Syndicators, schemes and scams: the business of REO rentals

This article evaluates recent efforts by syndicators to acquire and rent real estate owned properties (REOs) and points out the risks posed by such ventures. For more guidance on REO rentals and syndication, see the companion first tuesday March 2012 article, REO rentals: a syndicator’s guide.

The REO rental reality

Less than a year ago, the idea of renting real estate owned properties (REOs) in bulk was an afterthought in the discussion about distressed properties. Today, it’s a reality. In fact, REO rental schemes – the business of buying, rehabilitating, and renting REOs – in California’s hard hit and foreclosure-plagued communities is getting quite the accolade these days.

Take this story for example: a real estate developer buys single family residences (SFRs) in distressed California communities for discount prices at foreclosure auctions or in shortsales, renovates the properties and then rents them out for considerably less than the distressed owner’s original monthly mortgage payment.

In some cases, the developer even enters into a rent-to-own agreement with former owners or tenants. Much impressed by the perceived success of the REO rental schemes, investors channel funds into the developer’s operation to enable it to expand locally and nationally. [For more information about recent REO rental ventures in California, see the February 2012 San Francisco Chronicle article, Oakland’s Waypoint cashes in on empty homes.]