WEBVTT 00:00:00.000 --> 00:00:02.700 I want to start today with a little visualization 00:00:02.700 --> 00:00:06.179 exercise. Okay. I want you to close your eyes. 00:00:06.839 --> 00:00:08.380 Unless you're driving, please don't close your 00:00:08.380 --> 00:00:09.900 eyes if you're driving. But if you can, just 00:00:09.900 --> 00:00:12.259 imagine for a second that you are a landlord. 00:00:12.580 --> 00:00:14.820 Okay, I'm picturing it. I've got the, you know, 00:00:14.820 --> 00:00:17.219 the ring of keys, maybe a tool belt, probably 00:00:17.219 --> 00:00:18.980 a slightly worried expression about the plumbing. 00:00:19.199 --> 00:00:21.699 Exactly. The plumbing. You own a second property. 00:00:21.780 --> 00:00:23.579 Maybe it's a nice little three bedroom in the 00:00:23.579 --> 00:00:26.000 suburbs that you, I don't know, inherited from 00:00:26.000 --> 00:00:28.980 an aunt. Sure. Or maybe a basement suite you 00:00:28.980 --> 00:00:31.339 rent out to college kids to help pay the mortgage. 00:00:32.439 --> 00:00:34.659 You know the drill, right? You are the one getting 00:00:34.659 --> 00:00:37.920 the call when the faucet leaks at 7 a .m. on 00:00:37.920 --> 00:00:41.560 a Sunday. Ah, the dreaded Sunday morning panic. 00:00:42.219 --> 00:00:44.020 That's the moment you realize your weekend is 00:00:44.020 --> 00:00:46.039 completely over because a pipe burst. Right. 00:00:46.179 --> 00:00:48.340 And you're vetting tenants yourself. You're checking 00:00:48.340 --> 00:00:50.979 credit scores. You're stressing out if the place 00:00:50.979 --> 00:00:52.899 sits empty for a month because, you know, you 00:00:52.899 --> 00:00:55.020 still have to pay the bank. It's a very personal, 00:00:55.320 --> 00:00:59.380 hands -on, high -stress, small -scale existence. 00:00:59.539 --> 00:01:02.000 You probably know your tenant's dog's name. You 00:01:02.000 --> 00:01:04.359 definitely know the dog's name. It's the classic 00:01:04.359 --> 00:01:07.239 American mom and pop investment, right? It's 00:01:07.239 --> 00:01:09.680 Bob down the street who owns the duplex. It's 00:01:09.680 --> 00:01:11.599 a relationship business, fundamentally. Now, 00:01:11.640 --> 00:01:14.060 take that image, that single house, that personal 00:01:14.060 --> 00:01:16.159 connection, that Sunday morning plumbing repair, 00:01:16.379 --> 00:01:18.780 and I want you to multiply it. Okay, multiplying. 00:01:18.879 --> 00:01:21.019 Don't just multiply it by 10. Don't multiply 00:01:21.019 --> 00:01:25.060 it by 100. Imagine owning over 80 ,000 single 00:01:25.060 --> 00:01:29.219 family homes. 80 ,000? Yeah. That... That breaks 00:01:29.219 --> 00:01:31.359 the visualization. That's not a landlord. That's 00:01:31.359 --> 00:01:34.680 a small nation state. It is a city just scattered 00:01:34.680 --> 00:01:37.939 all across the map. Imagine a single entity owning 00:01:37.939 --> 00:01:40.719 enough driveways, front porches, and backyard 00:01:40.719 --> 00:01:43.000 fences that if you line them up, they would stretch 00:01:43.000 --> 00:01:45.540 across multiple states. That's incredible. Imagine 00:01:45.540 --> 00:01:49.540 collecting 80 ,000 rent checks digitally on the 00:01:49.540 --> 00:01:51.750 first of... every single month. It creates a 00:01:51.750 --> 00:01:55.090 visual that is almost impossible to wrap your 00:01:55.090 --> 00:01:56.930 head around. It just fundamentally changes the 00:01:56.930 --> 00:01:59.909 definition of what a landlord even is. It moves 00:01:59.909 --> 00:02:03.010 it from a role or a job into an industry. And 00:02:03.010 --> 00:02:05.069 that is exactly what we are diving into today. 00:02:05.109 --> 00:02:07.469 We are looking at a company called Invitation 00:02:07.469 --> 00:02:09.729 Homes Inc. You might see their ticker symbol 00:02:09.729 --> 00:02:13.580 on the New York Stock Exchange, INVH. But this 00:02:13.580 --> 00:02:16.039 isn't just a story about a stock or a real estate 00:02:16.039 --> 00:02:18.900 company. It is a story about a company born from 00:02:18.900 --> 00:02:22.080 the absolute ashes of the 2008 financial crisis 00:02:22.080 --> 00:02:25.039 that has fundamentally and I think. perhaps permanently, 00:02:25.280 --> 00:02:28.000 change the DNA of the American housing market. 00:02:28.180 --> 00:02:30.580 And that is such a critical distinction to make 00:02:30.580 --> 00:02:33.039 right at the start. We aren't talking about a 00:02:33.039 --> 00:02:36.319 really successful local property manager who 00:02:36.319 --> 00:02:39.840 just kept growing. No. We are unpacking how a 00:02:39.840 --> 00:02:43.439 massive corporate entity industrialized the very 00:02:43.439 --> 00:02:46.050 concept of the landlord. We're going to look 00:02:46.050 --> 00:02:48.090 at how they make money, the massive machinery 00:02:48.090 --> 00:02:51.349 behind their operations, and the controversies 00:02:51.349 --> 00:02:53.169 that have dogged them every step of the way from 00:02:53.169 --> 00:02:56.789 Wall Street bonds to, well, spider infestations. 00:02:56.789 --> 00:02:58.289 We are definitely going to get to the spiders. 00:02:58.370 --> 00:03:00.370 I read the source material on that, and it is 00:03:00.370 --> 00:03:02.550 absolute nightmare fuel. It's something else. 00:03:02.689 --> 00:03:06.020 But first, let's set the table. We have pulled 00:03:06.020 --> 00:03:08.939 together a massive stack of sources for this 00:03:08.939 --> 00:03:11.620 deep dive. We've got detailed financial records. 00:03:11.740 --> 00:03:13.599 We've got the corporate history, which tracks 00:03:13.599 --> 00:03:16.360 their evolution, investigative reports from Reuters, 00:03:16.599 --> 00:03:19.020 coverage from The Wall Street Journal and the 00:03:19.020 --> 00:03:21.740 legal filings. All leading up to their very recent 00:03:21.740 --> 00:03:24.099 settlement with the FTC. Exactly. The mission 00:03:24.099 --> 00:03:27.259 here is really to understand the shift. We're 00:03:27.259 --> 00:03:30.479 moving from the era of the mom and pop rental 00:03:30.479 --> 00:03:35.280 to the era of the securitization of rental income. 00:03:36.000 --> 00:03:37.900 Securitization of rental income. That sounds 00:03:37.900 --> 00:03:39.800 like the kind of phrase that makes people's eyes 00:03:39.800 --> 00:03:42.060 just glaze over at a cocktail party. It does. 00:03:42.099 --> 00:03:44.780 But stick with us. Because by the end of this 00:03:44.780 --> 00:03:47.039 hour, you are going to understand exactly what 00:03:47.039 --> 00:03:48.379 it means. And more importantly, you're going 00:03:48.379 --> 00:03:51.560 to understand why it matters to anyone who lives 00:03:51.560 --> 00:03:53.840 in a house in America, whether you rent or own. 00:03:54.219 --> 00:03:56.699 Why is that? Because when you securitize a home, 00:03:56.860 --> 00:03:59.419 you change its purpose. It really is a shift 00:03:59.419 --> 00:04:01.500 in the American dream. I just find myself incredibly 00:04:01.500 --> 00:04:03.280 curious about the mechanics of this. I mean, 00:04:03.280 --> 00:04:06.360 how does one company end up with 80 ,000 houses? 00:04:06.460 --> 00:04:09.180 They didn't just go to 80 ,000 open houses on 00:04:09.180 --> 00:04:10.919 Sunday afternoons and sign the guestbook, right? 00:04:11.099 --> 00:04:13.599 No, they certainly didn't. To understand invitation 00:04:13.599 --> 00:04:15.939 homes, you have to go back to the prehistory. 