Och-Ziff Calls Top Of "REO-To-Rental", And Distressed Housing Demand, With Exit Of Landlord Business

Tyler Durden's picture

The primary, if not only, reason there has been a brief spike in subsidized demand for housing in recent months, has been the GSE/FHFA endorsed REO-To-Rental plan, and associated securitization conduits, in which large asset managers have been encouraged to take advantage of government funded, risk-free financing (and entirely bypassing banks who have given up on loan origination due to legacy liability issues which have every bank tied up in litigation from now until Feddom come - just see today's Bank of America results) and purchase foreclosed properties in bulk, with the intention of converting them into rental properties. Needless to say, the subsidization of this wholesale purchasing of foreclosures, coupled with the ongoing "foreclosure stuffing" pursued by the big banks (as a reminder days to foreclose in New York just hit a record 1,072 per RealtyTrac as banks simply refuse to clear housing inventory faster knowing full well withheld inventory is an additional clearing price subsidy) is the main reason why the punditry has been confused into believing there is a housing rebound. That this "rebound" is merely a subsidized demand pull phenomenon a la the "cash for clunkers" auto sales program is patently clear to most. Nonetheless what little confusion is left, is finally coming to an end, thanks to none other than one of the first entrants in the REO-To-Rental space, $31 billion hedge fund Och Ziff, which a year after entering the program with hopes of quick riches, is now looking to cash out.

As Reuters reports, "Och-Ziff Capital Management Group LLC, the $31 billion hedge fund led by Daniel Och, recently told its investment partner, 643 Capital Management, that it wants to exit from the foreclosed homes business, said several people familiar with the matter." Why is Daniel Och calling it a day: "the New York-based hedge fund is looking to sell now because the returns it is generating from rental income are less than expected and it is looking to take advantage of a recent rebound in home prices in northern California." And so yet another myth unravels. Look for all the other piggybackers and late entrants to follow promptly in Och-Ziff's steps as the primary driver of distressed housing demand goes as easily as it came.

Reuters explains how REO-to-Rental is coming to an end:

The hedge fund is looking to make a profit on a portfolio of about 300 foreclosed homes in northern California that were acquired at distressed prices, said the sources, who did not want to be identified because they were not authorized to discuss the matter.


Though the total value of the portfolio is not known, its business model involved buying homes at an average price of about $100,000 apiece. In addition, Och-Ziff and its partner needed to spend tens of thousands of dollars on each home for potential renovations before renting them out.


The decision by Och-Ziff to exit the market after just a year is notable since the hedge fund was one of the first institutional investors to see the large supply of foreclosed homes in the United States as a new asset class that could generate consistent income if operated as rental properties.

What is effectively happening is that once again the large institutions, in this case those who are unburdened by legacy liabilities, i.e., hedge funds (it should be rather distressing that instead of banks serving the roles of landlords, this time around it is it is big hedge funds who are offering homes for rent) who have access to ZIRP are attempting to arb out the retail borrowing spread. The problem however is that while those who have access to Fed funding are expecting large, consistent ROEs, the other side of the equation is missing, and as rental prices increase fewer and fewer Americans can take advantage of the hedge funds' "generosity." This is what happens as the middle class collapse continues and as America's society sees its nominal (not to mention real) income continue to decline as hourly earnings collapse (as we pointed out last week).

And since the Fed has both broken and massively distorted the business cycle (recall: JP Morgan Finds Obama, And US Central Planning, Has Broken The Economic "Virtuous Cycle"), an investor can make an asset allocation decision in a far shorter length of time. In this case it took Och Ziff just one year to go from start to finish, and now to cash out as it sells to other, less sophisticated investors who have yet to discover the lack of IRR associated with the REO-to-Rental program.

Och-Ziff's move could indicate that institutional investors may have to dial back their expectations, especially with regards to rental income.


"It's not surprising that some investors may have overestimated rental returns," said Rick Sharga, executive vice president with Carrington Mortgage Holdings, a division of Carrington Capital, which has been buying and renting foreclosed homes since 2007. "If you are an investor getting into this cold you were probably making assumptions based on models rather than experience."


