What Happens When Wall Street Is Your Landlord?
Darrick Rainey

What Happens When Wall Street Is Your Landlord?

On the afternoon of Sept. 2, Robert Allen returned home from work earlier than usual to discover a guy posting a piece of paper to his front door. The uninvited guest said he worked for the landlord.

Allen and his wife rent a Spanish-style cottage on a quiet street in South Los Angeles. Their landlord happens to be Invitation Homes, a Dallas-based real estate investment trust backed by one of the world's largest private equity firms, Blackstone Group. The piece of paper pinned to the door was a notice to pay the rent or face the consequences.

Allen says he was stunned — after all, it was only one day after the first of the month.

Allen, 52, works as a casual longshoreman and his wife, Anntoinette, is a nurse. According to the notice, the couple had three days to pay the rent — at that time $2,114 — or the landlord could take them to court and have them evicted. Allen says the threat was overkill. He says he and his wife hadn't missed a rent payment in the two years they've lived there.

"The rent wasn't even late yet, and you're posting a notice?" he says, shaking his head. "Seemed like a scare tactic to me."

A scare tactic, he says, because the piece of paper arrived after Invitation Homes notified the Allens of a $250 rent increase — 12 percent more than they were paying — as a condition to renew their lease. They balked and threatened to move out unless the company agreed to lower the amount. Allen says the employee who answered the phone at the Ventura County number printed on the notice said he'd relay the message to someone in charge.

The Allens were still waiting for a response when the man showed up at their door.

Allen recounted the story on a recent Sunday morning, seated with Anntoinette in the couple's dining room, the house abuzz. Board games were neatly stacked on the table. A Rams game was playing on a TV in the living room, where the couple's young grandchildren were building a fort out of sofa cushions and blankets. ("Honey, I know you don't mean to break anything," Allen assured his granddaughter gently at one point, "but sometimes things fall and break on their own.")

"We're supposed to be negotiating and be nice with each other and come to an agreement," he says of Invitation Homes, "and you're out here trying to post a threatening letter."

Several tenants of Invitation Homes have reported receiving three-day eviction notices due to payments two or three days late. It happened to friends of the Allens who used to live around the corner. Robert Allen says those friends moved to Palmdale last year after Invitation Homes hit them with a large rent increase.

As for the Allens, Invitation Homes yielded at the eleventh hour and offered them a more reasonable increase of $80 a month.

Saving to buy a house and unprepared to search for a new rental, the Allens reluctantly agreed. They say it makes better financial sense for them to make a down payment on a home within the next year than to pay another rent increase of 6 or 7 percent to Invitation Homes.

"It's a vicious circle of paying the bills one month to the next," Anntoinette Allen says, "and not being able to accumulate anything because things cost so much."

Robert Allen says of the landlord's actions: "It was a wake-up call."

That call comes in the midst of an L.A. housing crisis plagued by skyrocketing rent, diminishing housing supply and questions of whether Invitation Homes is exacerbating the problem at the same time that it's capitalizing on it.

Invitation Homes is not L.A.'s largest landlord, but it is the city's largest landlord of single-family houses. And its size isn't the only thing that makes it unusual. It's a multibillion-dollar corporation that, according to its critics, is more concerned with taking care of its investors and stockholders than its tenants.

Robert and Anntoinette Allen in front of their rental home
Robert and Anntoinette Allen in front of their rental home
Ted Soqui

On the other hand, the company should be credited with eradicating blight and attracting and keeping conscientious tenants, according to Bruce Lavine, executive vice president of Invitation Homes. "We have invested an average of $22,000 per home for upfront renovations to our properties, many of which were previously sitting vacant and dragging down property values for surrounding homes," Lavine said in a written statement. "Those investments not only benefit residents but also drive economic growth and job creation in local communities."

He also stated: "Residents give us high ratings for customer service and satisfaction, and renew their leases and stay 50 percent longer compared to the apartment industry."

Those thousands of tenants — especially the ones willing to accept Invitation Homes' rent hikes — are the foundation of bundled, rental income–backed securities that are gaining popularity at nearly the same rate that they're drawing criticism.

Earlier this year, the Federal National Mortgage Association, aka Fannie Mae, announced that it would guarantee a $1 billion loan from Wells Fargo to Invitation Homes. Many industry observers found the move bizarre. In a letter to Mel Watt, director of the Federal Housing Finance Agency, which regulates Fannie Mae, National Association of Realtors president William Brown wrote:

"Rather than focusing on allowing well-qualified Americans to build wealth through affordable mortgage options, Fannie Mae is actively financing large institutions to compete with them. These investors do not expand the affordable housing stock. Rather, in this limited market they drive up the price of rents and remove affordable inventory from the hands of American homeowners. ... At a time of a historically low homeownership rate, our nation needs [Fannie Mae] to bolster homeownership opportunities for millions of responsible, middle-class American families, not funding special-interest deals with Wall Street financial firms that take away those opportunities."