00:04:15.960 --> 00:04:18.420 You have to understand the soil that this whole 00:04:18.420 --> 00:04:20.720 thing grew out of. Okay. Specifically the period 00:04:20.720 --> 00:04:24.819 between, say, 2005 and 2011. And it starts with 00:04:24.819 --> 00:04:26.959 a group called the Treehouse Group. Treehouse 00:04:26.959 --> 00:04:31.100 Group. It sounds whimsical, like a daycare center 00:04:31.100 --> 00:04:33.779 or maybe a tech startup with beanbag shares and 00:04:33.779 --> 00:04:35.939 free kombucha. It sounds friendly, doesn't it? 00:04:36.019 --> 00:04:38.180 Yeah. But they were very astute, very aggressive 00:04:38.180 --> 00:04:41.980 investors. This group was formed in 2005 by Dallas 00:04:41.980 --> 00:04:44.279 Tanner and a few others in Arizona. Think about 00:04:44.279 --> 00:04:46.279 Arizona in the mid -2000s, what comes to mind? 00:04:46.399 --> 00:04:49.980 Heat, golf courses, and the absolute... epicenter 00:04:49.980 --> 00:04:51.899 of the housing bubble. I remember reading stories 00:04:51.899 --> 00:04:54.240 about people buying three houses with zero money 00:04:54.240 --> 00:04:56.899 down. Precisely. Phoenix was ground zero. So 00:04:56.899 --> 00:04:59.220 when the subprime mortgage crisis hit, Phoenix 00:04:59.220 --> 00:05:01.360 wasn't just damaged, it was devastated. It was 00:05:01.360 --> 00:05:04.360 a foreclosure apocalypse. Wow. Prices were in 00:05:04.360 --> 00:05:07.220 free fall. Neighborhoods were hollowed out. I 00:05:07.220 --> 00:05:09.040 mean, you had streets where every other house 00:05:09.040 --> 00:05:11.600 had a bank notice on the window. Pools were turning 00:05:11.600 --> 00:05:14.420 green. And while most people were panicking or 00:05:14.420 --> 00:05:16.720 just losing their shirts, the treehouse group 00:05:16.720 --> 00:05:19.899 saw an opening. This is the classic buy when 00:05:19.899 --> 00:05:22.040 there's blood in the streets mentality. While 00:05:22.040 --> 00:05:23.720 everyone else is running out of the burning building, 00:05:23.839 --> 00:05:25.699 they're running in. Exactly. They looked at the 00:05:25.699 --> 00:05:28.779 carnage and they just saw math. Between 2010 00:05:28.779 --> 00:05:32.879 and 2011, they executed a strategic pivot. They 00:05:32.879 --> 00:05:35.220 started buying distressed houses. Buying the 00:05:35.220 --> 00:05:37.819 dip. In a massive way. They bought a thousand 00:05:37.819 --> 00:05:40.980 distressed houses in Phoenix. Now for a local 00:05:40.980 --> 00:05:44.529 group. 1 ,000 houses is huge. That's a huge portfolio. 00:05:44.930 --> 00:05:47.050 This is really one of the first clear instances 00:05:47.050 --> 00:05:49.810 of private equity stepping in to buy rentals 00:05:49.810 --> 00:05:52.410 in the post -Great Recession landscape. They 00:05:52.410 --> 00:05:55.449 realized a fundamental truth. All these people 00:05:55.449 --> 00:05:58.290 losing their homes, they still needed a place 00:05:58.290 --> 00:06:00.569 to live. That's a really poignant point. The 00:06:00.569 --> 00:06:02.370 families didn't evaporate. They weren't leaving 00:06:02.370 --> 00:06:04.069 Phoenix. They were just moving from the owner 00:06:04.069 --> 00:06:07.230 column to the renter column. Exactly. The demand 00:06:07.230 --> 00:06:10.759 for shelter is inelastic. You need a roof. And 00:06:10.759 --> 00:06:12.759 Treehouse Group realized that if they own the 00:06:12.759 --> 00:06:14.699 roofs, they captured that demand. So they have 00:06:14.699 --> 00:06:17.300 a thousand homes. That's a lot. If I owned a 00:06:17.300 --> 00:06:19.480 thousand homes, I'd be retired on a beach somewhere. 00:06:19.680 --> 00:06:22.180 Right. But when thousand isn't 80 ,000, so how 00:06:22.180 --> 00:06:24.120 did they make the jump to the big leagues? That 00:06:24.120 --> 00:06:27.800 happens in 2012. And it involves a name everyone 00:06:27.800 --> 00:06:30.360 in finance knows. The heavy hitter. Blackstone. 00:06:30.519 --> 00:06:32.639 Blackstone Inc. Yeah. The private equity giant. 00:06:33.139 --> 00:06:35.300 The guys who deal in billions, not millions. 00:06:35.379 --> 00:06:38.279 They are the ones who buy entire companies, reshape 00:06:38.279 --> 00:06:40.339 them, and sell them for parts or profit. Right. 00:06:40.680 --> 00:06:44.139 So in 2011, Treehouse merged with a Dallas -based 00:06:44.139 --> 00:06:46.819 property management firm called Riverstone Residential. 00:06:47.439 --> 00:06:51.360 Then in the spring of 2012, Blackstone Inc. acquires 00:06:51.360 --> 00:06:54.100 the whole entity to form what we now know as 00:06:54.100 --> 00:06:56.560 Invitation Homes. So Blackstone brings the checkbox. 00:06:56.639 --> 00:06:58.660 They brought a war chest. This wasn't just an 00:06:58.660 --> 00:07:00.759 investment. This was an ignition sequence. This 00:07:00.759 --> 00:07:03.060 was the capital injection needed to scale up 00:07:03.060 --> 00:07:05.899 from regional player with a good idea to national 00:07:05.899 --> 00:07:08.540 dominance. And what followed was essentially 00:07:08.540 --> 00:07:10.939 a shopping spree unlike anything the housing 00:07:10.939 --> 00:07:13.160 market had ever seen in American history. It 00:07:13.160 --> 00:07:15.040 was incredible. I was looking at the timeline 00:07:15.040 --> 00:07:17.579 in the notes and the speed is just breathtaking. 00:07:18.120 --> 00:07:21.100 Their first official purchase under the Invitation 00:07:21.100 --> 00:07:25.160 Homes banner was in April 2012. Correct. April 00:07:25.160 --> 00:07:28.639 2012 is the starting gun. And within one single 00:07:28.639 --> 00:07:32.680 year, just 12 months, they spent $4 billion on 00:07:32.680 --> 00:07:36.160 24 ,000 homes. Just let that sink in for a moment. 00:07:36.300 --> 00:07:40.060 $4 billion in 12 months. That's... If you do 00:07:40.060 --> 00:07:42.720 the math on that, that is roughly $11 million 00:07:42.720 --> 00:07:47.019 a day. every single day for a year. Every day. 00:07:47.259 --> 00:07:48.879 Weekends, holidays, didn't matter. They were 00:07:48.879 --> 00:07:51.639 spending $11 million a day buying single family 00:07:51.639 --> 00:07:54.379 homes. That is just mind boggling. Most people 00:07:54.379 --> 00:07:56.220 stress about buying one home over the course 00:07:56.220 --> 00:07:58.120 of six months. They were buying dozens, maybe 00:07:58.120 --> 00:08:00.699 hundreds a day. They became the largest buyer 00:08:00.699 --> 00:08:03.040 of rental homes in the United States almost overnight. 00:08:03.470 --> 00:08:05.709 It was a blitz. It brings up the logistics of 00:08:05.709 --> 00:08:07.550 that. How do you even buy that many homes that 00:08:07.550 --> 00:08:09.230 fast? You can't just drive around looking for 00:08:09.230 --> 00:08:11.889 sales signs. The paperwork alone would bury you. 00:08:11.990 --> 00:08:14.189 You have to have a system. You have to industrialize 00:08:14.189 --> 00:08:16.410 the purchase process. They weren't just browsing 00:08:16.410 --> 00:08:19.269 Zillow. They were buying in bulk. For example, 00:08:19.410 --> 00:08:22.730 in April 2013, they made a single purchase in 00:08:22.730 --> 00:08:25.350 Atlanta. One purchase. One purchase, buying 1 00:08:25.350 --> 00:08:28.269 ,400 homes from Building a Land Technology for 00:08:28.269 --> 00:08:32.610 over $100 million. One signature, 1 ,400 deeds 00:08:32.610 --> 00:08:35.269 transferred. Atlanta seems to be a recurring 00:08:35.269 --> 00:08:37.870 character in this story. Why Atlanta? Well, Atlanta, 00:08:37.970 --> 00:08:40.620 Phoenix, Tampa Bay. These were specific markets 00:08:40.620 --> 00:08:43.059 that fit their criteria. In Tampa Bay, for instance, 00:08:43.200 --> 00:08:46.440 between August 2012 and June 2013, they purchased 00:08:46.440 --> 00:08:51.419 1 ,650 homes for $250 million. These areas had 00:08:51.419 --> 00:08:54.279 the perfect storm conditions. high growth potential, 00:08:54.399 --> 00:08:56.659 but shattered by the crisis. And this is where 00:08:56.659 --> 00:08:58.700 we start to see the impact on the local markets, 00:08:58.820 --> 00:09:00.360 right? Because I imagine if you have a cash buyer 00:09:00.360 --> 00:09:02.960 coming in and sweeping up 1 ,600 homes, that 00:09:02.960 --> 00:09:04.960 has to do something to the ecosystem. Oh, it 00:09:04.960 --> 00:09:07.159 absolutely does. It puts a floor under the falling 00:09:07.159 --> 00:09:09.379 prices, which some would argue stabilize the 00:09:09.379 --> 00:09:11.259 market. It stopped the free fall. If you were 00:09:11.259 --> 00:09:13.879 a homeowner in Tampa trying to sell in 2012, 00:09:14.460 --> 00:09:16.200 Invitation Homes might have been the only buyer 00:09:16.200 --> 00:09:18.759 in town. So in that sense, they saved some equity. 