US Residential Asset Fund, LLC, implemented a unique strategy by launching as an REO- (real estate-owned) to-Rental fund. Christopher J. Crippen, the Fund’s manager, announced, “We put together a strategy that allows us to capitalize on the tremendous opportunities available in the REO-to-Rental markets and to support the communities we invest in.
US Residential Asset Fund’s investment strategy is focused on acquiring, renovating, leasing, managing, and exiting distressed single-family properties in multiple U.S. metropolitan areas. Tenants have the option to rent the properties with a “contract for deed,” paving the road to homeownership for those who otherwise would be lifelong renters. The tenants work with the Fund’s strategic partner, Sagamore Home Mortgage, to resolve their credit challenges, qualify for a mortgage, and purchase the home they are renting.
Mr. Crippen, an industry expert, explained, “This is really a unique Fund. We can do something good for the communities we invest in, enable our tenants to become homeowners, and provide double-digit returns for our investors. It’s a win-win-win strategy, which is hard to find in this market. I am proud to be a part of it.”
US Residential Asset Fund was founded by Mr. Crippen, Dana Bradley, Al Espinoza, Patrick Cipolla, and Amos Alexander. Focusing on the $3 trillion single-family rental market, the Fund expects to invest more that $20 million over the next two years, beginning with acquiring assets in the Charlotte, Memphis, and Chicago, MSAs. Phase two acquisitions will be in the Atlanta, Indianapolis, Tampa, Orlando, MSAs.
“My partners, Innotion Enterprises, Inc., and Performance Holdings, have been operating in the single-family and REO arenas, and have built a world-class acquisition, renovation, and management platform uniquely designed for these properties,” Mr. Crippen continued. “We work with Sagamore Home Mortgage to work with our tenants to qualify them to purchase our properties.” Christopher J. Crippen formerly headed Prescient Asset Management’s FDIC ORE Disposition.
Mr. Crippen described how the program works, saying, “All of our properties are offered as ‘rent to own’ (RTO) to our tenants. This encourages homeownership in the markets we are investing in. Studies show that RTO tenants take better care of their properties than strictly rental tenants. The benefits are a more secure investment and the ability to give back to the communities in which we invest. It’s a win-win-win situation.”
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• Investors Are Looking to Buy Homes by the Thousands (Click here for more info)
• Fannie to sell 2,500 foreclosed properties (Click here for more info)
• Bank of America Tries Foreclosure to Rental Approach (Click here for more info)
The investment strategy for the US Residential Asset Fund will be focused on acquiring, renovating, leasing, managing and ultimately exiting one, two, and three family foreclosed or distressed homes in multiple US Metropolitan areas. Initially, Charlotte, Memphis, & Chicago will be the launch markets. It is anticipated that phase two acquisitions will be in Atlanta, Indianapolis, Tampa and Orlando. Current economic indicators determined the selection of these target markets.
The Fund Management team, consisting of Al Espinoza, Dana Bradley, Christopher J Crippen, Patrick Cipolla and Amos Alexander, has a strategic relationship with national field service asset manager Innotion Enterprises, Inc. (IEI) to create the US Residential Asset Fund. Innotion will be represented by founder Al Espinoza and Amos Alexander who will also serve as a Fund Managers.
- Since early 2009, Dana Bradley has successfully participated in acquiring, renovating, leasing and selling or managing over 250 Charlotte, NC residential distressed assets ($10+ million in transactions). Dana and his team bring the unique experience of identifying, acquiring, renovating, leasing and managing these assets to “profitability”.
- With over 3 decades of Real Estate Acquisition, Development, Management and Disposition, Patrick Cipolla brings not only “real world” experience but strategic relationships that have been built through the years based on successful ventures.
- Innotion Enterprises, Inc. was founded in 1997 by Al Espinoza and is a Maryland based minority-owned business managed by military veterans. Amos Alexander and Chris Crippen serve on Innotion’s management team. In 2004 IEI expanded into REO Property management leading to extensive corporate and personnel experience providing complete property management and maintenance services for large and complex single family property portfolios. IEI has delivered property management services for approximately $1billion in distressed assets.
