Visulate Support for Single-family Rental Property Acquisitions

Peter Goldthorp – Visulate December 2012

Problem Description

Private equity and REIT investors have raised substantial funds to invest in the single-family rental market. Investing these funds presents analytical and logistical problems. Fund managers need tools to support their acquisition strategies.

Business Need

A Keefe, Bruyette & Woods report published in September 2012 estimated the total value of private equity committed for single family rental investment at $6-8 billion. The single family rental market is gathering momentum and attracting new capital commitments. These funds need to be invested in a timely manner.

A typical fund needs to acquire, rehab and lease 6 to 10 properties for every million dollars under management. This is a time consuming and labor intensive process for each property. These activities need to be monitored and coordinated to minimize the time taken for each newly acquired property to become an income producing asset.

The acquisition of each property involves the outlay of capital beyond payment of the purchase price and repair costs. These include payments for property inspections, closing costs, title insurance, transfer taxes, recording fees, broker commissions and property taxes or HOA fees in arrears. Some of these costs are unavoidable. Others may be reduced by process automation.

Functional Requirements

1. Customer Requirement

Private equity funds need analysis tools to help them identify target markets and areas to avoid. They also need tools to help them estimate income and expenses for each property they consider purchasing. Funds that are active in more than one MSA (metropolitan statistical area) or investing more that around $5 million per month in single family rental properties are likely to need software tools to help coordinate their activities.

2. Use Cases

1. Market Analysis and Selection

   1. Evaluate macroeconomic and demographics of target MSAs:

      1. Existing supply of homes
      2. Vacancy rates
      3. Prior and projected population and household growth
      4. Prior and projected migration
      5. Regional market-building activity
      6. Mortgage delinquency figures
      7. Employment trends
      8. Income ratios and price-to-rent ratios
   2. Identify target markets
   3. Establish acquisition criteria for each market
      1. Segment of Housing Stock
         1. Home size and price
         2. A, B, C or D class
         3. Rent vs. purchase affordability
      2. Vintage
         1. Age and condition of target properties
         2. Expected annual maintenance costs
      3. Location
         1. Proximity to major employers
         2. Ease of transportation/commute
         3. Neighborhood
         4. Homes that are part of cluster/community vs. "free standing"
         5. Proximity to other properties in our portfolio
         6. School districts and property taxes
         7. Homeowners' association and rules
      4. Property Description
         1. Size/square footage
         2. Number of rooms (beds/baths)
         3. Basements (finished vs. unfinished)
         4. Garage
         5. Pools
         6. Lot size
      5. Renovations Required
         1. Need and cost of renovation required vs. acquisition price and available rents in the market
         2. Ranges of renovation acceptable
      6. Acquisition Cost
         1. Market value vs. income value vs. estimated replacement cost
      7. Rental Rates
         1. Estimate risk-adjusted net rental yields
         2. Identity acquisition cap rate.
2. Develop Acquisition Plan
   1. Record target property criteria
   2. Record target location criteria
      1. Zip codes (to buy or avoid)
      2. Spatial coordinates (e.g. key employers or school districts)
   3. Record price guidelines
   4. Establish roles and responsibilities for key personnel
   5. Identify approved vendors
   6. Develop legal guidelines
      1. State and local laws

      2. Foreclosure auction process and practice
3. Execute Acquisition Plan
   1. Purchase properties at foreclosure auction
      1. Assemble lists of forthcoming auctions
      2. Identity location and physical characteristics of each property
      3. Estimate NOI, IRR and income value for “stabilized” rental property
      4. Review and exclude properties that do not meet acquisition criteria
      5. Perform title search on remaining properties
      6. Identify candidate properties
      7. Perform drive-by inspections and record results
      8. Establish maximum allowable offer for each property
      9. Assign buyer/bidder for each property
      10. Attend auction and bid on properties
      11. Fund winning bids

      12. Take possession of properties

      13. Inspect property and assemble repair estimates

   2. Purchase properties from MLS
      1. Assemble lists of candidate properties
      2. Identity location and physical characteristics of each property
      3. Estimate NOI, IRR and income value for “stabilized” rental property
      4. Review and exclude properties that do not meet acquisition criteria
      5. Visit properties
      6. Establish maximum allowable offer for each property
      7. Submit contingent offer (e.g. all cash with 10 day inspection period)
      8. Review counter offers and accept or reject them
      9. Inspect property and assemble repair estimates (prior to end of contingency period)
      10. Reject or renegotiate contract if purchase price + repair price exceeds max allowable offer
      11. Fund purchases
      12. Purchase properties with title insurance