00:09:19.100 --> 00:09:21.000 But there's a flip side. There's always a flip 00:09:21.000 --> 00:09:23.340 side. It also changed the rental landscape immediately. 00:09:23.909 --> 00:09:27.669 In Tampa Bay, during that blitz, 85 % of Invitation 00:09:27.669 --> 00:09:30.049 Homes' listings were priced above the average 00:09:30.049 --> 00:09:32.809 area rent of $1 ,200. So they weren't buying 00:09:32.809 --> 00:09:35.809 these distressed homes to then offer affordable 00:09:35.809 --> 00:09:38.110 housing to the people who just got foreclosed 00:09:38.110 --> 00:09:41.090 on? No. That is a key misconception. They were 00:09:41.090 --> 00:09:44.049 signaling a move toward higher -end rentals right 00:09:44.049 --> 00:09:46.750 away. So buy low. Buy low, renovate, sometimes 00:09:46.750 --> 00:09:49.629 just cosmetically, and rent high. This wasn't 00:09:49.629 --> 00:09:52.549 charity. It was aggressive arbitrage. They saw 00:09:52.549 --> 00:09:55.809 a gap. between the depressed asset price, the 00:09:55.809 --> 00:09:58.269 house, and the potential cash flow, the rent. 00:09:58.450 --> 00:10:00.210 Okay, let's unpack that strategy a bit more. 00:10:00.309 --> 00:10:02.009 Because they weren't just throwing darts at a 00:10:02.009 --> 00:10:04.450 map of the U .S., they had very specific criteria 00:10:04.450 --> 00:10:06.529 for where they bought. The sources mentioned 00:10:06.529 --> 00:10:08.669 something called strike zones. Strike zones. 00:10:08.889 --> 00:10:10.649 Yeah, it sounds like something out of a military 00:10:10.649 --> 00:10:13.710 briefing. And in a way, it was a tactical deployment 00:10:13.710 --> 00:10:16.669 of capital. A strike zone for invitation homes 00:10:16.669 --> 00:10:19.429 was a neighborhood that met a very specific Venn 00:10:19.429 --> 00:10:21.700 diagram. What were the circles in that diagram? 00:10:21.799 --> 00:10:24.100 Because I assume they aren't buying rural farmhouses 00:10:24.100 --> 00:10:28.879 or downtown condos. No. So circle one, desirability. 00:10:29.659 --> 00:10:32.360 These neighborhoods had to be near jobs, good 00:10:32.360 --> 00:10:35.600 schools, and transportation corridors. Places 00:10:35.600 --> 00:10:38.240 people wanted to live. They weren't buying in 00:10:38.240 --> 00:10:40.159 the middle of nowhere. They wanted the suburbs 00:10:40.159 --> 00:10:42.750 where the middle class. strives to be. Okay, 00:10:42.809 --> 00:10:44.690 that makes sense. You want tenants who want to 00:10:44.690 --> 00:10:47.110 be there. You want sticky tenants. Exactly. If 00:10:47.110 --> 00:10:49.309 you have a kid in the local high school, you 00:10:49.309 --> 00:10:51.149 aren't going to move just because the rent goes 00:10:51.149 --> 00:10:53.990 up $50. You're sort of stuck. Right. Circle two. 00:10:54.839 --> 00:10:57.299 Distress. These same desirable areas had to have 00:10:57.299 --> 00:11:00.000 high foreclosure rates. They were looking for 00:11:00.000 --> 00:11:02.220 the sweet spot where a nice neighborhood had 00:11:02.220 --> 00:11:04.779 been hit hard by the financial crisis. So they're 00:11:04.779 --> 00:11:07.039 buying the nicest house on the block, or at least 00:11:07.039 --> 00:11:08.759 the house in the nicest block, but buying it 00:11:08.759 --> 00:11:10.879 from the bank after the family has been foreclosed 00:11:10.879 --> 00:11:13.799 on. Essentially, yes. They were capitalizing 00:11:13.799 --> 00:11:16.100 on the mismatch between the quality of the neighborhood 00:11:16.100 --> 00:11:18.799 and the financial health of the current homeowners. 00:11:19.120 --> 00:11:22.169 They wanted the A location at the C price. And 00:11:22.169 --> 00:11:24.950 that brings us to the target demographic. Who 00:11:24.950 --> 00:11:27.149 are they renting to? I think there's an assumption 00:11:27.149 --> 00:11:30.009 that rental homes means low -income housing or 00:11:30.009 --> 00:11:32.250 Section 8. But based on what you're saying about 00:11:32.250 --> 00:11:35.129 desirability, that doesn't seem to be the case. 00:11:35.350 --> 00:11:37.750 Early on, there was a mix. About 16 % of their 00:11:37.750 --> 00:11:40.250 portfolio was Section 8 affordable housing properties. 00:11:40.789 --> 00:11:43.409 But that shifted as the strategy matured. The 00:11:43.409 --> 00:11:45.149 Wall Street Journal noted that they moved to 00:11:45.149 --> 00:11:47.570 compete specifically at the high end of the rental 00:11:47.570 --> 00:11:50.149 market. What does the typical invitation homes 00:11:50.149 --> 00:11:53.210 tenant look like today based on the data? The 00:11:53.210 --> 00:11:55.789 profile is quite specific and, you know, surprisingly 00:11:55.789 --> 00:11:58.330 affluent. They're typically in their late 30s. 00:11:58.350 --> 00:12:00.730 They are families with children, so they need 00:12:00.730 --> 00:12:03.389 the space, the yard, the school district. And 00:12:03.389 --> 00:12:05.590 the household income is approximately $100 ,000. 00:12:05.970 --> 00:12:08.929 $100 ,000. That is firmly middle to upper middle 00:12:08.929 --> 00:12:11.710 class. In many parts of the country, $100 ,000 00:12:11.710 --> 00:12:15.129 is a very solid income. Exactly. These are often 00:12:15.129 --> 00:12:17.409 people who, in a different economic climate, 00:12:17.720 --> 00:12:20.240 would be homebuyers. They are the prime candidates 00:12:20.240 --> 00:12:23.740 for home ownership. But due to credit issues 00:12:23.740 --> 00:12:26.419 lingering from the crash or lack of a down payment 00:12:26.419 --> 00:12:29.200 or simply the scarcity of inventory, partly caused 00:12:29.200 --> 00:12:32.759 by investors buying up stock, they are renting. 00:12:33.000 --> 00:12:35.580 It's a bit of a catch -22, isn't it? You earn 00:12:35.580 --> 00:12:37.779 $100 ,000. You want to live in a good school 00:12:37.779 --> 00:12:40.240 district. But the starter homes in that district 00:12:40.240 --> 00:12:42.779 are being bought by a corporation that rents 00:12:42.779 --> 00:12:45.360 them back to you. Yes. You are paying the mortgage. 00:12:46.080 --> 00:12:48.379 but it's someone else's mortgage. That is the 00:12:48.379 --> 00:12:51.460 core tension of this entire phenomenon. You have 00:12:51.460 --> 00:12:53.840 a class of people who have the income to buy, 00:12:53.980 --> 00:12:57.220 but not the capital or the opportunity. And Invitation 00:12:57.220 --> 00:13:00.200 Homes steps in to monetize that gap. And the 00:13:00.200 --> 00:13:02.440 scale of this operation today is just massive. 