Gregor Watson, founder of 643 Capital Management, which is Och-Ziff's partner, said he is not marketing the portfolio of homes but declined to comment further. An Och-Ziff representative declined to comment.

Och Ziff is the first to wave goodbye...

Over the past year, other high-profile Wall Street names, such as Blackstone Group, Oaktree Capital Management, Colony Capital and TCW, have all committed money to investing in foreclosed homes. Oaktree has invested in a fund managed by Carrington.


Wall Street analysts estimate that this year alone, private equity firms, hedge funds and other investment firms have raised between $6 billion and $8 billion to acquire single-family homes at either foreclosure auctions or from banks. So far, private equity giant Blackstone has emerged as one of the biggest buyers, spending more than $1 billion to gobble up foreclosed homes.


Sharga said it was not surprising that an early market entrant like Och-Ziff would look to get out and take advantage of the recent appreciation in home values. He said other early financial investors also may change direction and decide to cash in sooner rather than later.


"This is a normal winnowing-out process," Sharga said. "We will see other early entrants depart."

... but it won't be the last. Expect all other subsidized "buyers" in the space to proceed to dump their properties en masse shortly. The problem is that once the greater fool is no longer clearly defined at the poker table, and the get rich quick scam has been exposed, the offerless market quickly goes back to being bidless. Which is precisely what will be the catalyst for the 4th leg down of the dead cat bouncing housing market, and the end of the illusion that this time it's different and Bernanke has actually done something right.

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SubjectivObject's picture

Trashed Howzes Bischez

Dalago's picture

Exactly.  So whos going to buy if the bigs are selling?

kaiserhoff's picture

Ain't no big surprise.  Renting is dirty work, and dependent on local knowledge and tight control.

Even with ZIRP, you can still lose money.  I guess Ben needs to push the 10 year to -3%.

That's a joke, Ben, a joke.  Quit foaming at the the mouth...

Larry Dallas's picture

This is what happens when you have too much captial under management and not enough investing ideas.

The landlord business is shitty. It. Just. Is.

Foreclosing in CA requires an act of congress too.

Should have went to Texas.

disabledvet's picture

great comment and one of the perennial weaknesses of the Tylers Durden: there is an ALTERNATIVE of "cash for real estate clunkers" namely equities...and unlike all that overhead, legacy costs, legal b.s. and simply put zero return...if equities keep powering ahead it's time to exit. Big story...well presented here, big deal. the fact is the "big banks" are no more...and thus are TOTALLY focused in the capital markets and raising money for big business. now and going forward...probably for decades actually. securitization is dead. Facebook has killed the IPO market for Social Media. the global collapse started with real estate and along those lines it proceeds apace...thus drying up what little is left of investor appetite in the space. the same cannot be said for the technology space...solar, nat gas, cloud computing all continue to reap massive billions for their early investors and corporate chieftans. there is no recovery in wages...hence, no recovery in housing. plain old arable land has been a better investment going on 10 years now...and that's the purview of railroad stocks which have been rock stars going on 30 years now. at some point the rest of the transportation sector will participate...but not until the Federal Government truly acts upon a rational energy policy involved in driving down the cost of energy to where it should be...namely "in or around zero." clearly consumption of electricity has collapsed. how cheap can that the juice be produced then? i say VERY cheap. throw in a two front war and i see industrial production continuing to power forward...driving certain wages and benefits noticeably higher. we shall see but while i'm still down on the recovery of ME...i'm still not down on the continued recovery of the economy. obviously this Fed will do nothing to stop the dollar from continuing to implode...

Heyoka Bianco's picture

Che cazzo stai dicendo? Billions in cloud computing? In fucking massively-oversupplied-with-cheap-Chinese-crap and failing-even-with-massive-subsidies solar? And another spewing the moronic Keynesian 'war is good for economies'? Who's going to pay for all that production? It's not exports, it's just more debt. Please to be explaining why the Iraq and Afghanistan clusterfucks didn't rescue our economy.
You are completely clueless, and your writing (excuse me, typing) would embarrass a 4th grader.