Another common complaint about Invitation Homes is that it is ill-equipped to handle the human aspect of being a landlord.

Amanda Copeland and her child, who suffers from autism, moved into an Invitation Homes–owned house in Woodland Hills in 2013. According a lawsuit Copeland would later file, the house was in constant need of repairs and was infested with "spiders, ants, silverfish and other vermin." When she asked for repairs, the lawsuit states, the manager in charge of Copeland's house delayed, and she complained to the manager's boss. She then received an email from the manager, David Castaneda, reading in part:

"Your frustration regarding the lack of response from our maintenance desk has been addressed and you should be contacted about your request now within 48 hours. You have expressed to us several times that the condition of the property has been difficult for your child, who has autism. Had we been aware that your child had a disability when you started the application process with Invitation Homes we would not have offered the lease to you. It is not our responsibility to ensure a suitable residence for a child with special needs."

According to the federal Fair Housing Act, it is illegal to refuse to rent to someone on the grounds that one of the tenants has a disability.

In April 2014, Copeland received word that her lease would not be renewed. According to the lawsuit, an Invitation Homes representative told a friend of Copeland's, "We will not rent any home to this family under any circumstances."

Copeland could not be reached for comment. According to court documents, the lawsuit was dismissed in 2015. Invitation Homes spokesperson Claire Parker declined to discuss the merits of Copeland's complaint, saying only, in an email, "Invitation Homes is deeply committed to treating all its residents fairly, and with respect and dignity in every instance."

Copeland's story reveals something else about the nature of corporate ownership, according to USC professor Dana Cuff. When your landlord is a publicly traded corporation, you might be treated less as a person than as a number in a spreadsheet, an asset with a cost.

"We still have some expectation of community in a neighborhood," Cuff says of the traditional landlord-tenant relationship. "There's no interest for a corporation in that. They're only interested in a return on their investment."

The 2008 financial crisis feels like a lifetime ago, but its aftershocks can still be felt. When families who'd been sucked into the subprime mortgage market defaulted on their mortgages, their homes became the property of Fannie Mae, or Wells Fargo, or other financial institutions left holding the bag. Many of those homes, in turn, were sold to other financial institutions such as Blackstone, one of the largest private equity firms in the world — and now one of the largest real estate investors in the world. Rather than try to sell the houses, Blackstone gambled on them being more valuable as rentals. Blackstone founded Invitation Homes in 2012, for the purpose of managing its portfolio of single-family homes.

It turned out to be a prescient investment. Home prices and rents in cities across America have trudged reliably upward in the years since the recession, especially in sunny Southern California, where Invitation Homes owns more than 8,000 houses.

"It is important to note," Invitation Homes' Parker says in a written statement, "that the professional single-family rental industry represents less than 1 percent of the more than 16 million single-family homes that are rented in this country, most of which are owned by mom-and-pop operators."

Indeed, Invitation Homes' 3,150 or so homes in L.A. County are a mere fraction of the county's 3.4 million housing units (a figure that includes apartment units). But the company's homes are clustered in certain areas where some say they have an outsize impact: the northern part of the San Fernando Valley, South Los Angeles and Compton.

For instance, Invitation Homes owns 18 single-family houses within a half square-mile of the street where Robert and Anntoinette Allen live. The company owns 42 homes within about 1.3 square miles of the couple's home. Within a 4-square-mile area of South L.A. — bounded by Figueroa Street, Century Boulevard, Van Ness Avenue and Gage Avenue — the company owns 134 homes.

The concentration of these so-called REO-to-rentals (REO stands for "real estate owned") — along with flippers and real estate speculators, all of which draw upon large pools of financing — is yet another obstacle to first-time homebuyers struggling to gain a foothold in the modern economy, community members say.

"If I ever wanted to buy a house in Leimert Park, I'm not competing against people who grew up in Leimert Park," says Damien Goodmon, a local activist. "I'm now competing against Wall Street investors, who've bought thousands of homes in a day."

Los Angeles is a city of renters. According to the latest census figures, L.A. has 1.4 million housing units; about 37 percent of them are occupied by their owners. The rest are rented.

More than 600,000 apartment units are covered by the city's 1979 rent-stabilization ordinance. Tenants living in those units are protected in a variety of ways: Their rent can be raised by only 3 percent a year, and it's much more difficult to evict them.

Renters of newer apartment buildings (built after 1978) and of single-family homes are not protected. Their landlords can raise their rent at any time and have much more leeway to evict a tenant.

"These tenants are sitting ducks," says Larry Gross, who heads the Coalition for Economic Survival. "They have absolutely no rights in regards to how many times these corporate bandits can raise rents."

