Wall Street's Single-Family Home Grab, Phoenix — Part 1

Phoenix - In early September 2019, an owner of a two-story, single-family tan stucco home in San Tan Valley, an unincorporated community southeast of Phoenix, put her property up for sale.

While it was still months before the emergence of a global pandemic that would spark a nationwide race among individuals and families to buy single-family homes, the greater Phoenix real estate market was strong, and it wasn't unusual for sellers to receive a rapid-fire succession of offers within days of listing. Four days later, the seller accepted one.

The transaction, though, would be anything but routine.

As it happened, the buyer was FirstKey Homes, a $5 billion corporation based in Georgia and owned by New York private equity firm Cerberus Capital Management LP. Using the arcane parental moniker Cerberus SFR Holdings III LP, FirstKey made a $5,000 down payment as part of its all-cash offer, and told the seller it planned to convert the home to a rental. After the inspection, the buyer asked for a $12,000 price reduction, claiming the 2,276-square-foot, three-bedroom home needed a new air conditioner.

"The air conditioner worked," Dawn Marthini, the Offerpad agent who represented seller Rebecca Ngumi, told Law360 in a recent interview. "When they came back with their monster $12,000 off the price, I told her, 'I think we can do better if we find another buyer.'"

But Ngumi said "Nope, I want to be done with this house," and agreed to sell her home for $231,000, which factored in the $12,000 discount, Marthini recalled. Corporate buyers "will always come in and hammer you on inspections."

FirstKey told Law360 it felt the system was on its last legs and sought what it considered to be a reasonable concession, no different from the negotiations that go on in the purchase of an owner-occupied home. 

Phoenix — the nation's fifth-largest city, with a population of roughly 1.75 million — has seen more and more of its existing single-family homes quietly snapped up by Wall Street corporations, who in turn convert the properties to rentals.

While corporate buyers often have a host of demands like short inspection windows days before the closing and requirements that owners vacate the property during that period, their typical quick, all-cash offers often help them beat out individual buyers who require financing and are not as fast to make bids.

Over the course of several months, Law360 analyzed property data within the city of Phoenix and the myriad LLCs, LPs and funds that own thousands of the city's single-family rental homes. The data shows just how prominent corporate ownership has become.

The city has roughly 278,000 primary-residence, single-family homes, and of that total about 41,000, or nearly 15%, are rentals.

Law360 found that 25 corporations each own at least 0.1% of the city's single-family rental housing stock, and collectively own more than 7,500 properties — nearly 1 in 5 rental homes in the city.


Invitation Homes — which The Blackstone Group Inc. bought in 2012 and maintained an interest in until 2019, when it divested its stake — is the largest player in Phoenix, with roughly 2,700 single-family rental homes, 6.5% of the city's single-family rentals. FirstKey, another of the 10 largest players in Phoenix, has roughly 300 single-family rental homes to its name. 

Law360 restricted its analysis to primary homes, both owned and rented, and its investigation did not consider nonprimary homes, most of which are "snowbird" properties where out-of-state individuals spend the winter months, according to the Maricopa County Assessor's Office. The numbers also exclude Phoenix's rapidly growing stock of single-family rental home communities that developers have erected using a "build-for-rent" model, since Maricopa County likens such homes to apartments and zones the entire communities — many of which comprise hundreds of single-family rental homes — as single legal parcels.


More Pain for First-Time Buyers and Renters

As more of the city's single-family stock is bought by corporations and converted to rentals, taking homes out of the supply pipeline and putting upward pressure on for-sale home prices, it becomes that much harder for first-time homebuyers to achieve homeownership.

Phoenix has seen some of the biggest price surges of any U.S. market over the past year, with prices rising nearly 27% from June 2021 to June 2022, according to the S&P CoreLogic Case-Shiller home price index.

"We particularly saw this during the pandemic," said Lora Phillips, an associate research professor at Arizona State University. "The average working-class household was having trouble competing with cash buyers, who were by and large corporations, willing to put in offers even above asking."

While increased corporate ownership is making it harder for first-time buyers, in some cases, renting from corporate landlords is also not a great deal for tenants. Such corporations have at times saddled tenants with steep rent increases, and Wall Street landlords have a mixed record when it comes to maintenance requests. Many tenants believe they won't get their security deposits back, even if they go to great extremes to take care of and clean their house.

While the trend has seemingly put more money into sellers' pockets thanks to corporations routinely paying well above asking price, agents told Law360 that corporations often use aggressive tactics during the buy phase, creating headaches for sellers. Corporations are generally quick to make high all-cash offers that sellers have difficulty turning down, but companies often then look for ways to lower the buying price after locking in the deal, agents told Law360.

