of the time, the HOA costs are too high.
Most institutions that we see want to buy homes dated from 1960 onward, minimum of a three bedroom, two bathroom, and they have to be FHA-approved. If it’s an FHA-approved product, that helps with their back-end securitization of the funds later on, so that’s something that we always have to keep our eye on.
We don’t buy any kind of unique properties, so nothing that’s like a horse property or big lots or random stuff like that. There are institutions that will buy pools, so pools are OK. We’re always looking for properties that have reasonable parking.
No kind of wild or off-the-wall homemade additions or anything on the property. That’s why Arizona’s always been the hotbed for this is because all of our homes look the same — everything’s brown, they all have tile roofs. So it’s very easy to scale when you’re looking at the same product type, over and over again.
It’s very difficult in a place like Portland, where every home is different. It’s a tough spot for us to buy in because you’re sending inspectors to houses and every house is far different than the one before, so that creates all kinds of complications when we’re scaling.
What are some of the other big markets in which you, or institutional investors, look for properties?
I’m in Phoenix, Las Vegas and Boise, Idaho. Atlanta is probably the second largest market in the United States for single-family for rent to Phoenix. Dallas and San Antonio, Texas, are also great markets. All of Florida as well. North Carolina and South Carolina are getting pretty good influx of traffic from institutional investors and we’re starting to see some of our Midwest states get [similar institutional demand]; Invitation has some product in Chicago.
The Inland Empire region of California has gotten inundated with a lot of it, so there’s a lot of practicers there. The northeastern markets are starting to see some as well because some of the other markets have just been swallowed already.
Invitation, to give you some perspective of scale, might report that they own somewhere around 300,000 homes nationwide. They’re the sleeping giant. So real estate agents in my market will say to us, or I’ll see it on the news, “Everybody’s moving [to Phoenix] from California.” But that’s not really the case.
There are some people moving — more than normal — but what’s really happening is there’s a new demand from a bunch of different institutions that are also buying.
If you look at who’s actually transacting in the market, the biggest numbers are coming from these institutions that are buying 300, 400 homes a month and scaling for rental. We cap out around $500,000 — there’s not much we can purchase over $500,000.
What happens if you don’t meet a quota that is set for you in a month?
Not much — the [quota] goes up for the next month. Most of these companies have a goal.
Can you break down your process when working with institutional investors?
The flow for this is, first we have what we call our underwriting period that takes six months to figure out what we can buy. We “pretend buy” for a little while, saying if we were to bid on that house, we would have won it because we would have had the highest offer.
Then we go through a phase where [the institution] raises money. So they’ll maybe go to Dubai and get like $2 billion from a prince or something. We’ll then take that $2 billion, and leverage it with JP Morgan or Wells Fargo, and now you’ve got a $7 billion fund.
They will go deploy the money, and the acquisition period can take anywhere from 24-36 months; it just depends on how active or how quickly we can scale on the market.
Then we’ll go to stabilization. Basically that means that we have to clear out any bad buys and assets that aren’t performing — maybe it ended up being attached, maybe the pool doesn’t work, there’s a thousand reasons why we’re going to clear out some of the [homes].
Then they’ll roll [those homes] up into a REIT, and they’ll do a one-day sale on Wall Street, and voila, you’ve got your $7 billion.
Most of these funds, they at least double their money almost every time. But most of the stocks you’ll see, they’re trading around $26 per share. It’s kind of a common, very stable stock. It’s all class A stock, AAA rated, so it’s very, very sustainable, common stock that people can buy.
What would you say to agents concerned about institutions taking over the market?
The future mindset behind the institutional or the fund manager behind one of these would tell you that they’re not trying to remove homeownership from people, they want to provide a platform by which people can buy stock and real estate investments.
Maybe that’s how they earn their equity rather than having to worry about owning a home and all the things that come with that. You’re just buying stock instead of owning a piece of real estate yourself.
There’s opportunity for our agents to play here, they just need to learn how to do it.