Earlier this year, a research assistant with MIT's department of city planning analyzed L.A. County property records and used the data on ownership to map what she calls in her master's thesis "an emerging oligarchy of institutionalized landlords" in Los Angeles County. By far the largest of the Wall Street landlords, at 87 percent of the institutionally owned single-family rentals, is Invitation Homes.

The research assistant, Maya Abood, is now a researcher at USC's Program for Environmental and Regional Equity and an expert on Wall Street landlords in Southern California. She has analyzed the locations of thousands of Invitation Homes rental properties, along with census data, to determine what impact the company and its smaller competitors have had on L.A. housing.

On Abood's map, colored dots of single-family rentals belonging to Invitation Homes stipple a vast area of South L.A., the length of Interstate 10 from Fairfax Avenue to the I-110 interchange, and down either side of the Harbor Freeway through Compton, Carson and Lancaster, all the way to San Pedro.

"Neighborhoods that are primarily African-American have a higher percentage of homes owned by these companies and a higher number of homes owned by these companies," Abood says. "Also, these neighborhoods have higher median incomes and higher commute times. You can think of these companies as targeting the American Dreams of people who have historically been shut out of the housing market."

Invitation Homes' president-CEO, John Bartling Jr., emphasizes the company's positive contribution to the areas in which it invests.

"Our investment strategy is simple," Bartling told investors during a quarterly earnings call in May. "We invest in supply-constrained infill locations near major employment centers with good schools and desirable amenities where families can thrive."

Amenities in South L.A. include the $2 billion Crenshaw/LAX Metro line, the $2.6 billion Los Angeles Stadium and Entertainment District in Inglewood, and the conversion of the Baldwin Hills Crenshaw Plaza into 551 condominiums, 410 market-rate apartment units, a 400-room hotel and a brand-new, 10-story office building. Whether by luck, algorithm or intuition, Invitation Homes finds itself in the thick of the fastest-appreciating housing market in Los Angeles, and with a good deal of leverage.

Aaron Terrazas, a senior economist at the real estate web site Zillow, says such investments all but ensure rising property values. "Often when cities do make these major investments, they tend to look toward communities that have lagged in terms of development," Terrazas says.

Add to the equation a legion of high-salaried tech workers in search of more affordable housing than the skyrocketing rents of Silicon Beach, and it is unsurprising that displacement pressure is building on the longtime residents of South L.A.

"Certainly this area in the last decade or longer did lag behind the Los Angeles market," Terrazas says. "Now that pattern is inverting itself and that area is outpacing the rest of the city."

Death Alley is the nickname for the corridor of Vermont Avenue that runs two miles north from Imperial Highway. The area saw 60 homicides between 2007 and 2014. Today, with the ripple effects of prosperity, the median home prices in Death Alley are appreciating at about 12 percent per year (the rate for the L.A. Metro area is about 5.5 percent). And the median rent is appreciating by about 11 percent annually (the L.A. Metro area's median increase is 4 percent).

Until recently, the sudden turnaround of neighborhoods like Westmont, Gramercy Park and Manchester Square might have seemed farfetched. Now, unchecked rent increases on single-family homes abound.

Sheri Eddings rents a four-bedroom home in Westmont from Invitation Homes. She says the company has raised the rent from $1,800 in 2013 to $2,200 this year.

But the rent for a single-family home in Eddings' ZIP code, 90047, is increasing on average by 9 percent per year — well above Eddings' rent increases. That means Invitation Homes isn't doing anything out of the ordinary, though that may be hard for Eddings to see.

"I went to the head people, I called around and asked them, how do you get your increases?" she says. "If you came around this neighborhood at night, you wouldn't increase it."

Eddings says shootings have been rampant in the neighborhood, which is near the intersection of Vermont and Century. Her next-door neighbor was recently shot in front of his house, she says.

Invitation Homes purchased the house in 2012 for $191,000. This year, it was assessed at $301,000. "Nothing's different, except there's more crime," Eddings complains.

The house was gut-renovated and new appliances were installed before Eddings moved in. Though the floor in the living room is badly warped (a problem the company refuses to acknowledge or fix, she says), and the patio floods when it rains, Eddings says the home suits her and her daughter, and that the value is good for the area.

"I love my home, and I'd love to stay there," she says. "I just don't want to continue to pay the prices that they're asking me to pay."

Eddings, who has a job in retail, says the lease she signed this year is stricter than the last. The cutoff date for late payment of rent was moved from the fifth to the third, and a charge of $35 a month was added for her dog, a Shih Tzu mix named Milo.

Ernest M. Freedman, Invitation Homes' chief financial officer, told investors in May that the company has taken steps to standardize its leases nationally, with fees consistently included and strictly applied. "And so, things like pet rent are up 300 percent year-over-year," he said. "We had over $1.5 million of pet rent in the first quarter, for instance."

