Big Builders Scoop Up Big Bucks With Foreclosures

Homebuilder Beazer Homes (NYS: BZH) is starting to look up recently, after experiencing a rather disappointing year. Its revenue stream has certainly opened up, increasing 73% and 52% for Q1 and Q2. Now it's exploring a new endeavor to bolster profits even more: buying foreclosures that it fixes up and then rents.

Beazer has recently teamed up with Kohlberg Kravis Roberts (NYS: KKR) to create a new real estate investment trust called Beazer Pre-Owned Rental Homes. Currently, the trust features 200 single-family houses that Beazer has been accumulating in the Phoenix and Las Vegas areas for the past year or so. According to The Wall Street Journal, about 10% of these homes had originally been built by Beazer and were purchased cheaply as either foreclosures or short sales.

Large homebuilders are prime candidates for this sort of investment, since they have lots of cash on hand and can do the renovation work themselves. Lennar (NYS: LEN) , one of the nation's biggest homebuilders, has purchased approximately 300 houses through its financing arm, Rialto Capital Management, and Toll Brothers (NYS: TOL) has been in the foreclosed-property game for nearly two years, after creating its Gibraltar Capital and Asset Management division. The subsidiary has been busy acquiring properties since then, although, unlike Lennar's Rialto unit, Gibraltar also invests in commercial property and other assets.


Homebuilders aren't the only players in this lucrative game. Other big investors have also been scarfing up distressed properties for a deep discount and then renovating and putting them on the rental market. New York hedge fund Och-Ziff Capital Management Group (NYS: OZM) , has partnered with McKinley Capital Partners to purchase hundreds of homes in California over the past few years. The houses are being rented, but the partners expect to sell the homes eventually, once the market rebounds.

Participation in this investment scheme may have just have gotten a bit easier. Fannie Mae's recent decision to package and sell foreclosed properties in bulk to well-financed investors is attracting some of these big names, such as Rialto. Though interested, Lennar's CEO noted that caution was the order of the day, since determining costs would be problematic with such large pools of properties. Fannie offered 2,500 renter-occupied homes in the April round, with strict requirements for participation and rigid parameters, such as the provision that the entire bundle must be purchased and then rented for a specific number of years.

Fool's take
The results of the government's property auction won't be known for some time, but chances are good that at least some of the foregoing companies threw their hats in the auction ring. Big investors, particularly homebuilders, see the profit not only from renting these formerly distressed homes but also from eventually selling them when the market improves. I can certainly see these investments making money over the next several years.

Will these types of investments help the housing market to recover more quickly? I believe they will. Though some critics think it's unfair for Fannie to sell these properties to big money, small investors simply wouldn't be able to market these homes quickly enough to make it worthwhile. Cleaning up the foreclosure mess is central to healing the housing market, and here's an example, for once, where throwing money at a problem really does help.

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At the time this article was published Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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