00:13:02.620 --> 00:13:05.620 As of July 2024, Invitation Homes owns about 00:13:05.620 --> 00:13:08.779 84 ,000 homes in 16 markets. And I noticed a 00:13:08.779 --> 00:13:10.960 heavy concentration in certain areas. It's not 00:13:10.960 --> 00:13:13.139 evenly spread out across the 50 states. No, very 00:13:13.139 --> 00:13:15.159 heavy. California is a major profit center for 00:13:15.159 --> 00:13:17.960 them. 17 % of their total rental income comes 00:13:17.960 --> 00:13:20.200 from California alone. Which makes sense, right? 00:13:20.259 --> 00:13:22.539 Given the high property values and high rents 00:13:22.539 --> 00:13:25.909 there. If you control a significant chunk of 00:13:25.909 --> 00:13:28.889 single -family rentals in a tight market like 00:13:28.889 --> 00:13:31.889 Los Angeles or the Bay Area, you have tremendous 00:13:31.889 --> 00:13:34.730 pricing power. But they aren't just buying old 00:13:34.730 --> 00:13:37.190 houses anymore, are they? This was a surprising 00:13:37.190 --> 00:13:39.149 detail in the research. I always pictured them 00:13:39.149 --> 00:13:41.590 as just scooping up existing stock, but they're 00:13:41.590 --> 00:13:43.350 actually builders now. This is the evolution 00:13:43.350 --> 00:13:45.409 of the model. Yeah. Once you run out of distressed 00:13:45.409 --> 00:13:47.549 inventory, because eventually the market recovers 00:13:47.549 --> 00:13:49.889 and you can't buy foreclosures for pennies on 00:13:49.889 --> 00:13:52.570 the dollar, you have to find a new supply. So 00:13:52.570 --> 00:13:54.470 you make your own. You make your own. In 2021, 00:13:54.710 --> 00:13:57.070 they launched a joint venture with Pulte Group. 00:13:57.269 --> 00:13:58.830 Pulte Group is one of the biggest home builders 00:13:58.830 --> 00:14:01.110 in the country. If you drive through a new subdivision, 00:14:01.210 --> 00:14:03.129 there's a good chance Pulte built it. Right. 00:14:03.309 --> 00:14:07.250 And the plan was to build... sold 7 ,500 new 00:14:07.250 --> 00:14:10.769 homes specifically for invitation homes to rent 00:14:10.769 --> 00:14:13.789 out. So built to rent. Exactly. We are moving 00:14:13.789 --> 00:14:17.409 from buying old distressed stock to purpose -built 00:14:17.409 --> 00:14:20.070 rental communities. Imagine an entire cul -de 00:14:20.070 --> 00:14:23.090 -sac or an entire neighborhood where no one owns 00:14:23.090 --> 00:14:25.610 the home they live in. Everyone pays rent to 00:14:25.610 --> 00:14:27.789 the same corporate landlord. The mailboxes all 00:14:27.789 --> 00:14:29.809 look the same. The lawns are all cut by the same 00:14:29.809 --> 00:14:31.730 service. And the rent checks all go to the same 00:14:31.730 --> 00:14:34.049 bank account. That feels like a fundamental shift 00:14:34.049 --> 00:14:36.590 in how we view suburbs. It's almost like returning 00:14:36.590 --> 00:14:40.169 to a company town model. But the company isn't 00:14:40.169 --> 00:14:43.110 a coal mine or a factory. The company is the 00:14:43.110 --> 00:14:45.779 landlord itself. It connects back to that idea 00:14:45.779 --> 00:14:48.539 of industrializing the landlord business. It 00:14:48.539 --> 00:14:51.240 allows for incredible efficiency. If you own 00:14:51.240 --> 00:14:53.580 every house on the street, your maintenance crew 00:14:53.580 --> 00:14:57.039 can hit 10 houses in an hour. But it also changes 00:14:57.039 --> 00:14:59.639 the social fabric. There are no homeowners associations 00:14:59.639 --> 00:15:02.590 led by residents. There's just... The management 00:15:02.590 --> 00:15:05.470 company. But here's the thing. To really industrialize 00:15:05.470 --> 00:15:08.149 it, to scale it to 80 ,000 homes, you need more 00:15:08.149 --> 00:15:09.690 than just rent checks coming in. You need Wall 00:15:09.690 --> 00:15:12.590 Street. You need massive leverage. And this is 00:15:12.590 --> 00:15:14.809 where the story gets really technical and I think 00:15:14.809 --> 00:15:17.110 really fascinating. This is the financial engineering 00:15:17.110 --> 00:15:19.909 that makes the whole machine hum. Right, because 00:15:19.909 --> 00:15:22.570 invitation homes didn't just invent a way to 00:15:22.570 --> 00:15:25.610 manage 80 ,000 homes. They invented a way to 00:15:25.610 --> 00:15:28.350 turn those homes into a financial product. They 00:15:28.350 --> 00:15:32.789 created a new asset class. In 2013, Invocation 00:15:32.789 --> 00:15:35.350 Homes pioneered the Single Family Rental Security, 00:15:35.669 --> 00:15:38.629 or SFR. Okay, for those of us who don't have 00:15:38.629 --> 00:15:40.629 a Bloomberg terminal on our desk, let's break 00:15:40.629 --> 00:15:44.389 this down. What is an SFR security? How do you 00:15:44.389 --> 00:15:46.909 turn a house into a bond? Think of it like a 00:15:46.909 --> 00:15:48.690 mortgage bond. You know how in the movie The 00:15:48.690 --> 00:15:51.250 Big Short, which I know you love, they explain 00:15:51.250 --> 00:15:53.629 how thousands of mortgages are bundled together 00:15:53.629 --> 00:15:55.929 into a bond that investors can buy. Right, the 00:15:55.929 --> 00:15:57.509 mortgage -backed security. They take a bunch 00:15:57.509 --> 00:15:59.690 of loans, put them in a bucket, and sell slices 00:15:59.690 --> 00:16:01.590 of the bucket. This is similar in structure, 00:16:01.750 --> 00:16:04.070 but the underlying asset is different. Instead 00:16:04.070 --> 00:16:06.309 of bundling mortgage payments, where the homeowner 00:16:06.309 --> 00:16:09.029 pays the bank invitation homes, bundles rental 00:16:09.029 --> 00:16:11.809 income. Oh, wow. They take the monthly rent checks 00:16:11.809 --> 00:16:14.610 from thousands of their houses, pool all that 00:16:14.610 --> 00:16:17.669 cash together and sell bonds to investors based 00:16:17.669 --> 00:16:20.830 on that cash flow. So if I'm an investor, a pension 00:16:20.830 --> 00:16:24.590 fund or a hedge fund, I buy this bond and I get 00:16:24.590 --> 00:16:26.990 paid interest. And that interest is paid for 00:16:26.990 --> 00:16:28.889 by the rent money collected from families in 00:16:28.889 --> 00:16:31.789 Atlanta and Phoenix. Precisely. You're buying 00:16:31.789 --> 00:16:35.289 a stream of rental income. And this was revolutionary 00:16:35.289 --> 00:16:37.690 for them. It allowed them to raise massive amounts 00:16:37.690 --> 00:16:40.289 of money to buy more houses. It's a flywheel. 00:16:40.409 --> 00:16:42.690 Buy houses, rent them out. Securitize the rent, 00:16:42.789 --> 00:16:45.110 get cash from investors, buy more houses. So 00:16:45.110 --> 00:16:46.690 the house isn't just a place to live anymore. 00:16:46.750 --> 00:16:49.389 It's collateral for a bond. Correct. It financializes 00:16:49.389 --> 00:16:51.850 the home. And the numbers are just staggering. 00:16:52.090 --> 00:16:55.830 By January 2017, they had sold nearly $10 billion 00:16:55.830 --> 00:16:59.799 in SFR bonds. $10 billion. By July 2018, that 00:16:59.799 --> 00:17:02.980 number hit $15 billion. It's a perpetual motion 00:17:02.980 --> 00:17:05.039 machine of capital. But there was a moment in 00:17:05.039 --> 00:17:07.059 2017 where this got a little controversial involving 00:17:07.059 --> 00:17:09.039 the government, right? Because up until now, 00:17:09.079 --> 00:17:10.759 this is just private equity doing private equity 00:17:10.759 --> 00:17:13.380 things. But then Uncle Sam got involved. The 00:17:13.380 --> 00:17:15.660 Fannie Mae controversy. This is a crucial plot 00:17:15.660 --> 00:17:19.000 point. In January 2017, Fannie Mae, a government 00:17:19.000 --> 00:17:21.180 -sponsored entity designed to help Americans 00:17:21.180 --> 00:17:24.660 buy homes, guaranteed $1 billion of debt for 00:17:24.660 --> 00:17:26.799 invitation homes. Wait, wait, let me get this 00:17:26.799 --> 00:17:30.319 straight. Fannie Mae, whose entire mission is 00:17:30.319 --> 00:17:33.000 to support homeownership. It's right there in 00:17:33.000 --> 00:17:35.480 their charter backed the corporate landlord. 