ClassicalLib17's picture

In my town if you are a non-owner occupied rental property of 2 units and above you must get a city rental license.  Now before you trash this law,  consider the fact that most absentee landlords are shitheads who rent to the first sec.8 voucher that comes along.  It is also very useful for when there is a driveby shooting and I need to contact the landlord to inform him what just happened and tell him that he needs to request that the tenant move out voluntarily or begin eviction proceedings so he doesn't have to justify his license before the city administrative court.  I pay close attention to what goes on in my ward. 

Waterfallsparkles's picture

In Maryland you need a Rental License for any Property you rent.  Unless of course you are a large Landlord with 100 units.

Every 3 years you have to have the Apartment Inspected by a Home Inspector.  A minimum of $125. per unit.  Lead Tested between each Tenant.  A minimum of $175. per unit.  A licensing fee of $50. per unit.

We also have Code Enforcement Officers that will fine you $200. a day or more for your Tenant not putting the lid on your Trash can.   Plus, any trash or debris in your yard or on your property.  Or and other assorted building violations.  Such a pealing paint, missing drain spouts, etc.  The Law subjects you to a fine and potential Jail fine.

Not getting a Rental License is a $1,000. a day fine.

azzhatter's picture

the white shoe hedgies will never survive this dirty biz

fonzannoon's picture

But Buffet said buying a single damily home today......ah shit.....

dick cheneys ghost's picture

Tyler, thanks for 'keeping it real''..........

AldoHux_IV's picture

Maybe the next trick up their sleeve will be feudalism-- old play book but an effective one since the slaves are too obese and too obsessed about the next Bieber/OneDirection/PSY strokefest to do anything about it.


rsnoble's picture

I hope all the people that bought up all this shit thinking they're gona get rich charging $1000k month rents to fucking min wage workers lose their collective asses.

Of course the ones that hold the longest may do ok when the cities finally won't care or can't enforce 20 families living in one residence.

bigrooster's picture

No chance ahole noble.  I am making big bucks on my "local" rentals because I bought low and can manage/fix everything myself.  As far as Wall Street is concerned...yes they have no clue what it takes to manage a single rental property.

Downtoolong's picture

a year after entering the program with hopes of quick riches, is now looking to cash out.

Here's my problem with that. I can't figure out how to front run them by shorting the market. 

The Master's picture

Short the publicly traded stragglers like Blackstone if they are not exiting en masse like Och-Ziff

Bunga Bunga's picture

They not gonna hold on those houses? Do they fear the Japanese housing "recovery"?

Cabreado's picture

The hubris of the managers of false money with nowhere to go starts to look rather embarrassing...

Och Ziff, which coincidentally is Yiddish for "Oh Shit," might better have left such an endeavor to the more experienced in such matters (Waste Management, for example).

But hubris reigns... 'til it don't.

GittyUP's picture

The article is so off base.

My qualification: I buy between 300-400 houses a year in south Florida. Have been since 2008.

The returns are excellent on single family and small multi family. And I'm talking absolute returns on unlevered money. I could only wish to have cheap money to lever up and increase my cash on cash to 25%+.

It's a dirty business that requires local knowledge.

His fund he is closing probably had expected returns in excess of 15% based on a model. When it turned out to be only 11% net they prob gave up considering how much man power it takes to manage 1000 single family homes. It's quite the operation... Trust me.

I am competing for ReO, short sales, notes etc and I can tell you the demand has never been higher. Demand in increasing exponentially by the quarter.

Just because one hedge fund is closing shop it does not indicate a trend.

CoolBeans's picture

Rentals or resales?  If the former, you must have quite a management firm.

disabledvet's picture

eh, it's just Och-Ziff...i agree. "bunch of nobodies."

oldschool's picture

Thanks for the counterpoint.   But it seems to me this is an empirical (not just anecdotal and local) question that neither you nor the article have answered.  What portion of the market is comprised of guys like you, who are creating demand, versus guys like Och, who may be increasing supply?  How do they play off each other, and how will that interaction, along with others, affect the national market?  

