September 1, 2014
Drowning in Profits
Posted on Jun 23, 2014
By Laura Gottesdiener, TomDispatch
This piece first appeared at TomDispatch. Read Andy Kroll’s introduction here.
Security is a slippery idea these days—especially when it comes to homes and neighborhoods.
Perhaps the most controversial development in America’s housing “recovery” is the role played by large private equity firms. In recent years, they have bought up more than 200,000 mostly foreclosed houses nationwide and turned them into rental empires. In the finance and real estate worlds, this development has won praise for helping to raise home values and creating a new financial product known as a “rental-backed security.” Many economists and housing advocates, however, have blasted this new model as a way for Wall Street to capitalize on an economic crisis by essentially pushing families out of their homes, then turning around and renting those houses back to them.
Caught in the crosshairs are tens of thousands of families now living in these private equity-owned homes. For them, it’s not a question of economic debate, but of daily safety and stability. Among them are the Cedillos of Chandler, Arizona, a tight-knit family in which the men work in construction and the oil fields, while the strong-willed women balance their studies with work and children, and toddlers learn to dance as early as they learn to walk. Their story of a private equity firm, a missing pool fence, and the death of a two-year-old child raises troubling questions about how, as a nation, we define security in housing and why, in the midst of what’s regularly termed a “recovery,” many neighborhoods may actually be growing increasingly vulnerable.
A Buying Frenzy
Square, Site wide
“We’ve always lived in apartments, apartments, apartments,” said Christine.
The three of them were excited to find a place they could afford that was big enough for their children, Christine’s partner Javier, and their parents Olga and Jesus. Christine’s oldest daughter, two-year-old Zahara, was so close to Brenda’s son that the two called each other brother and sister.
The only worry during the party was the pool, carefully monitored by the adults. Being unfenced, it had been a source of stress since they moved in. Repeated requests to the management company overseeing the property that one be installed had resulted in nothing. The Cedillos had no idea that the house’s real owner was a private equity firm called Progress Residential LP. It had been founded in 2012 by Donald Mullen, a former Goldman Sachs partner, and Curt Schade, a former managing director at Bear Stearns, an investment bank that collapsed in 2008. Progress was financed by a $400 million credit line from Deutsche Bank.
The same month that the family rented the house at 1471 West Camino Court, Progress Residential purchased more homes in Maricopa Country than any other institutional buyer. Nationally, Blackstone, a private equity giant, has been the leading purchaser of single-family homes, spending upwards of $8 billion between 2012 and 2014 to purchase 43,000 homes in about a dozen cities. However, in May 2013, according to Michael Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business at Arizona State University, Progress Residential bought nearly 200 houses, surpassing Blackstone’s buying rate that month in the Phoenix area.
The condition and code compliance of these houses varies and is rarely known at the time of the purchase. Mike Anderson, who works for a bidding service contracted by Progress Residential and other private equity giants to buy houses at auctions, was sometimes asked to go out and look at the homes. But with the staggering buying rate—up to 15 houses a day at the peak—he couldn’t keep up. “There’d be too many, you couldn’t go out and look at them,” he said. “It’s just a gamble. You never know what you’ve got into.”
The House on West Camino Court
The two-story house that would soon become the Cedillo family’s home was in fine structural condition when the family signed the lease. It hadn’t sat vacant for long. Earlier that year, the former owner, Lloyd Carter, sold the house to avoid foreclosure after realizing that he owed $100,000 more on his mortgage than the house was worth. (“I didn’t even know who they sold it to,” Carter told me. “The title agency just sent the documents with the courier and met me at a Starbucks.”)
There were a number of small rehab issues: a cockroach infestation, oil that had spilled in the driveway, and a sloppy paint job. Christine recorded some of these problems and others on a walk-through inspection, but she wasn’t overly troubled. “All I was looking for was a place big enough for us to be together,” she said. Until then, she had been living in her parents’ apartment in Tempe with Zahara and her younger daughter Elysiah.
The one serious problem was the lack of that pool fence. Before the family moved in, Christine asked the Golba Group, the property management company hired by Progress to lease and maintain many of its houses, to install one. As she recalls, Lacey, the property agent, left for a moment and when she returned “said they weren’t going to put it up.” Christine offered to cover the cost and was informed that the family could install their own barrier, but only if it didn’t affect any of the landscaping and wasn’t fixed to any permanent structures, which to Christine sounded impossible.
The next week, the family moved in, increasingly nervous about the fenceless backyard, especially since they were unsure what steps they could legally take as renters. Christine’s father began collecting wood to build a barrier on the patio and the family agreed on a safety plan: both front and back doors were to remain locked at all times, and multiple adults had to supervise the children if they were outside. Christine says she called the company another time to ask for a fence, again offering to cover the cost.
Golba claims it has no record of these requests. Lacey (who declined to share her last name) said she doesn’t remember the Cedillos, no less whether they requested a fence. “If you knew the amount of properties we had,” she told me by phone. “It was over a year ago.”
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