00:17:35.759 --> 00:17:37.940 That was exactly the reaction. It was the first 00:17:37.940 --> 00:17:40.700 time in history a government sponsored entity 00:17:40.700 --> 00:17:43.519 backstopped a single family corporate landlord. 00:17:43.799 --> 00:17:46.680 I can imagine that did not go over well with 00:17:46.680 --> 00:17:50.079 housing advocates. No, it sparked a fierce backlash. 00:17:50.559 --> 00:17:53.619 More than 25 affordable housing groups criticized 00:17:53.619 --> 00:17:56.799 the deal. Their argument was simple and powerful. 00:17:57.909 --> 00:18:01.410 Fannie Mae exists to protect and encourage homeownership. 00:18:01.410 --> 00:18:03.710 It's supposed to help the little guy get a mortgage. 00:18:03.809 --> 00:18:06.289 Right. By backing invitation homes, they were 00:18:06.289 --> 00:18:09.170 effectively subsidizing a competitor to the individual 00:18:09.170 --> 00:18:11.349 home buyer. They were helping the giant compete 00:18:11.349 --> 00:18:13.009 against the family trying to buy their first 00:18:13.009 --> 00:18:14.869 home. It does seem like a conflict of interest. 00:18:15.089 --> 00:18:16.829 I mean, if Fannie Mae helps invitation homes 00:18:16.829 --> 00:18:19.430 get cheaper debt, invitation homes can bid higher 00:18:19.430 --> 00:18:21.849 on houses, pricing out the very people Fannie 00:18:21.849 --> 00:18:23.700 Mae is supposed to help. That was the argument. 00:18:23.799 --> 00:18:25.539 Now, the Federal Housing Finance Agency, the 00:18:25.539 --> 00:18:28.279 FHFA, which regulates Fannie Mae, they had a 00:18:28.279 --> 00:18:30.579 justification. What was it? They claimed it was 00:18:30.579 --> 00:18:33.119 a way to learn about the mechanics of the single 00:18:33.119 --> 00:18:36.119 family rental market. Their spokesperson, Corinne 00:18:36.119 --> 00:18:38.140 Russell, argued that since so many Americans 00:18:38.140 --> 00:18:40.240 were renting, the government needed to understand 00:18:40.240 --> 00:18:42.240 that market to see what their role should be. 00:18:42.420 --> 00:18:45.420 It sounds like a very expensive experiment or 00:18:45.420 --> 00:18:48.660 a very convenient excuse to help out a big player. 00:18:48.920 --> 00:18:50.519 Depending on your cynical view of government 00:18:50.519 --> 00:18:53.289 and finance, yes. But regardless of the intent, 00:18:53.569 --> 00:18:55.890 the result was that Invitation Homes got cheaper 00:18:55.890 --> 00:18:58.230 financing, backed by the government -implied 00:18:58.230 --> 00:19:00.970 guarantee. It validated their model at the highest 00:19:00.970 --> 00:19:03.150 level. And shortly after that, they went public. 00:19:03.470 --> 00:19:07.150 February 2017, Invitation Homes IPO. It was the 00:19:07.150 --> 00:19:09.069 second largest real estate investment trust, 00:19:09.349 --> 00:19:13.750 or REIT IPO in history, raising $1 .77 billion. 00:19:14.589 --> 00:19:16.730 They were now a public company, answering to 00:19:16.730 --> 00:19:18.650 shareholders every quarter. And they didn't stop 00:19:18.650 --> 00:19:20.970 growing there. They merged with another giant. 00:19:21.190 --> 00:19:24.269 Yes. In November 2017, they merged with Starwood 00:19:24.269 --> 00:19:26.789 Waypoint. Starwood was another massive player 00:19:26.789 --> 00:19:28.750 in this space that had spun off from Starwood 00:19:28.750 --> 00:19:31.049 Capital Group. This merger consolidated their 00:19:31.049 --> 00:19:33.130 dominance. They became the undisputed heavyweight 00:19:33.130 --> 00:19:35.710 champion of the sector. And interestingly, the 00:19:35.710 --> 00:19:38.049 architect of all this blackstone eventually left 00:19:38.049 --> 00:19:40.670 the building. They did. This is classic private 00:19:40.670 --> 00:19:43.180 equity lifecycle. Blackstone divested its share 00:19:43.180 --> 00:19:46.000 in November 2019. They walked away with a significant 00:19:46.000 --> 00:19:48.500 gain. They saw the opportunity in the crisis, 00:19:48.700 --> 00:19:51.700 built the machine, took it public, waited for 00:19:51.700 --> 00:19:54.359 the stock to appreciate and cashed out. And Invitation 00:19:54.359 --> 00:19:57.920 Homes was now a standalone public giant. Exactly. 00:19:57.940 --> 00:20:00.740 So we have the machine. It's huge. It's publicly 00:20:00.740 --> 00:20:03.759 traded. It's backed by billions in bonds and 00:20:03.759 --> 00:20:07.180 it owns 80 ,000 homes. But machines don't fix 00:20:07.180 --> 00:20:10.180 toilets. Machines don't deal with termites. And 00:20:10.180 --> 00:20:13.200 this is where the rubber meets the road. Or perhaps 00:20:13.200 --> 00:20:15.319 where the sewage meets the basement. This is 00:20:15.319 --> 00:20:17.359 the dark side of the efficiency. When you turn 00:20:17.359 --> 00:20:20.119 rental income into a bond, you have a fiduciary 00:20:20.119 --> 00:20:22.519 duty to your bondholders to maximize that income. 00:20:22.660 --> 00:20:24.680 That is your legal obligation. Right. And there 00:20:24.680 --> 00:20:26.440 are only two ways to maximize rental income. 00:20:26.660 --> 00:20:29.680 Raise the rent or cut the costs. And cost in 00:20:29.680 --> 00:20:32.519 this case means maintenance. Exactly. The core 00:20:32.519 --> 00:20:34.839 critique of this entire business model. from 00:20:34.839 --> 00:20:37.500 housing advocates, from tenants, even from some 00:20:37.500 --> 00:20:40.339 financial analysts, is that corporations are 00:20:40.339 --> 00:20:44.240 incentivized to keep repair costs as low as possible. 00:20:44.940 --> 00:20:47.940 Reuters did a deep dive into the data, analyzing 00:20:47.940 --> 00:20:50.400 the bond documents. What did they find? They 00:20:50.400 --> 00:20:52.460 found that invitation homes spent an average 00:20:52.460 --> 00:20:56.839 of roughly $11 ,142 per year per house on maintenance. 00:20:57.220 --> 00:21:00.299 Is that a lot? It sounds low. My parents definitely 00:21:00.299 --> 00:21:02.400 spend more than that on their house. A water 00:21:02.400 --> 00:21:04.779 heater alone is a grand. Well, compared to the 00:21:04.779 --> 00:21:06.819 average homeowner, who typically spends about 00:21:06.819 --> 00:21:09.980 $3 ,100 a year on maintenance. So they were spending 00:21:09.980 --> 00:21:11.819 about a third of what a normal owner spends. 00:21:12.119 --> 00:21:14.599 Roughly, yes. Now, to be fair, the company disputed 00:21:14.599 --> 00:21:15.819 this, right? I want to make sure we represent 00:21:15.819 --> 00:21:18.000 their side. How do they justify that number? 