Meanwhile, there's been little or no effort by the city, county or state to regulate conversion of such homes to rentals. And homeowners associations — which have a broad reach in Phoenix, even in single-family home communities — have done little if anything to regulate renting out homes on a long-term basis.

"They just came with big money. Wall Street bought up so much of Arizona, with short turnaround times and lots of cash," said Christie Ellis, an associate broker and team lead at The Christie Ellis Team, speaking of what happened prior to June, when the pace of deals started to slow amid recession fears and rising interest rates.

"They wanted to get someone in there fast … and came with the most ridiculous amounts of money," Ellis added.

An Asset Class Is Born

Little thought of as an asset class before the Great Recession, single-family rentals have become one of the darlings of Wall Street, with some real estate investment trusts now focusing entirely on the sector. Indeed, the term single-family rentals has become so ubiquitous that many corporations in the business of buying and renting out single-family homes use "SFR" as part of their arcane owner names.

In the years leading up to the Great Recession, institutional investors started showing interest in single-family homes in Phoenix, but firms flocked to the city in earnest in the years following the downturn, seeking to get into the market at rock-bottom prices, given the severity of the last crash in the Valley of the Sun.

Phoenix lies near the northern boundary of the Sonoran Desert, so long-distance corporate landlords didn't have concerns of mold and mildew, like they might have had in some U.S. cities. And the city's housing stock is relatively new, which would seem to make it easier for landlords to be distant. The median age of homes in both Maricopa County and the state of Arizona is 30 years, and only Nevada has a lower median age, at 26 years, among states, according to a report this year from House Method. By contrast, the median age of homes in New York state is 63.

Wall Street's view was housing would be a good hedge against economic downturns. The model has been hugely profitable for the firms that hit the ground running, as home prices have steadily risen every year for a decade and the rents have skyrocketed. Phoenix also has relatively low property taxes, and Maricopa County recently pushed the rate even lower. And prices of many Phoenix rental homes have outperformed even the red-hot single-family market of late.

A handful of the major players nationwide are public companies, including Invitation Homes, a $20 billion market cap company that posted $111 million in net income available to common stockholders in the second quarter, an 83.9% jump from the same period a year earlier.


"We do get concerned about corporate ownership — and especially out-of-state, high-volume corporate ownership — for a few reasons. It doesn't have to be that way, obviously," said Michael Lucas, executive director at Atlanta Volunteer Lawyers Foundation. Atlanta has one of the highest rates of corporate single-family home rentals in the country.

On top of benefiting from a decade's worth of gains in home values and rising rents, corporations have also drawn on the commercial mortgage-backed securities model that earned notoriety during the last real estate crash, with firms pooling and securitizing thousands of single-family homes.

Residential mortgage-backed securities deals have given even more Wall Street investors a chance to tap into the sector on the secondary market, and corporate landlords, as part of the larger securitization process, have taken out enormous loans backed by hundreds or thousands of homes — and used some loan proceeds to buy even more homes, restarting the cycle.

Invitation Homes, for one, landed a $1 billion loan from Wells Fargo in 2017, and after using $510 million of the proceeds to pay down debt from a similar 2014 loan also backed by single-family rental homes, the company had $490 million in remaining cash to work with.

Dechert LLP has handled the lion's share of the recent securitization work on the legal side, assisting with nine of the 10 largest single-family residential securitization deals in 2021. The law firm helped Progress Residential with seven of those 10 deals and guided FirstKey Homes on two of the other largest transactions of the year.


More recently, with inflation and recession fears top of mind, Wall Street continues to view single-family rentals as a hedge, since residential rents, unlike those at office properties, can be readjusted annually, provided there are no rent controls in place.

Phoenix has none.

One Company Went All In on Phoenix

Invitation Homes hit the pavement running in Phoenix in 2012, after the Federal Housing Finance Agency in February of that year launched a program granting eligibility prequalification to investors seeking to buy portfolios of foreclosed homes, with the proviso that the investors would in turn rent out the homes in the near term. Starwood Waypoint Homes merged with Invitation Homes in 2017 to create a powerhouse in the space, and the combined company has continued to expand its single-family holdings in Phoenix.

Meanwhile, Progress Residential, a mega player in the sector, has also been actively buying up Phoenix single-family homes, and now owns nearly 1,200 of the city's single-family rentals, making that firm the second-largest Phoenix player. Pretium Partners LLC, which manages more than $50 billion in assets, owns Progress.