With well over 75 years of combined real estate experience this team will utilize their unique skill sets to capitalize on the current deeply discounted available assets in the United States. The Fund will only purchase distressed and under valued residential assets.
The US Residential Asset Fund will seek to acquire assets, which over a targeted 5-7 year hold period; will offer investors an estimated 12% annual internal rate of return (“IRR”). This IRR will be realized two ways. First, through operating capital from the properties net rent revenue. Second, through appreciation on the properties. The Fund plans to provide investors a preferred 8% distribution of operating cash flow to be paid quarterly.
Unless reinvested, capital proceeds will be distributed upon the sale of each individual property at which time investors shall receive the preferred return. Finally, all residual operating and capital proceeds will be split 50% to the investor and 50% to the Manager which may increase returns substantially to all stakeholders.
All properties will be professionally managed to profitability by a professional property management company. It is anticipated that these residential assets will be desirable by investors or owner occupants at some subsequent point. This asset class is fairly liquid and provides stable cash flows with minimal management fees and no debt financing initially. Debt may be used at the discretion of Management to acquire more foreclosed residential assets and further improve IRR/ROI. Prices for single family foreclosed assets are at cyclical low levels and rental demand continues to be high. The following factors support strategic investment in residential assets in the United States.
- According to RealtyTrac there are currently over 1.4 Million foreclosed residential assets in the United States with another 6 Million residential properties in some stage of default potentially ready to foreclose over the next 24 months.
- Rental demand is growing as a result of a population explosion fueled by “echo boomers” entering the workforce, increased immigration and the continued migration of renters unable to qualify for a mortgage.
- The potential for significant inflation exists in the U.S. Investment in single/multi-family real estate, with its shorter term leases and ability to raise rents quickly, has historically provided an attractive hedge against risk.
- A recent employment recovery in the US is expected to further drive housing demand. A lack of available construction financing has caused recent construction starts for all rental properties to be at an all-time low.
- Industry experts predict less than 100,000 rental units to be delivered nationally through 2014, yielding a potential shortage of rental units.
The properties purchased through the Fund at this cyclical low, will benefit largely from the improvement in the overall economy, as well as the recovery of rents and increased occupancy. Increased property value will be created with strategic capital improvements and property management, aided by construction and rental operations experts. We are highly focused and are targeting a specific niche opportunity that exists in the single family residential real estate market. Our management team is experienced and has a successful track record of participating in residential investments or managing REO properties nationally. Based on these factors, we believe The Fund’s Strategy is achievable.
Al Expinoza, Fund Manager – Al has been actively involved in residential and commercial real estate investment for over 25 years. He is currently the Chief Executive Officer (CEO) for Innotion Enterprises Inc. (IEI). Al founded Innotion Enterprises, Inc., a federal real estate management company, growing it from a start-up operation to over 40 million in annual sales. Innotion Enterprises, Inc. was recently ranked the #2 fastest growing real estate companies in America by Inc. Magazine. Innotion has also been one of the Washington areas fastest growing companies for 2011 and 2012. In 2012 Mr. Espinoza also received the SmartCEO technology innovator award for Innotion’s innovations in the REO management field.
Al is also highly experienced in real estate investment and rehabilitation developing an extensive real estate rental investment portfolio over the past 20 years. He has also participated in several public development projects including a revitalization of blighted areas in downtown Baltimore, MD. Presently, Mr. Espinoza and his team of real estate management professionals have managed over 20,000 REOs for federal agencies including the Department of Housing and Urban Development(HUD) and the Federal Depositors Insurance Corporation(FDIC).
Mr. Espinoza holds a Bachelors of Science in Computer Science from the University of Maryland and an MBA from Loyola University in Finance and Investments, as well as being a Juris Doctor candidate. Al also has been an active member and moderator for the Entrepreneurs Organization as well as the Young Presidents Organization.