00:21:18.140 --> 00:21:20.440 They did. They argued that the Reuters data was 00:21:20.440 --> 00:21:23.319 incomplete. They said it missed some system backup 00:21:23.319 --> 00:21:26.240 costs and capitalized expenditures, which are 00:21:26.240 --> 00:21:28.380 essentially big renovations that are tracked 00:21:28.380 --> 00:21:30.740 differently than day -to -day repairs. They also 00:21:30.740 --> 00:21:33.160 argued that their scale allows them to get work 00:21:33.160 --> 00:21:35.809 done cheaper. Maybe they get a bulk discount 00:21:35.809 --> 00:21:38.549 on water heaters because they buy 5 ,000 at a 00:21:38.549 --> 00:21:40.950 time. Or they have in -house handymen so they 00:21:40.950 --> 00:21:43.369 aren't paying retail labor rates. Right. But 00:21:43.369 --> 00:21:47.849 still, the gap, 1 ,142 varters is $3 ,100, is 00:21:47.849 --> 00:21:51.099 stark. Even with a bulk discount, that's a massive 00:21:51.099 --> 00:21:53.259 difference. That implies something isn't getting 00:21:53.259 --> 00:21:55.839 fixed. And that gap seems to manifest in the 00:21:55.839 --> 00:21:58.259 tenant experience. The list of complaints in 00:21:58.259 --> 00:22:01.059 the source material is, well, it's pretty visceral. 00:22:01.220 --> 00:22:03.440 It suggests that the efficiency comes at the 00:22:03.440 --> 00:22:06.200 cost of livability. It does. Yeah, let's talk 00:22:06.200 --> 00:22:08.319 about the horror stories. Media outlets like 00:22:08.319 --> 00:22:11.619 CBS Sacramento, WGCL TV, and the Arizona Republic 00:22:11.619 --> 00:22:14.160 have done reports on this. What are tenants actually 00:22:14.160 --> 00:22:17.039 seeing? We aren't talking about a squeaky hinge 00:22:17.039 --> 00:22:19.650 or a chipped... paint job. We are talking about 00:22:19.650 --> 00:22:22.549 serious habitability issues. Toxic black mold 00:22:22.549 --> 00:22:25.410 that isn't remediated properly. Just, you know, 00:22:25.410 --> 00:22:27.390 painted over. I have to say, over mold. We're 00:22:27.390 --> 00:22:29.549 talking about sewage, backing up in the bathtubs, 00:22:29.549 --> 00:22:31.250 and sitting there for days because the approval 00:22:31.250 --> 00:22:33.970 process for a plumber is too slow. And the pests. 00:22:34.250 --> 00:22:36.750 That's the part that got me. Vermin infestations. 00:22:37.289 --> 00:22:40.109 Spiders, cockroaches, ants. There was a specific 00:22:40.109 --> 00:22:42.390 mention of spiders in the Reuters report that 00:22:42.390 --> 00:22:44.670 really paints a picture of neglect. And there 00:22:44.670 --> 00:22:47.779 was a report from WGCL TV. but a home damaged 00:22:47.779 --> 00:22:50.640 by a tornado where the damage caused health issues 00:22:50.640 --> 00:22:53.140 for the tenants, and the response was allegedly 00:22:53.140 --> 00:22:56.640 just inadequate. One detail that stuck out to 00:22:56.640 --> 00:22:59.819 me in the CBS Sacramento report was nails poking 00:22:59.819 --> 00:23:03.329 out of floors. That feels so specific and so 00:23:03.329 --> 00:23:06.049 negligent. It implies a rush job. It implies 00:23:06.049 --> 00:23:08.410 cheap carpet installation or hurried renovations 00:23:08.410 --> 00:23:10.690 between tenants. In the industry, they call it 00:23:10.690 --> 00:23:12.569 turn and burn. Get the old tenant out, slap some 00:23:12.569 --> 00:23:14.869 paint on, put some carpet down, get the new tenant 00:23:14.869 --> 00:23:17.109 in. And if you miss a nail, well, someone steps 00:23:17.109 --> 00:23:19.829 on it. Speed is the priority over quality. And 00:23:19.829 --> 00:23:21.710 the complaint isn't just that these things happen. 00:23:21.789 --> 00:23:25.089 I mean, houses break, pipes burst, bugs get in. 00:23:25.190 --> 00:23:27.640 It's the response time. Right. Tenants report 00:23:27.640 --> 00:23:30.299 unfulfilled repair requests, broken appliances 00:23:30.299 --> 00:23:32.539 like stoves and garage doors sitting breaking 00:23:32.539 --> 00:23:35.220 for weeks. If you are a mom and pop landlord 00:23:35.220 --> 00:23:37.339 and your tenant's stove breaks, you probably 00:23:37.339 --> 00:23:39.559 go to Home Depot that day or the next day because 00:23:39.559 --> 00:23:41.599 you don't want an angry tenant. You have a reputation 00:23:41.599 --> 00:23:43.980 in the neighborhood. You have a reputation. But 00:23:43.980 --> 00:23:46.480 if you are a corporation, roll 80 ,000 tenants. 00:23:47.319 --> 00:23:50.920 One angry tenant is a statistic. Because if the 00:23:50.920 --> 00:23:53.000 goal is to keep that maintenance number at $1 00:23:53.000 --> 00:23:56.539 ,100 to satisfy the bond rating agencies, you 00:23:56.539 --> 00:23:59.420 delay, you defer, you patch instead of replace. 00:23:59.960 --> 00:24:02.720 Precisely. Every dollar spent on a plumber is 00:24:02.720 --> 00:24:05.619 a dollar not paid to the bondholder. The incentives 00:24:05.619 --> 00:24:07.819 are completely misaligned with the tenant's comfort. 00:24:08.279 --> 00:24:10.690 The tenant is the source of revenue. But the 00:24:10.690 --> 00:24:13.130 bondholder is the boss. But it's not just about 00:24:13.130 --> 00:24:15.410 saving money on repairs. It's also about generating 00:24:15.410 --> 00:24:18.130 revenue through fees. We've heard about junk 00:24:18.130 --> 00:24:21.089 fees in the airline industry or banking. But 00:24:21.089 --> 00:24:23.609 how does it apply here? This is the fee economy 00:24:23.609 --> 00:24:25.950 applied to housing. Reuters found a security 00:24:25.950 --> 00:24:27.930 bundle, one of those bonds, where the houses 00:24:27.930 --> 00:24:31.910 are making $1 ,538 a month in rent. But on top 00:24:31.910 --> 00:24:33.369 of that, they were bringing in an additional 00:24:33.369 --> 00:24:37.470 $985 per year per house in other fees. Nearly 00:24:37.470 --> 00:24:40.130 $1 ,000 a year in extra fees. That's almost an 00:24:40.130 --> 00:24:42.490 extra month of rent. What on earth are they charging 00:24:42.490 --> 00:24:44.990 for? Everything they can think of. Smart home 00:24:44.990 --> 00:24:47.450 fees? For the electronic lock they installed 00:24:47.450 --> 00:24:49.470 that you didn't ask for, air filter delivery 00:24:49.470 --> 00:24:51.630 fees where they mail you a filter you have to 00:24:51.630 --> 00:24:55.170 install yourself. Oh, come on. Pet fees, utility 00:24:55.170 --> 00:24:57.730 management fees, it's death by a thousand cuts. 00:24:58.109 --> 00:25:00.470 There are class action allegations about late 00:25:00.470 --> 00:25:03.410 fees that were particularly egregious. Yes, this 00:25:03.410 --> 00:25:05.630 is a major point of contention. They were reportedly 00:25:05.630 --> 00:25:08.990 charging $95 if a tenant was even one minute 00:25:08.990 --> 00:25:11.710 late. One minute. One minute past the deadline. 00:25:12.160 --> 00:25:14.680 And the allegations claimed they charged this 00:25:14.680 --> 00:25:17.460 even if the company's own online payment portal 00:25:17.460 --> 00:25:19.920 was broken and the tenant couldn't pay on time. 00:25:20.039 --> 00:25:22.359 That is infuriating. It feels like you're trapped. 00:25:22.460 --> 00:25:24.420 You can't just move out easily because moving 00:25:24.420 --> 00:25:26.380 is expensive and disruptive, especially if you 00:25:26.380 --> 00:25:30.039 have kids in school. So you pay the $95. It exploits 00:25:30.039 --> 00:25:32.200 the friction of moving. They know you don't want 00:25:32.200 --> 00:25:34.099 to leave so they can squeeze the margins. They 00:25:34.099 --> 00:25:36.440 have the leverage. And if you don't pay or can't 00:25:36.440 --> 00:25:39.240 pay. Eviction. And this is where the industrialization 00:25:39.240 --> 00:25:42.430 gets really cold. A study by the Federal Reserve 00:25:42.430 --> 00:25:45.710 Bank of Atlanta in December 2016 shed some light 00:25:45.710 --> 00:25:48.410 on this. They compared corporate landlords to 00:25:48.410 --> 00:25:50.970 other landlords regarding eviction filings. What 00:25:50.970 --> 00:25:53.190 were the numbers? They found that corporate landlords 00:25:53.190 --> 00:25:56.069 were significantly more aggressive. Invitation 00:25:56.069 --> 00:25:59.730 Homes evicted 15 % of its renters. Starwood Waypoint. 