Determining chain of ownership is a murky process. Some of the firms among Phoenix's top 25 single-family home rental operators, like FirstKey Homes and Progress Residential, have parent companies, and Law360 opted in such cases to list the better-known name as opposed to the parent.

While the lion's share of the corporations are U.S. real estate firms, private equity shops, asset management companies and funds, Japanese conglomerate Yamasa is also among the largest owners of single-family rentals in Phoenix, a testament to just how global the race to buy U.S. single-family homes and convert them to rentals has become.

The 25 corporations as a whole own nearly 3% of all primary or rental single-family homes in Phoenix.

Such landlords note that they are providing rental alternatives to apartments, giving tenants the opportunity to live in a house without the need to come up with a large down payment or worry about maintenance and repairs. And some provide a pathway to homeownership through "rent-to-own" programs.

This is particularly helpful in markets like Phoenix, which has seen rapid in-migration and corporate relocation in recent years, according to David Howard, executive director of the National Rental Home Council, a single-family rental industry group.

"When people move to a new market they tend to rent in the short term," Howard told Law360. 

"As an organization we fully support homeownership and many of our member companies have programs in place to assist renters on their path to homeownership," Howard added.

Over the past two years, as the pandemic has also set off a single-family buying spree among individuals and families, with residents seeking more space, less density and backyards, home prices across the nation — and particularly in Phoenix — have surged, and that's meant bidding wars for the relatively few homes that have hit the market relative to demand in the months before interest rates climbed.

And Wall Street corporations have had the resources to emerge victorious.

A Flurry of Purchases Came at High Price Points

In April 2021, when an owner listed a three-bedroom, 1,586-square-foot home at 8729 W. Mackenzie Drive for $330,000, Invitation Homes, using the entity IH6 Property Phoenix LP, went under contract to purchase the home just six days later for $350,000, wrapping up the deal in May. That home is now worth an estimated $483,000, a 38% increase over 16 months, according to Redfin's home value estimate.

"A lot of these big companies that are doing it are REITs. It's mostly investment funds that are being traded on Wall Street," Marthini said. "They always want the sellers to completely vacate the property three days before closing — which can be difficult — so they can come in and inspect everything."

For Invitation Homes, the deals were happening so fast that the company in one instance lost track of how many bedrooms were in a Phoenix-area home it recently purchased, believing it was renting out a four-bedroom house shortly after buying it. A new tenant arriving at the home this year had to inform Invitation that there weren't four bedrooms. Invitation relocated the tenant to another property.

Meanwhile, Progress Residential entity Progress Phoenix LLC in April 2021 bought a 1,460-square-foot home at 7325 W. Magnolia St. for $335,000, two days after the owner listed it at $320,000, and closed in May. Redfin estimates that home to now be worth $466,000, a 39% gain in 16 months.

"It was hard to get an inspector out quickly enough. They were buying up so many properties so quickly," said Katie Canar, a HomeSmart agent who has brokered several recent sales of homes to Progress Residential, speaking about that company. "I don't think they had enough manpower to keep track of their files. I had to keep track of their listing agents all three times I worked with them."


Homeowners associations, which are prevalent in Phoenix, have largely ignored the trend. HOAs in other states, including North Carolina, have taken steps to regulate conversion to rentals, requiring new owners in some cases to wait a period before renting a home out.

Tempe-based AAM LLC is the largest Phoenix-area HOA management firm, with 621 HOAs including roughly 189,000 household units under management, according to a December list of rankings from the Phoenix Business Journal. The largest Phoenix-headquartered management firm on that list is City Property Management Co., which manages 333 HOAs and roughly 98,000 units. Representatives at those firms couldn't be reached for comment.

Dennis Legere, principal advocate at the Arizona Homeowners Coalition, told Law360 he's opposed to HOAs changing their initial rules and regulations, which place little or no restriction on long-term rentals.


"I don't support changing the use restrictions on properties," Legere said. "My perspective has always been: look to the behavior. The associations have a right to manage behavior, as opposed to a right to manage how an owner uses the properties. HOAs should focus on the behaviors of the residents."

Tenants Face Rising Rents, Few Options for Voicing Concerns

While the surge in single-family home prices in Phoenix has made it that much harder for first-time buyers to own a property, single-family rents are also increasing. And while Phoenix renters face steadily rising rents, they also have no easy avenue for voicing concerns.

The state's housing department website notes that there's no state agency to enforce Arizona's Residential Landlord and Tenant Act, and recommends that parties seek help from lawyers. The act governs the rights and obligations of landlords and tenants in the state, and outlines remedies each can pursue in the event of a dispute.