Dana J. Bradley, Fund Manager Dana Bradley is currently a Principal at Performance Holdings, since 1993 Dana has been personally investing in commercial real estate projects. He has specialized in the acquisition of shopping centers and other income producing real estate assets, second home lot development, mezzanine or debt financing and asset based lending. Since early 2009 Dana has been the fund manager of several funds that have focused on the foreclosed residential marketplace. He has been instrumental in the acquisition, renovation, leasing, management, and sale of over 250 properties totaling over $10,000,000 in transactions.
A proud graduate of Bryant University in Smithfield, RI, with a BS in Marketing Dana was awarded the prestigious “Young Alumni Leadership Award” in 1999. While in college he founded a variety of successful entrepreneurial ventures that assisted with his education expenses. Following graduation, he was employed as a sales and marketing representative for a major consumer products manufacturer, and successfully recruited and managed a sales organization of more than 500 representatives.
Dana later joined The Loflin Group – a boutique staffing and placement firm – specializing in (then) Big Five accounting and finance professionals. Dana quickly grew to become the top producer in the firm and was promoted to Vice President in 1995 and Sr. Vice President in 1996. In addition to his other accomplishments at The Loflin Group, Dana successfully established and managed relationships with many new clients, including Gillette, Walt Disney, and Fidelity Investments. Among his most significant achievements was billing over $1 million in fees and placing 200+ excellent candidates, both of which earned him the honor of nomination in the Top 2% of recruitment professionals nationwide. Dana ultimately left the retained search business to pursue Performance Holdings on a full time basis in 1998.
Born in New England, Dana currently lives on beautiful Lake Norman in NC with his wife and 2 young kids. Dana is an Eagle Scout and he serves on the boards of The Entrepreneurs’ Organization and the Patriot Charities, which raises funds for wounded warriors returning from Iraq and Afghanistan.
Christopher J. Crippen – Fund Manager, Christopher Crippen has over 15 years of executive-level experience in managing and investing in real estate. The rare combination of his passion for education and entrepreneurial attitude have given him a unique opportunity to successfully develop and implement innovative business ventures. He has enjoyed a direct involvement in the creation of the REO asset disposition policies and procedures currently in use by the FIDC.
Christopher set foot on the long road to education and success at the age of 17 when we joined the U.S. Army. He served two tours on the Demilitarized Zone between North and South Korea (DMZ). While in the Army, Christopher was a member of the Army Tae Kwon Do team and won of the bronze medal in sparring at the ATA world championship in 1993. The time he spent in the U.S. Army, earned him the GiBill which he used to pay for his education. Christopher was accepted to the University of South Florida, where he earned his Bachelors Degree in Biochemistry.
After graduation, Christopher began work at a mortgage lender, where he ultimately began his long love affair with real estate and finance. He soon rose to the top of the company and was managing over 540 brokers. To embrace his passion for development and entrepreneurism he opened First Republic Residential Investments, a Correspondent Mortgage Lender, which had over 40 brokers that were originating over $50mm in residential and Commerical mortgages annually.
Christopher saw the signs of the pending crisis and closed his lender then went to work for Fannie Mae as an REO Asset Manager overseeing a portfolio of over 350 REO Assets. Christopher left Fannie Mae to lead the FDIC Division at Prescient Asset Management. While at Prescient, Christopher led a team of 35 Asset managers and 120 bank closing personnel. During his tenure Christopher and his team closed 153 Banks and managed the disposition of over 23,000 REO assets with a combined value of over $2 billion.
In 2010, Christopher decided to fulfill a life long ambition to study abroad and moved to France, where he studied fine art photography. While in Paris, Christopher could not help but notice the U.S. housing crisis unraveling and unveiling the immense opportunity within it. He returned to the U.S. and partnered with Innotion Enterprises, Inc. to capitalize on the current market opportunities. Christopher has authored and co-authored several books on opportunities in the distressed property market and speaks at some of the biggest events in the REO industry.