I don't know, but neither does anyone else who has stepped forward at this point, so let's keep that in mind.

russwinter's picture

Those who have been paying much attention to my output know I have been seeing this one coming a mile away. I have stated ad nauseum that land-lording is a tough business even in economies and neighborhoods that were improving such as Tacoma where I was involved in vintage apartments in 1997-2003.  

But to think that you could pick up foreclosed houses, pour tens of thousands into them and them rent them to the impoverished masses with a squatter mentality in this country and make out like a bandit, is the ultimate in hubris.

NoDebt's picture

My brother just cashed out of his two rental properties owned for just 2 years.  For exactly the reason stated above- it's a dirty business that requires local knowlege and constant attention.  If you think you're just going to sub out all the dirty work you won't make a dime.  If you do it yourself, prepare to make it your primary occupation or close to that.

Pimpin' ain't easy.

thorgodofthunder's picture

Good for them. Solid business model. Lemonade from lemons. Capitalism. Why the hate for risk takers? Try it yourself. I've got lots of rental units acquired over decades. Never stopped buying.

azzhatter's picture

i tried this years ago.bought 3 houses.turned out to be a fucking nightmare. jackoffs tear up property and dont pay rent. cant get eviction orders in any timely manner. not for me

Ham-bone's picture

Picking rentals in decent areas that have positive cash flow is tough.  I bought my duplexes in '01 and '03 and took long time to find those that were new construction (wouldn't require lots of initial maintenance), could house decent people (unlikely to trash place) at rates that kept it occupied and cash flow positive.  Trying to do this on the court house steps or in lots of 500 or 1000 houses is impossible.  Bond to wind up with a lot of problem rentals alongside those that make sense.  Seems a good idea to cull the herd.

helping_friendly_book's picture

What idiot would buy foreclosures while the FRBNY is buying 40 billion of MBS a month?

They can't get rid of the foreclosures and the FRBNY is enabling the building of new foreclosures driving rents to new lows.

Any smart person would find a decent foreclosure, kick in the front door, write a bogus lease, get the utilities cut on and rent some rooms, board up the front door and windows and live free for three years.

Squatters are the new rich. 

What the hell is Bernanke thinking?

Build more vacant housing will be good for the economy?

Orly's picture

"Build more vacant housing will be good for the economy?"

Seems to be working for the Chinese...

helping_friendly_book's picture

China does not have debt of 16.3 Trillion dollars. The USA does. Like comparing apples and oranges.

Housing prices and rents are related. The cheaper house the lower the rent.

I am tired of people trying to compare China's economy to the US economy. 

The USA is broke. China is the new superpower.

The frbny is fucking us up and will put me underwater if they keep building vacant housing.

I think cash is the place to be right now.

Orly's picture

China's the new superpower, with a towed diesel, previously-mothballed, Ukrainian aircraft carrier that has planes take off on a ramp?

With enough poison in the riverbeds to choke the Mongol hordes; poisonous smog so bad, some days you can't see a half-mile in front of your face?

With entire cities that are literally empty?  2,800-store malls with 12 occupants?

With a population that can barely read and write?

Okay, man.  I guess I need to rethink the definition of "superpower."


helping_friendly_book's picture

Been there?

Apparently NOT! You don't know what you are talking about.

"With a population that can barely read and write?"

The most ridiculous statement I have ever heard.

Go there and see. You will be envious.

Did you watch the 60 annivesary parade? Look it up on UTUBE.

They have 1.5 trillion in US Treasuries.

We have 16.3 trillion in debt which will become due and must be, either, refinaced or a corresponding  cut in spending.