Rent increases of between 5 and 10 percent a year, at the time a lease is up for renewal, also are lucrative. Freedman told investors in May that renewals account for two-thirds of Invitation Homes' business.

Invitation Homes went public in January, a stock offering that netted $1.7 billion. In August, the company announced plans to merge with the second-largest rental-home owner, Starwood Waypoint Homes, creating a corporate landlord conglomerate that dwarfs all others in the country, with 82,000 homes in 17 metro areas.

Mergers might be the only avenue for growing Invitation Homes' portfolio; its home buying has slowed to a trickle. In the first half of 2017, the company reports that it bought just 41 homes in Southern California.

"We've been running this business now for about five years," Freedman said during a May conference call, "and the first two and a half to three years it was very focused on acquiring homes, renovating them, getting residents in there and generating positive cash flows, and we were very successful at that. The last couple of years, it's been very focused on how can we operate better. And now we're very focused on building the brand and saying, what can we provide service-wise, from an internal growth perspective, to make our residents experience better when they are living with us."

But Invitation Homes does more than just manage its rental homes. In much the same way that home loans were pooled and processed into mortgage-backed securities, Invitation Homes has packaged its rental income into financial instruments.

"It works just like it did with subprime mortgages," says Eileen Appelbaum, a senior economist at the Center for Economic and Policy Research. "They take a bundle of properties. The risk is mitigated by the fact that they have good ones and bad ones. And then they pool them and slice them. It's all over the place. You don't even know what's in it. They have yields higher than what you can get from anywhere."

To some, including Appelbaum, this all sounds eerily reminiscent of the mortgage-backed security craze that led to the financial meltdown in 2008.

"It's the same people who were foreclosed on," she says of some of the tenants. "The same people who are now renting. Why do we think, come the next recession, the result will be any better? The same people that can't keep up with their mortgage won't be able to keep up with their rent."

At least not if the rents keep going up.

Renita Barbee in front of her South L.A. rental home
Renita Barbee in front of her South L.A. rental home
Ted Soqui

Renita Barbee has been renting in South L.A. since she lost her home there more than a decade ago.

Barbee, 52, lives a block away from Robert and Anntoinette Allen, in a subdivision of cottages built when Pepperdine University was a small liberal arts college at Vermont and 79th Street.

Barbee and her husband rented their house for $1,895 from Invitation Homes in 2013. The rent has increased every year since, and this year she pays $2,120 a month.

On Sept. 27, Barbee got a notice from the landlord of an $800 rent increase. She says she reached out to the landlord, to see if it was an error.

"I can't afford it," she says. "It is a gigantic rent increase. At that amount, if I were to apply for the place right now, with my income, I wouldn't qualify."

The notice also said that should her lease expire in December without her signing a new one, Invitation Homes would begin charging a monthly premium of $500, on top of the increase.

She says that after Invitation Homes did not return her phone calls and emails seeking a more reasonable rent increase, she reluctantly began to pack her family's belongings. "So the sheriff doesn't throw me out on the grass," she says, "I'm preparing for the worst while I look for something else." As she spoke, her eyes were dampened with tears.

Barbee, a dispatcher for the city, earns a salary of about $78,000 a year. Her husband is a plumber who has had two strokes. And she's had a difficult year. In July her mother died. Her daughter is in her senior year of high school, and Barbee wanted to stay at their house for at least one more year.

"I can't even speak to a live person," she says of the unanswered calls. "It's way different than working with an individual homeowner. These people don't care at all."

Like many new tenants, Barbee liked Invitation Homes in the first year. The rent is competitive, if your credit is good the deposit is small, and the improvements to the properties make the homes a good value. They're not old or outdated like a lot of properties in the area.

"I highly recommended them when I first moved here," Barbee says. "I've given the number out to quite a few people."

Finally, nearly a month after Barbee received notice of the $800 rent increase, a manager from Invitation Homes called to tell her it was a computer-generated error. The real increase was going to be closer to $200 a month, nearly 10 percent above her current rate.

After Los Angeles Times columnist Steve Lopez spoke with Blackstone, showing an interest in Barbee's situation, the landlord called back and offered an extra six months at her current rate.

But Invitation Homes would almost certainly raise the rent again after six months, she says. "Until the law is changed they're going to keep doing it. It's just a matter of time."

A former supervisor of Barbee's at the transportation company where she worked for 14 years has moved his elderly mother into his house — and offered to rent the woman's newly vacant house to Barbee. It's closer to her daughter's school than the house she has now. She's considering it — and is continuing to prepare to leave.

Wrapping the dishes and glasses in the kitchen reminds her of the family dinners in the backyard when her mother was still living.

"I am going to miss this place," she says. "I get real emotional packing. It's pretty sad."

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