Amos Alexander, Fund Manager – Mr. Alexander has been actively involved in single family real estate investment for over 20 years. Amos’s unique combination of construction knowledge and project management places him in a unique position to provide operational leadership to real estate investment funds. Amos has successfully completed over 100 residential and commercial projects that have returned on average 20% IRR. Amos holds BS degree in Environmental Science and a MBA degree from Indiana University specializing in financial analysis, supply chain/Operations management as well as holding the highest level certification in Lean Six Sigma quality improvement practices. Mr. Alexander is currently the Chief Operating Officer (COO) for Innotion Enterprises Inc. (IEI) in charge of running REO management operations for over 10,000 properties nationwide utilizing a team of over 550 field contractors and an in-house staff.
Patrick A. Cipolla, Fund Manager Patrick is currently the founder of Innovative Real Estate Development Consultants, LLC based in Miami, FL and a Licensed Real Estate Broker active in five states: CT, FL, MA, NY and RI. He began his career in real estate over 30 years ago and has extensive executive experience in the acquisition, development, leasing, financing and management of commercial and residential assets including, but not limited to shopping centers, multi-family and restaurants.
In the late 80’s and early 90’s Patrick was a Principal and the Executive Vice President of Development and Finance of Bella Vista Group, Inc. Bella Vista Group based in Buffalo, NY developed community shopping centers throughout the United States and their client list included Walmart; Home Depot; Tops Supermarkets (Ahold); BJ’s Wholesale Clubs and Wegmans Food Markets.
In the mid 90’s Patrick became a licensed mortgage broker in New York State and founded Bella Vista Mortgage Corp. Bella Vista Mortgage was a residential mortgage brokerage firm that included eighteen associates that specialized in arranging non-conforming loans in Upstate New York. In 1995 Patrick became a Principal and the President of Entertainment Systems Holding Corp. The ESHC team was a major catalyst in the renaissance and development of the Chippewa Entertainment District and Theatre District of Downtown Buffalo. They owned and operated three bars; one restaurant; one nightclub and a live music venue. Around the same time Patrick became a Principal and the President of Eden Entertainment Group, Inc. Eden promoted over one hundred concerts and events in New York, North Carolina and Canada with a headlining list that included B.B. King; Johnny Cash; Anita Baker; the Cure; Santana; the Tragically Hip; the Goo Goo Dolls… The company produced Eden Music-Fest, Canada’s largest outdoor musical event in 1996. Sixty national (America) recording artists performed over three days.
From 1999 to present Patrick has worked closely with Samuels & Associates Development Company, LLC based out of Boston, MA which is regional leader in shopping center and mixed-use apartment and condominium development and management in New England. Patrick has performed various roles including the sourcing of development opportunities; assisting in the acquisition and redevelopment of over thirty shopping centers and coordinating development programs for two major supermarket chains.
• April 11, 2012 • 1:09pm
The rental market for real estate owned properties could reach $100 billion in 2012 with single-family REO investors in Florida and the Midwest reaping the most profit.
According to new data from CoreLogic the single-family rental market is “strong and vibrant with stable rents, low months’ supply and a healthy pace of closings.” The sector boasts potential returns for investors that are far and above many asset classes in the real estate market, helped by the government’s new REO-to-rental program.
To measure single-family rental returns across the nation, CoreLogic examined capitalization rates among 26 markets. The best opportunities for single-family REO-to-rental investors, the company discovered, are in Florida and the Midwest, which boast high cap rates and a large stock of potential REO properties.
Capitalization rates are the most common metric for determining the profitability of an investment property and have been stable since late 2010, providing much higher returns than most investments. The rate measures the annual cash flows from renting a property relative to the acquisition price.
According to CoreLogic, West Palm Beach, Fla. (12.4%) offers the most attractive cap rate, followed by Cleveland (12.3%), Fort Lauderdale, Fla. (12%), Chicago (11.6%) and Las Vegas (11.4%).
The markets with the lowest cap rates include Honolulu (5.4%), Raleigh, N.C., (7.3%) and Austin, Texas (7.7%).