00:26:00.079 --> 00:26:02.940 This was before the merger evicted 30%. 30%. 00:26:02.940 --> 00:26:05.940 That means one in three families living in a 00:26:05.940 --> 00:26:08.359 Starwood home got an eviction notice. It is an 00:26:08.359 --> 00:26:10.740 incredibly high turnover rate. It suggests a 00:26:10.740 --> 00:26:13.259 zero tolerance policy. And the study noted a 00:26:13.259 --> 00:26:15.500 racial disparity as well. It found that being 00:26:15.500 --> 00:26:17.720 African -American increased the chance of eviction 00:26:17.720 --> 00:26:20.220 under these companies. Why the disparity? Is 00:26:20.220 --> 00:26:23.140 it deliberate bias or something else? It's likely 00:26:23.140 --> 00:26:25.880 the result of automation. The automation of the 00:26:25.880 --> 00:26:27.819 eviction process where an algorithm automatically 00:26:27.819 --> 00:26:30.960 files a notice the moment rent is late removes 00:26:30.960 --> 00:26:33.700 the human element. A mom and pop landlord might 00:26:33.700 --> 00:26:35.740 say, OK, Bob, I know you lost your shift this 00:26:35.740 --> 00:26:38.880 week. Pay me next Friday. The algorithm just 00:26:38.880 --> 00:26:42.599 executes the filing. And because of broader economic 00:26:42.599 --> 00:26:46.200 disparities, that rigid automation hits minority 00:26:46.200 --> 00:26:50.380 communities harder. It's blind justice, but it 00:26:50.380 --> 00:26:53.019 effectively penalizes the vulnerable. This brings 00:26:53.019 --> 00:26:55.579 us to the legal and regulatory side of things, 00:26:55.759 --> 00:26:58.140 because you can't operate like this, charging 00:26:58.140 --> 00:27:01.400 hidden fees, letting houses fall apart, evicting 00:27:01.400 --> 00:27:04.099 people by algorithm without eventually attracting 00:27:04.099 --> 00:27:07.200 the attention of lawyers and eventually the government. 00:27:07.380 --> 00:27:10.160 And they certainly did attract attention. Let's 00:27:10.160 --> 00:27:12.849 talk about the BPO loophole first. This is a 00:27:12.849 --> 00:27:15.130 technical regulatory blind spot that invitation 00:27:15.130 --> 00:27:17.910 homes exploited to enable their growth. BPO stands 00:27:17.910 --> 00:27:21.329 for broker price opinion. Correct. Now, after 00:27:21.329 --> 00:27:23.289 the 2008 housing crisis, the government tried 00:27:23.289 --> 00:27:25.329 to tighten up the rules. Congress banned BPOs 00:27:25.329 --> 00:27:27.210 from mortgages. They said if you were going to 00:27:27.210 --> 00:27:29.549 lend money on a house, you need a real licensed 00:27:29.549 --> 00:27:31.450 appraiser to go inside, check the foundation, 00:27:31.690 --> 00:27:33.549 check the wiring, and give a real value. You 00:27:33.549 --> 00:27:35.170 can't just have a real estate broker drive by 00:27:35.170 --> 00:27:38.150 and guess the price. Exactly. That seems like 00:27:38.150 --> 00:27:40.410 a sensible rule to prevent another bubble. We 00:27:40.410 --> 00:27:43.829 don't want phantom value. It is. But. The law 00:27:43.829 --> 00:27:46.329 applied to mortgages. It didn't explicitly apply 00:27:46.329 --> 00:27:50.069 to bonds backed by multiple homes. So invitation 00:27:50.069 --> 00:27:52.609 homes could use BPOs for their securitizations. 00:27:52.849 --> 00:27:54.910 So they were valuing these billion -dollar bond 00:27:54.910 --> 00:27:57.769 portfolios based on drive -by inspections. Essentially. 00:27:57.890 --> 00:28:01.210 The SEC investigated this starting in 2017. They 00:28:01.210 --> 00:28:04.069 found invitation homes was using unlicensed contractors 00:28:04.069 --> 00:28:07.410 to inspect only the exteriors of the homes. They 00:28:07.410 --> 00:28:09.430 would just assume the interiors were renovated 00:28:09.430 --> 00:28:11.869 and in good condition. Which explains the disconnect. 00:28:12.839 --> 00:28:14.519 Bond investors thought the houses were worth 00:28:14.519 --> 00:28:16.920 X because the outside looked nice, while the 00:28:16.920 --> 00:28:19.160 tenant living inside knew the stove was broken, 00:28:19.339 --> 00:28:21.660 the carpet was torn, and there were ants in the 00:28:21.660 --> 00:28:24.359 kitchen. Exactly. The valuation was based on 00:28:24.359 --> 00:28:26.640 an assumption of quality that didn't always exist. 00:28:26.880 --> 00:28:29.900 It inflated the perceived value of the assets 00:28:29.900 --> 00:28:32.279 backing the bonds. It allowed them to borrow 00:28:32.279 --> 00:28:34.000 more money than perhaps they should have been 00:28:34.000 --> 00:28:36.319 able to. And the tenants started fighting back. 00:28:36.559 --> 00:28:38.519 It wasn't just individual complaints anymore. 00:28:38.779 --> 00:28:42.460 They organized. In May 2018, tenants in Northern 00:28:42.460 --> 00:28:45.400 California filed a class action lawsuit. They 00:28:45.400 --> 00:28:48.940 sued over excessive rent hikes and fees. In places 00:28:48.940 --> 00:28:51.779 like Oakland, Invitation Homes was raising rents 00:28:51.779 --> 00:28:54.799 by 10 % per year. 10 % is huge. Inflation is 00:28:54.799 --> 00:28:57.660 usually 2 or 3%. Wages definitely aren't going 00:28:57.660 --> 00:29:00.259 up 10%. You know, it was double the norm for 00:29:00.259 --> 00:29:03.180 that market. And remember, Oakland has rent control 00:29:03.180 --> 00:29:05.519 for older buildings, but single -family homes 00:29:05.519 --> 00:29:08.019 often fall outside those protections, so they 00:29:08.019 --> 00:29:09.900 could push the rents as high as the market would 00:29:09.900 --> 00:29:12.690 bear. I read about the protests in the notes. 00:29:12.829 --> 00:29:15.789 That's a powerful image tenants marching on Blackstone's 00:29:15.789 --> 00:29:18.009 headquarters. The Alliance of Californians for 00:29:18.009 --> 00:29:21.630 Community Empowerment, or ACCE, organized those. 00:29:21.829 --> 00:29:24.230 It wasn't just holding signs. Tenants actually 00:29:24.230 --> 00:29:26.809 went into the offices in Santa Monica and placed 00:29:26.809 --> 00:29:29.190 letters on the executives' desks. They demanded 00:29:29.190 --> 00:29:31.650 meetings. They said, look us in the eye and explain 00:29:31.650 --> 00:29:34.369 why my rent is going up $300 a month when you 00:29:34.369 --> 00:29:36.049 won't fix the mold. Did they get the meeting? 00:29:36.250 --> 00:29:38.250 The sources say the company never got back to 00:29:38.250 --> 00:29:40.859 them. They just ignored it. which strategically 00:29:40.859 --> 00:29:43.299 is what large corporations often do. They wait 00:29:43.299 --> 00:29:46.440 you out. Silence speaks volumes. But while they 00:29:46.440 --> 00:29:48.460 might have ignored the tenants, they couldn't 00:29:48.460 --> 00:29:50.079 ignore the Federal Trade Commission forever. 00:29:50.400 --> 00:29:53.099 This all culminated very recently in September 00:29:53.099 --> 00:29:57.859 2024. The FTC settlement. This is the climax 00:29:57.859 --> 00:30:00.460 of the legal troubles we are discussing. Invitation 00:30:00.460 --> 00:30:02.839 homes reached a settlement with the Federal Trade 00:30:02.839 --> 00:30:05.039 Commission. And this was not a small slap on 00:30:05.039 --> 00:30:06.640 the wrist. They didn't just have to say sorry. 