You are, oblivious, delerious and live in your own fantasy land.




disabledvet's picture

Bernanke is buying the MBS...not the house. He's driving prices LOWER not higher buy doing this...causing an even greater credit contraction than otherwise would exist. in my view. So you should by the MBS...NOT the house! "Do as i do...not as i say" so to speak. Wait till a major budget crisis hits a major American City. Atlanta property has COMPLETELY collapsed...although the football team is doing pretty well interestingly enough. but the glut of housing in the US South is STAGGERING. in fact the glut of housing everywhere in the USA is a sight to behold...right up there with used cars. obviously it's in no one's interest to say "housing is going to collapse again." not after all that has been spent on...whatever it was spent on. Creating the greatest bubble in world history i guess! Anywho..."you'll never see that again"....which is saying something btw.

helping_friendly_book's picture

I think that was my point. Buying MBS means more empty houses, meaning dropping rents.

TruthInSunshine's picture

When The Fed buys MBS, what do you think happens to much of the security backstopping the MBS (i.e. the actual homes)?

They may or may not be or go vacant, but it's irrelevant to the claim you've made, because many get a stay of foreclosure (if already foreclosed on and are listed), or go off the market, or if not listed are far less likely to go onto the market, as a result. The entity that controls the mortgage note controls the fate of the property.

This is how the prices for the remaining on market properties are driven higher (artificially, and for how long, no one knows, so good luck to investors who aren't too-big-to-fail).

The Fed is contracting the supply of properties marketed and otherwise available.

helping_friendly_book's picture

 "The Fed is contracting the supply of properties marketed and otherwise available."


How can the supply of properties be contracting if jackass Bernanke is buying 40 billion in MBS?

People, here, seem to be operating on the premise that the 40 billion MBS purchases are for existing housing! 

He never said he was scooping up foreclosures. He is enabling builders to continue building unneeded supply of MacMasions.

To suggest that buying 40 billion in MBS per month will somehow cause:

" the prices for the remaining on market properties (to be) are driven higher" is ridiculous.

The law of supply and demand dicate a greater supply will reduce the price. ECON 101.

Even if the money created goes to buy CMBS the market will suffer. 

TruthInSunshine's picture

My understanding of the mechanics, with the usual caveat that I could/might be wrong, is that when any entity, including the Fed, buys a mortgage backed security, they then have the ability to control the if, how and when of whether the asset backing the MBS is foreclosed upon (or not) and listed for sale (or not) pursuant to any foreclosure.

If the entity buying the MBS feels like socking the underlying asset away, for whatever reason, even choosing to not foreclose upon it and keep it off market, this is yet one more residential dwelling that would've been foreclosed upon and sold pursuant to such foreclosure, which would ordinarily increase the amount of housing inventory available for purchase, thus depressing prices.

But because the Fed is intervening with, stalling & even stopping this clearing mechanism, the converse is the result.

(Assume a large impact given the 40 bln monthly of base fiat the Fed is deploying. not even counting what the GSEs like Freddie/Fannie are doing).

helping_friendly_book's picture

Buying 40 billion in MBS implies paying someone else 40 billion for those 40 billion in MBS. Yes? Those who recieve 40 billion will then create another 40 billion in MBS, by building new housing, to satisfy the FRBNY's stated goal of buying 40 billion of MBS per month.


The 40 billion in MBS has to come from somewhere! I don't think, as you suggest, the 40 billion in MBS is sitting around in some bankers sock draw. The 40 billion in MBS per month is being created by financing new building projects.

I don't buy your arguement that the FRBNY is trying to "help the economy". They are self serving the needs of their cartel and are pumping fresh currency through the financial system to give the appearance of economic activity.

I've seen this scam before.

TruthInSunshine's picture

- "Buying 40 billion in MBS implies paying someone else 40 billion for those 40 billion in MBS. Yes? Those who recieve 40 billion will then create another 40 billion in MBS, by building new housing, to satisfy the FRBNY's stated goal of buying 40 billion of MBS per month. Yes?"


Do you actually believe there's a 1-to-1 replacement, or even remotely close to that, for a dollar of fiat given to banks to purchase their mortgages (many of which are currently mehh or bad, and many of which are going mehhh or bad month after month), and that the banks then go out and create a dollar of new housing stock with that fresh fiat?