      13. Take possession of properties

   3. Bulk purchase properties
      1. Assemble lists of candidate properties
      2. Identity location and physical characteristics of each property
      3. Estimate NOI, IRR and income value for “stabilized” rental property
      4. Review and identify properties that do not meet acquisition criteria
      5. Investigate disposition strategies for properties that do not meet criteria
         1. Exclude from transaction
         2. Buy and sell
      6. Perform title search on remaining properties
      7. Perform drive by inspections and record results
      8. Establish maximum allowable offer for each property (if purchased separately)
      9. Establish maximum allowable offer for pool of properties
      10. Negotiate purchase
      11. Fund purchase
      12. Take possession of properties

4. Take possession of a property

   1. Obtain insurance

   2. Visit property, secure and change locks

   3. Switch on utilities

5. Rehab property for use as rental

   1. Review repair estimates with vendors or in-house repair team

   2. Agree scope of work and schedule

   3. Monitor progress

   4. Inspect completed work

   5. Handover to property management team

   6. Review and pay vendor invoices

3. Functionality and Feature Description

The following table shows a summary of required features for a software system to support single family acquisitions. We have developed our own proprietary software to support these features.

Feature Summary

F01 - Macroeconomic analytical tools to identify target MSAs

Visulate maintains sales data for cities and property usage types. It displays this data in summary form via an interactive report. This report could be extended to include demographic data.

F02 - Record acquisition criteria for each target market

Visulate does not support this at the moment. It would be a relatively simple enhancement to add a screen and associated tables.

F03 - Evaluate acquisition criteria for individual properties in each target market

Visulate generates NOI estimates for properties based on their size, location, usage and building classification. It stores seed data values in a database table. This table records annual income and expense estimates on a price per sq ft basis. The table is seeded using values derived from Government statistics (mostly HUD and Census Bureau).

Estimates are generated at run-time by matching property characteristics to the seed data values. Seed data can be recorded for any city in the USA. City values can be adjusted by zipcode. For example, rents in zipcode 12345 are 105% of the city value.

Visulate can store estimates in a database and allows users to refine them. It also allows estimates to be download from the database to a spreadsheet for offline working.

F04 - Automated evaluation of acquisition criteria

Visulate supports bulk uploads of property data from a spreadsheet. Details of candidate properties can be entered onto a spreadsheet and uploaded into the database. It could be extended to evaluate these properties automatically and reject ones that do not meet the acquisition criteria (recorded by F02)

F05 - Support for multiple users and roles in more than one market

Visulate was designed as a multi-user, multi-role system. It has an access rights model based around a logical entity called a business unit. A business unit is a collection of related properties. Users are granted access to one or more business units. This allows them to access details of its properties.

Business unit grants are role based. This allows the owner of the business unit to control the actions that a user can perform. For example, a role grant might allow a real estate broker to enter property details without granting access to the general ledger for the business unit. It could also allow them to enter and edit properties in their own MSA with seeing details of other MSAs where the fund was investing.

F06 – Support for Mobile

Visulate works on any browser enabled platform. This allows users to record estimates and inspection results from an iPad.

F07 - Record and monitor offers, inspections, deadlines and alerts

Visulate can record valuations and offer prices. It can also store inspection results and repair estimates. It needs to be extended to track dates and deadlines for key events.

F08 - Manage work orders and 3^rd party vendors

Work orders are recorded as expenses against a property. Estimates can be recorded for each work order from one or more vendor. Each work order may result in one or more invoices. Invoices are recorded in accounts payable and the general ledger.

Visulate allows the owner of a business unit to maintain a list of approved vendors for it. Payments to a vendor a tracked. Visulate provides reports to help generate 1099 tax forms for vendors.

F09 - Integrated property management system

Visulate has a property management system that is optimized for single family rentals. It uses the same tables and infrastructure as the acquisition software and is fully integrated with it.

F10 - Rehab project planning and scheduling

Visulate does not support project planning or job scheduling.

F11 - MLS integration

Visulate can pull MLS listing from RETS enabled servers. It maps the listing data to the property data using the tax id included in the MLS XML. Results are displayed in an integrated report.