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Slumlord Millionaires

Wall Street's new scheme to profit off poor people

Jeff Haynes/AFP

Jeanette, a single mother with four children, rented a house in South Los Angeles with a rotting fence. When she finally asked her landlord to fix it, she was informed that the fence’s poor condition was actually her dog’s fault, and that she needed to pay $500 within two days or face eviction. The only way she could cover the cost was through taking out a payday loan. 

A couple months later, Jeanette’s employer shifted her pay schedule, and she asked her landlord for a rent extension. The landlord refused, demanding payment under threat of eviction. Jeanette took out another payday loan. “I just feel like I’m sinking deeper and deeper into debt, and not getting much for my money,” she said at a community meeting on Monday.

Jeannette’s landlord doesn’t live in her community. She rents through Invitation Homes, a division of Blackstone, the large private equity firm. Blackstone has become the industry leader in a new Wall Street scheme, where rich investors have spent more than $20 billion buying up over 130,000 distressed single-family homes and converting them to rental units. They’ve even sold bonds backed by the rental revenue streams, similar to the mortgage-backed securities whose failure nearly blew up the economy in 2008.

When Wall Street firms began buying rental units in bulk in 2011, experts warned that they had no history of managing large numbers of rental properties spread over hundreds of square miles, and would skimp on costs at the expense of tenants. Now, according to the first survey on the practice, those fears are being realized. Tenants report that Blackstone’s rental management resembles that of a slumlord. They rent properties with significant maintenance problems, fail to keep contact with their customers, and violate state and local laws.

The report, put together by economic justice groups Strategic Actions for a Just Economy (SAJE) and The Right to the City Alliance, sampled tenant reactions from Invitation Homes rentals in South Los Angeles and Riverside, California. They canvassed 292 properties in these cities, eventually surveying 51 families about their experiences. Between 85 and 95 percent of the respondents were people of color, and many of them used to be homeowners.

Though Invitation Homes claims to have spent $25,000 per home to bring them up to standards, 46 percent of respondents reported plumbing problems, 39 percent found roaches or other insects, and around one in five had issues with air conditioning or mold or leaky roofs. One Los Angeles tenant is suing Invitation Homes after they say they were sickened by mold in their rental property. And families in these properties had little chance of a face-to-face meeting with their landlords to go over these problems: The nearest Invitation Homes office to the South Los Angeles area is 35 miles away in Woodland Hills. 

“You can’t reach anybody, it’s very hard,” said Ursula, another South Los Angeles renter. “But when you owe them money, they call you, harass you on the phone, put a note on the door, email you constantly.”

SAJE released the study at a community meeting in South Los Angeles Monday, attended by two members of Congress: Mark Takano, who represents Riverside and has become the leading Congressional voice of concern against the rental scheme, and Maxine Waters, ranking Democrat on the House Financial Services Committee.

“We don’t know what it means to have hedge funds involved with developing a whole rental market,” Waters said. “I am very interested in what is going on that you have been able to identify and document.”

Renters complain of being burdened with virtually all the responsibilities of homeowners, without any of the financial benefits of homeownership. Ursula, a renter in South Los Angeles, explained in the meeting that she was initially informed the landlord would pay the water bill. But the landlord never did so, and she had to cover the cost to keep the water on. When she deducted the cost of the water bill from her next month’s rent, Invitation Homes refused to accept the partial payment, and threatened an $800 fee. Eventually, Ursula learned that she had to pay all utilities and even landscaping costs.

Ursula could never find the stipulation in her lease agreement making her responsible for additional costs. In fact, tenants say, Blackstone leases contain confusing and contradictory language at variance with their initial commitments. Rep. Takano met with Blackstone this April and tried to secure a standard lease agreement, without success. “They did promise me they would send a lease, and we have not to this day seen one,” Takano said. “My office has been emailing them continuously.”

The secrecy over the lease agreement may stem from the onerous terms. In addition to charging renters for virtually all ancillary costs, several tenants reported having to pay over twice their monthly rent amount on their security deposit, a violation of California law (Invitation Homes said in a statement that they do not charge more than the statutory limit for security deposits). Others said there were allowances for Invitation Homes to break the lease and “evict the tenant without warning” if they needed to liquidate the property quickly. And renters seeking a month-to-month lease rather than one or two year commitments had to pay far more. Ursula said that she was offered $1,950 a month for a long-term lease, but $2,650 a month on a month-to-month.

“They’re saying, we want to lock you in so we can sue you if you don’t honor the lease,” said Rep. Waters.

This adds up to unaffordable costs for the majority of homes, with 67 percent of survey respondents in Los Angeles and 63 percent in Riverside paying monthly rent that exceeds 30 percent of their income. That doesn’t include all the extra costs of utilities and landscaping. “My rent is $1,700, and the bills are another $1,000,” said Yuri, who lives with her parents and three children. “We’re barely hanging on.”

This casts doubt on claims by Blackstone that they would lower overall rental costs by increasing supply on the market. So far, this hasn’t happened. A report put out by Rep. Takano’s office earlier this year showed rents rising in his district precipitously, even after Wall Street-owned rentals came online. And rents have continued to increase nationwide, despite stagnant wages.

Invitation Homes renters reported that the company used eviction notices and collection techniques aggressively to maximize revenue. Some tenants cited a host of additional fees, from new deposit requirements for pets to surcharges for electronic payments. Others reported getting notices to vacate on their door by the fourth of the month, even though the rent was actually due by the fifth.

Invitation Homes’ harsh methods of collection were perfectly predictable, given Blackstone’s duty to pay back investors. Vacancy rates on the first set of Invitation Homes properties spiked in May, rising to double the national average (and given these reports about their property management, you can see why). That means Invitation Homes must get full value from the homes they still have rented to keep bondholders happy, whether by locking tenants into long-term leases or racking up fees.

A spokeswoman for Invitation Homes, Denise Dunckel, said that the report “grossly distorts the facts and ignores institutional investors' contribution to the American housing recovery.” She maintained that Invitation Homes “complies with applicable California and Federal landlord/tenant and related housing laws,” and that residents have a 24-hour number for maintenance requests, which Invitation Homes responds to “within a few hours.”

However, with more single-family rental securities going on the market every day, Rep. Takano, a renter himself, has concerns about the end game. “They did not buy these properties to hold onto them forever,” he said. “If they want to turn these homes over when prices rise, or if there’s a bump in our recovery, it could lead to a mass sell-off. Mom and pop landlords have an investment in keeping renters in place. Corporations don’t.”

The entire enterprise represents wealth-stripping in minority communities, argued Cynthia Strathman, executive director of SAJE. “The rental money leaves the community and doesn’t come back, and people build up no equity of their own,” she said. Her organization recommended more affordable rental units, just-cause eviction laws and rent-control policies were calls for additional oversight from federal regulators and Congress, to acquire more data about what is happening with these rentals. “This small report invites more quantitative research questions with more data sets,” she said.

“This is what I speculated could be happening,” said Congressman Takano after the event. “When the bondholders want their payments, the landlords don’t cut these residents any slack, and sometimes they need slack. They’re not deadbeats, they’re working hard.”