Corporate Buyers Underpay for SFRs Compared to Individuals

A new study of corporate ownership of single-family homes in Atlanta – one of the epicenters of the practice in the nation – finds that it resulted in the loss of $1.25 billion in equity from affected neighborhoods between 2010-2022. And $681 million of that loss fell on the city’s majority-Black neighborhoods, where corporations are involved in 70% of single family transactions, compared to 30-40% for other neighborhoods.

By comparison, the total institutional ownership share nationwide is 3.8 percent, according to a 2023 study by the Urban Institute.

The Atlanta study was conducted by researchers Nicholas Polimeni and Brian Y. An of Georgia Tech’s School of Public Policy. It noted that homes in the Sunbelt are especially targeted because many Southern states have weak tenant protections, rising home values and economic growth, with weaker access to mortgage markets for nonwhites.

To analyze the issues, the researchers had to develop a methodology of their own because of challenges that make it difficult to identify parcel ownership. These include a lack of a standardized methodology to identify corporate SFR investors and landlords, their use of different business names or multiple mailing addresses for properties they acquire and operate, different business structures including shell companies, and the lack of rental registries in many states, including Georgia.

In addition, publicly traded REITs are required to report their business activities and list of subsidiaries to the SEC. However, private equity firms and privately-traded REITs are not, and they tend to focus their SFR holdings in lower-income neighborhoods with larger percentages of Black residents nationwide, the report noted.

Regardless of race, “corporations, especially institutional investors, have an asymmetric advantage in information about the real estate market trends, and they are equipped with financial liquidity via securitization. Such resources allow them to purchase a bulk of properties at once, cut down prices during transactions with home sellers, and outbid individual buyers who typically have mortgage constraints,” the report stated. “Moreover, when a significant portion of properties are owned by the same corporate landlords, they may exert market power in rental price determination.”

Institutional ownership can be particularly harmful to renters if the owner’s portfolio is too large to manage, or if its purpose is to charge rent rather than provide a service.

The researchers found that corporate buyers in Atlanta bought SF properties for 37.6% less than individuals were able to, while selling them for 7.4% more. Corporations also buy most of their holdings through atypical sales like foreclosure and multi-parcel deals, helping them to buy at less than fair market value, then sell them through “typical sales.”

“On average, corporate buyers paid about $22,000 to $23,000 less than an single family property’s fair market value when compared with what individual buyers paid for what properties were worth. When corporate investors sold those properties back to individual buyers, they charged about $7,000 to $8,000 more than the properties’ fair market value,” the report noted.

The effect is to exclude some individuals from home ownership and the ability to build assets through appreciation or equity.

Interestingly, the analysis found that the SF market is still dominated by smaller-scale corporate investors who own one to 10 properties. Such deals have increased, but so have deals involving medium-sized corporations with transactions involving 10-49 properties and large corporations with 50 or more in a sale year. In 2018, nearly 60% of total sales in Atlanta involved a company, and it was the peak year for institutional investment.

“Neighborhoods with the highest equity loss have experienced a financial extraction equivalent to 5% of their income annually between 2011 and 2021 by corporate investors,” the report found. It defines equity loss as “the net profits accumulated by corporate investors through the acquisition of single family properties by paying under fair market value, gaining the income from rental business, and the selling of such properties at higher prices over fair market value.”