That's just delusional on a scale I can't imagine.

The banks are not only NOT directly creating any replacement housing stock, they're extra-hesitant to even loan the fiat they Fed is giving them out (hence their massive excess reserves) for any reasons, let alone loans for housing construction (they're doing it under extremely cautious conditions, such as when the FHA is backing the loan, which happens to be in 88% of all cases).


"The 40 billion in MBS has to come from somewhere! I don't think, as you suggest, the 40 billion in MBS is sitting around in some bankers sock draw. The 40 billion in MBS per month is being created by financing new building projects."

The Fed buying MBS from banks isn't to allow for a significant increase in new housing stock to occur (which would be deflationary in today's environment) whatsoever.

It's nearly exclusively designed to keep the banks afloat since they're choking on bad MBS. As an additional intended desire, the Fed hopes it restrains inventory, which has the affect of lifting prices on NEW and EXISTING homes for sale, since they're artificially limiting supply this way.

If everything had to be marked to FMV and sold quickly in order for the banks to have to recapitalize themselves, even partially, housing prices would probably be on the order of 30% lower than where they are now.

helping_friendly_book's picture

You are operating on the assumtion that the FRBNY is trying to help the recovery.

When they said, explicitly, they will openendedly purchase 40 billion in MBS per month I will bet the banks are busy creating 40 billion of MBS/month.

The FRBNY serves it's cartel's interest and none elses.

I see new housing being built all over. Those loans are coming from somewhere!


They must be coming from banks! 


I see prolific amounts of new condo projects and townhouses going up where I live.

If you are saying the banks ARE NOT creating what the FRBNY says they will purchase I find your word, either, naive or disingenuous.

Why wouldn't they create exactly what the FRBNY wants to purchase?


Thisson's picture

What they are doing is crystal clear.  They are replacing MBS bad debts with new currency to prevent deflation.  It's that simple.  This isn't finding new housing stock.  It's moving bad paper off the bank balance sheets so they avoid losses.  The Fed will take the losses, because a central bank that prints money doesn't care about losses. 

TruthInSunshine's picture


And as I mentioned, they're constraining inventory of homes available for sale, which also artificially prevents deflation.

It's going to be one for the history books to see what happens when the Fed begins to unwind its balance sheet. A wise sage told me he doesn't think it will be pretty, given that the Fed's balance sheet is now a infected pustule loaded with smallpox.

helping_friendly_book's picture

Absolute madness. I am not buying what you are selling or what you claim.

I see NEW HOUSING being built.

Brand new single family and multi-family houses, condos and apartments being built by illegal aliens, Mexicans and Central Americans in this country illegally while the Federal Gov't sits on their ass and allows this destruction to continue.

It is going to be fun watching those douche bags try and refinance that 16.3 trillion in public debt which continues to grow at an alarming rate. 

Let's see how many more treasury securities the nyfrb  can put on their tab since no one else will buy them.

A deaf and dumb public awaits the silent frieght train coming just around the bend.


jonjon831983's picture

Translation... landlording is actual hard work and they want easy liquid money.

jim249's picture

Translation; They figured out the housing market is still dead in the water and they want out now before the next leg down and the people they were hoping to rent to don't have any money to pay rent.

SoCalBusted's picture

Exactly, there are some pretty big risks...

1.  Housing market tanks further (high probability)

2.  General landlord risks (high probability - especially when renting properties en mass)

3.  Local property tax increases (high probability)

While not the answer, it would be interesting if they could negotiate better and locked in property tax rates before buying the properties.  Just like businesses that propose to build large facilities and are looking for the "right" location.


Thisson's picture

You forgot changes in income tax deductability of mortgage interest expense, although that is arguably implicit in #1 (housing market tanking further).

Sokhmate's picture

Going bidless is not good for bidness.

Floodmaster's picture

In this market(boomers sell and downsize),a 1,100 rent is cheaper than a 172,000 home. you can even save more than 77,000$ in 6 years on a 1,100 vs 300,000$ home !!!

0% rent increase / home price change.