The common denominator for low cap rate markets is below-average prices relative to the other higher-yielding markets or markets where prices recently improved.
After making certain adjustments such as the normal REO 30% distressed-price discount, the cap rate for the nation’s overall single-family rental market in January was 8.6%, down slightly from 8.8% a year earlier, but up about 3% from 2006 during the heath of the housing boom.
“If bulk sales do come to market, investors are likely to gain some concessions that are deeper than 30%,” CoreLogic said. “If the price discount rises to 40% to 50%, cap rates would increase to between 10% and 12%.”
And foreclosures are creating new single-family rental opportunities.
The majority of recently foreclosed borrowers move into single-family rentals, according to the Federal Reserve. During the last five years, completed foreclosures transformed more than 3 million homeowners into potential renters — more than the net increase in the number of the renters during the 1990s and the early part of the 2000s prior to the housing bust.
Census data show an increase in the share of the single-family housing stock that is rented in the hardest hit parts of the sand states of Arizona, California, Florida and Nevada.
In February, the Federal Housing Finance Agency announced the first REO-to-rental pilot of nearly 2,500 Fannie Mae properties.
“Given the government’s emphasis is shifting to the viability of converting REO housing stock into rental properties, there will be plenty of opportunities for large investors to participate and scale in a manner that previously was difficult,” CoreLogic said.
Any long-term REO-to-rental strategy will need to adopt extensive refurbishment plans as much of the foreclosed property that financial institutions would like to bulk-sell is in bad shape.
Morgan Stanley analysts say that nearly 95% of distressed homes are in no shape to rent out, in some key markets. Only a tiny fraction of these properties are less than a decade old, they add.
“The importance of getting construction — or specifically, re-construction or rehabilitation — right cannot be overstated,” according to a report from lead author Oliver Chang, sent to Morgan Stanley clients. “The quality and cost of rehabilitation can continue to benefit or haunt the asset far past the initial completion of work. For example, shoddy plumbing or other infrastructure work can result in significantly higher maintenance costs over time, and can also affect eventual exit pricing.”
Chang and his team point out that these complexities predicate that REO-to-rental investors should not look for a quick buck and place bets that housing prices will recover so that the property can be sold for a much higher price.
“Therefore, we believe it is critical that the rehabilitation work be done such that the workers are incentivized to minimize long-term costs, not just short-term expenses,” the report states.
Chris Clothier, a partner in Memphis Invest, said his turn-key real estate investment firm follows a renovate strategy.
The firm acquires, renovates, sells and manages REO rental properties for private investors in the Memphis and Dallas markets. It spends an average of $78,000 to acquire each REO and puts an average of $16,300 into renovations.
The company works with about 400 investors, generally smaller investors with portfolios of several homes, not hundreds.
Clothier declined to seek bid approval on the Federal Housing Finance Agency‘s upcoming pilot bulk REO-to-rental program because he prefers to keep a tight control on the location and condition of the REOs he buys, investing only in well-known established neighborhoods. Buying properties one-off allows that control, he said, whereas the FHFA pilot likely will require bulk investors to accept some undesirable properties.
Morgan Stanley estimates that renovations will cost about 25% of the purchase price and provide an internal rate of return of about 8.2%. See cashflow model assumption below.
Chang and his team sent the report just as sources said the FHFA pushed the vetting process back to May for prospective bidders on Fannie Mae REO. For Morgan Stanley, bidders will not be qualified unless they can prove scalability of their operations.
“Our premise is simple: if an operator can handle the acquisition of 20 homes per week (about 1,000 per year) right now, what would happen if they were delivered 400 empty, distressed homes in one week?” they ask.
Moody’s Investors Service believes rental markets are generally balanced. Further, market fundamental may tend toward working out on their own.
“It is unclear how many additional purchases the federal program can generate,” said Celia Chen, a senior director at Moody’s Analytics. “On their own, investors are already purchasing foreclosed and distressed properties in large and growing numbers. Tax incentives may be a more effective way of driving additional investor purchases.”
Kerry Curry contributed to this report.