"If I did have any complaints, it would be the two-day delay on the AC, because that should be fixed within a couple of hours, because it's really hot in Arizona," said Lily Chavarria, speaking of Invitation Homes' delay in fixing the air conditioning at the Phoenix-area home she formerly rented from the company. She now rents a home from Invitation on North 84th Lane in the city of Phoenix. She's been happy with Invitation Homes' prompt response times when maintenance issues have come up at her current rental.

"We are proud of the quality products and services we provide, and we believe our residents overwhelmingly appreciate our efforts," an Invitation Homes spokesperson told Law360.

Meanwhile, single-family home rent has jumped 12% in Phoenix, from $2,141 in June 2021 to $2,395 in June 2022, according to Zillow. That rate has since fallen to $2,310 as of September 2022.

And corporations have not been shy about raising rents for tenants who stay on after the initial lease period. A third tenant told Law360 her rent has jumped more than $425 over the course of three years, after starting below the $1,300 mark.

Buyers Are Using Aggressive Tactics

20038 N. 14th Ave. rises a full two stories, towering over the nearby one- and 1.5-story homes. A steady soft drone comes from Arizona State Route 101 that's separated from the Deer Valley Sunrise HOA community by a pair of walls, one high and one low. A blue sports car roars out of an adjacent garage, for a fleeting moment blending in with the highway symphony before emerging as a soloist. The house, like the surrounding hundreds, is stucco with a light tan terracotta roof, and a mesquite tree guards the left half of the home.

When the owners of that three-bedroom, 1,421-square-foot house listed it for sale in March, offers came in quickly, including a large one from Progress Residential, Canar, who represented the seller, told Law360.

"They came in just way over asking. … They were very aggressive on that one. I was leveraging my other offers, saying, we've got X, Y and Z already in hand," Canar said. "They modified their offer twice, and came up more and more each time."

The sellers of that home planned to buy another, and liked the idea that they could use Progress' high-percentage closing rate to help ensure things would go smoothly with their next purchase. They accepted Progress' $450,000 offer, which was $30,000 over asking price.

"That was one of the reasons they chose them. They could use that on their next offer. 'I've got a cash buyer who has a reputation for closing deals 99% of the time,'" Canar said, recalling the sellers' logic. "That was a big part of why they went with Progress."

But all was not smooth sailing for the sellers.

The parties attached a special addendum to the contract allowing the sellers to stay in the house five days after closing. The sellers would be charged $500, and the title company would hold back $10,000 in sale proceeds until the sellers vacated the property, Canar said. The sellers stayed the five days and vacated after the fifth day, per the agreement.


Progress "told me that they had emailed my client asking to take photos. … They didn't copy me, and my clients didn't receive an email," Canar said. "I had asked them, 'Are you planning on doing a final walk-through?' … I didn't hear back.

"At the end, they tried to keep that $10,000 of my clients' proceeds. They stated that [the sellers] hadn't taken the photos for the final walk-through. I went back through every single word of the contract. There was nothing that stated that they needed to take photos," Canar said. "They just needed to vacate by 5 p.m. and leave the home in the same condition. I had to fight tooth and nail to get my clients' money back."

The title company initially refunded $8,000.

"It literally took probably three weeks back and forth with the title company, and they finally released the remaining $2,000. … It took a ton of my time," Canar said. "They asked me to take the key out of my box, remove my box and leave it in the electrical panel box where anybody could open it up. I said, 'No, I don't want that liability.' The client was offering a full 3% commission. I had to tell them this is part of the buyer's agent's responsibility."

"It seemed like they tried to get rid of as much responsibility as possible," Canar added.

Progress Residential declined to comment for this article.

Those who lived in the city a decade ago remember what happened during the last downturn — and now wonder what the future holds.

The city was one of the hardest-hit during the Great Recession, with average home prices falling more than 50% from $227,000 in June 2006 to $104,000 by May 2009, according to S&P CoreLogic Case-Shiller. Prices declined even further, bottoming out at just above $100,000 in September 2011, a culmination of more than five years of declines that wiped out 56% of home values from their peak in June 2006.

"A lot of people are wondering, 'Is our market going to crash the way our market crashed in 2008?'" Ellis said. "We went from the lowest of the lows to now the highest of the highs."

--Additional reporting by Emma Whitford. Editing by Orlando Lorenzo. Graphics by Ben Jay. Data analysis by Jacqueline Bell and Xavier Chauvris.

Correction: An earlier version of this article misstated the month when the median single-family home rent in Phoenix reached $2,310. The error has been corrected.

For a reprint of this article, please contact reprints@law360.com.