00:30:06.839 --> 00:30:09.960 No, money changed hands. They agreed to refund 00:30:09.960 --> 00:30:14.779 $48 million to customers. $48 million. That is 00:30:14.779 --> 00:30:17.700 a significant chunk of change. Even for a big 00:30:17.700 --> 00:30:20.619 company, that stings. What were the specific 00:30:20.619 --> 00:30:23.700 charges that led to that? The FTC alleged unfair 00:30:23.700 --> 00:30:26.700 and deceptive tactics. And the list reads like 00:30:26.700 --> 00:30:29.059 a summary of everything we've discussed. Saddling 00:30:29.059 --> 00:30:31.640 people with hidden fees, unjustly withholding 00:30:31.640 --> 00:30:34.319 security deposits and crucially misleading people 00:30:34.319 --> 00:30:36.720 about eviction policies during the pandemic. 00:30:37.079 --> 00:30:39.359 Withholding security deposits is a classic bad 00:30:39.359 --> 00:30:41.799 landlord move. Oh, there's a scratch on the floor. 00:30:41.839 --> 00:30:44.019 I'm keeping your two thousand dollars. But doing 00:30:44.019 --> 00:30:46.119 it at an industrial scale, something else entirely. 00:30:46.299 --> 00:30:49.539 It turns nickel and diming into a multimillion 00:30:49.539 --> 00:30:52.039 dollar revenue stream. Yeah. If you keep, say, 00:30:52.160 --> 00:30:54.440 five hundred dollars from every tenant who moves 00:30:54.440 --> 00:30:57.480 out and you have ten thousand tenants move out 00:30:57.480 --> 00:31:01.069 a year. That's $5 million in pure profit. Wow. 00:31:01.250 --> 00:31:04.210 The settlement was a validation of years of tenant 00:31:04.210 --> 00:31:06.789 complaints. It forced the company to acknowledge, 00:31:07.170 --> 00:31:09.930 financially at least, that these practices were 00:31:09.930 --> 00:31:12.829 unacceptable. So let's zoom out. We have covered 00:31:12.829 --> 00:31:15.130 a lot of ground here. We've covered the origin 00:31:15.130 --> 00:31:17.769 story in the Arizona desert, the massive buying 00:31:17.769 --> 00:31:20.509 spree fueled by Blackstone cash, the financial 00:31:20.509 --> 00:31:23.230 engineering with bonds and the Fannie Mae controversy, 00:31:23.549 --> 00:31:26.269 the maintenance horror stories, and the legal 00:31:26.269 --> 00:31:29.059 battles. What does this all mean for the listener? 00:31:29.279 --> 00:31:31.200 It brings us back to that question of the American 00:31:31.200 --> 00:31:34.079 dream. For decades, the narrative was simple. 00:31:34.180 --> 00:31:36.559 You work hard, you save up, you buy a home. That 00:31:36.559 --> 00:31:39.039 was the primary vehicle for middle class wealth 00:31:39.039 --> 00:31:41.220 creation. It was how you save for retirement. 00:31:41.380 --> 00:31:43.420 It was how you pass something on to your kids. 00:31:43.660 --> 00:31:45.880 Instability. Just knowing your landlord can't 00:31:45.880 --> 00:31:47.859 sell the building out from under you. Knowing 00:31:47.859 --> 00:31:49.859 you can paint the walls whatever color you want. 00:31:50.200 --> 00:31:53.940 Exactly. What Invitation Homes represents is 00:31:53.940 --> 00:31:57.000 a shift toward a rentership society. It's not 00:31:57.000 --> 00:31:59.059 just about owning a home anymore. It's about 00:31:59.059 --> 00:32:01.960 who owns the rental market. Right. When 80 ,000 00:32:01.960 --> 00:32:03.980 starter homes are taken out of the purchase pool 00:32:03.980 --> 00:32:06.559 and move permanently into the rental pool, it 00:32:06.559 --> 00:32:09.180 creates a scarcity for buyers. It pulls the ladder 00:32:09.180 --> 00:32:12.759 up. In many ways, yes. Those 80 ,000 homes are 00:32:12.759 --> 00:32:15.299 80 ,000 families who aren't building equity. 00:32:15.559 --> 00:32:17.579 They are paying off a bondholder's investment 00:32:17.579 --> 00:32:20.480 instead of their own mortgage. And it introduces 00:32:20.480 --> 00:32:23.640 a new dynamic, the efficiency of corporate management 00:32:23.640 --> 00:32:26.420 versus the personal touch of individual ownership. 00:32:26.759 --> 00:32:29.400 Sure, Invitation Homes has an app. You can pay 00:32:29.400 --> 00:32:32.019 your rent on your phone. That's efficient. But 00:32:32.019 --> 00:32:34.440 can you negotiate with an app when you lose your 00:32:34.440 --> 00:32:37.220 job? Does the app care if your heater is broken 00:32:37.220 --> 00:32:40.579 in a snowstorm? Yeah. The data suggests it doesn't. 00:32:40.599 --> 00:32:42.619 The data suggests the app and the company behind 00:32:42.619 --> 00:32:45.339 it cares about the bondholder. And that is the 00:32:45.339 --> 00:32:48.200 fundamental misalignment. A mom -and -pop landlord. 00:32:48.750 --> 00:32:50.509 Wants the house to stay in good shape because 00:32:50.509 --> 00:32:52.710 it's their retirement nest egg? Have a personal 00:32:52.710 --> 00:32:55.589 stake in the physical asset? A corporate landlord 00:32:55.589 --> 00:32:58.230 wants the portfolio to yield a return. If one 00:32:58.230 --> 00:33:00.450 house rots, it's a rounding error as long as 00:33:00.450 --> 00:33:04.309 the fees across the other $79 ,999 cover it. 00:33:04.470 --> 00:33:07.150 It's a sobering reality. We're really seeing 00:33:07.150 --> 00:33:09.349 the financialization of shelter. That is the 00:33:09.349 --> 00:33:11.730 perfect phrase for it. Financialization of shelter. 00:33:12.400 --> 00:33:15.140 Taking a basic human need a roof over your head 00:33:15.140 --> 00:33:18.319 and turning it into a tradable, securitized financial 00:33:18.319 --> 00:33:21.900 product optimized for yield rather than livability. 00:33:22.119 --> 00:33:24.720 So as we wrap up this deep dive, I want to leave 00:33:24.720 --> 00:33:26.619 our listeners with a provocative thought. We 00:33:26.619 --> 00:33:28.500 talked about their new venture building homes, 00:33:28.660 --> 00:33:31.359 specifically to rent. The built to rent revolution. 00:33:31.500 --> 00:33:33.839 If corporations continue to buy up single family 00:33:33.839 --> 00:33:36.240 homes and now start building entire communities 00:33:36.240 --> 00:33:39.259 that are for rent only. Are we moving toward 00:33:39.259 --> 00:33:41.579 a future where homeownership is obsolete for 00:33:41.579 --> 00:33:44.039 the middle class? Are we heading toward a permanent 00:33:44.039 --> 00:33:46.579 subscription model for housing? It is a valid 00:33:46.579 --> 00:33:49.259 fear. Think about it. We subscribe to music with 00:33:49.259 --> 00:33:51.980 Spotify. We subscribe to movies with Netflix. 00:33:52.200 --> 00:33:54.720 We subscribe to software. We subscribe to food 00:33:54.720 --> 00:33:57.180 delivery. Everything is a subscription. If housing 00:33:57.180 --> 00:33:59.579 becomes just another subscription service, the 00:33:59.579 --> 00:34:01.980 wealth gap between the owners, the shareholders, 00:34:02.160 --> 00:34:05.019 and the subscribers, the tenants, will only widen. 00:34:05.529 --> 00:34:08.010 You never own the asset. You just pay for the 00:34:08.010 --> 00:34:09.949 privilege of using it. And the most chilling 00:34:09.949 --> 00:34:13.650 part. In that future, your landlord isn't a person 00:34:13.650 --> 00:34:16.769 you can talk to. It isn't Bob from down the street. 00:34:16.969 --> 00:34:19.590 It's an algorithm that answers to the stock market. 00:34:19.750 --> 00:34:22.190 And the stock market never sleeps. It has no 00:34:22.190 --> 00:34:24.269 empathy. And it certainly doesn't come over to 00:34:24.269 --> 00:34:26.449 fix the sink on a Sunday. That's it for this 00:34:26.449 --> 00:34:29.110 week's Deep Dive. We hope this gave you a clearer 00:34:29.110 --> 00:34:31.610 picture of the giant owning the house next door. 00:34:31.789 --> 00:34:34.030 Stay curious and read the fine print on that 00:34:34.030 --> 00:34:34.989 lease. See you next time.