Hedge funds will soon no longer be allowed to own single-family homes

The large-scale purchase of single-family homes by business owners – who then convert them into rental properties – has come under increasing scrutiny in recent years. Lawmakers have gradually responded with bills to rein in, and in some cases ban, private equity, real estate investment trusts and hedge funds from buying single-family homes.

According to Next City, the most prominent of these bills was introduced in December 2023: the End Hedge Fund Control of American Homes Act, introduced in the Senate by Oregon Senator Jeff Merkley, with companion legislation introduced in the House by Rep. Adam Smith.

The bill, which has been referred to committee but has yet to be voted on, would effectively ban hedge funds from owning single-family homes within 10 years of its passage.

The Merkley/Smith bill, as written, would force large business owners to divest their current holdings of single-family homes over a 10-year period. An applicable entity that manages investors’ funds, is a fiduciary of the funds, and purchases new homes would tax half the cost of each additional home. Entities that fail to dispose of their homes above the 50-home limit would be taxed $50,000 for each excess home. And hedge funds specifically would pay that penalty if they own homes at all (with ten years to sell them).

The taxes would go toward a new housing trust fund for down payment assistance for aspiring homeowners.

The legislation defines a “hedge fund” as any taxpayer with $50 million or more in assets under management. There are exemptions for nonprofits or organizations that primarily build or renovate single-family homes.

Merkley told Next City/Shelterforce that he first heard about the issue from voters who were outbid for starter homes for their families by deep-pocketed investors willing to buy the homes sight unseen.

“I started hearing the vignettes of people competing in Oregon with no-cash, no-inspection offers,” Merkley says. “And about three years ago I started seeing the statistics of the large number of homes being purchased.”

While total ownership of single-family homes by private equity remains relatively small, a 2022 report from MetLife estimates that by 2030, 7.6 million single-family rental homes in the United States – more than 40 percent – ​​could be owned by corporate investors. According to a November report from the Private Equity Stakeholder Project (PESP), the estimate of 1.6 million homes owned by private equity is “likely a dramatic underestimate due to a lack of transparency in ownership data.”

The issue was the subject of a much-discussed hearing in Congress in 2022. And on March 7, President Biden released a policy announcement on housing ahead of his State of the Union address that mentioned the influence of private equity on housing, saying: “Corporate landlords and private landlord-equity companies across the country have been accused of illegally sharing information, price fixing and inflating rents,” a reference not only to the rent gouging but also to ongoing lawsuits against RealPage, a data analytics company that investigates does to landlords, for coordinating rental prices among customers.

Private equity firms typically buy homes with the goal of making a quick profit and then sell them. According to the Private Equity Stakeholder Project’s November report, private equity firms generally aim to deliver a 15 percent return to investors over a three- to five-year period, and they achieve this by cutting costs, including delaying maintenance, circumventing regulations and imposing unnecessary costs on tenants.”

A 2022 report from Drexel University found that between 2020 and 2021, 19 percent of single-family home sales in Richmond, Virginia, went to investors (a broad category that includes individual home flippers and private equity giants), and a quarter of homes purchased in Jacksonville, Florida, and Philadelphia during the same period were purchased by investors.

The bill is one of several introduced in recent years in an effort to address private equity purchases of residential properties, although the other bills are all at the state or local level.

Among them is a North Carolina law that bans any entity from owning more than 100 homes in counties with more than 150,000 residents. Each house over 100 would result in a daily fine of up to $100. In its report, PESP referred to the bill, which was referred to committee over a year ago but never received a vote, as “one of the strictest rules for corporate housing that have ever been attempted by any state government.”

A bill in Minnesota, HF685, would prohibit business entities from converting single-family homes into rental properties. The bill, introduced in January 2023, has not yet received a vote, but is gaining support: it has 18 authors at the time of writing.

Minnesota has been particularly affected by private equity landlords. In 2022, Next City covered a group of single-family home tenants in Minnesota who put their rent in escrow instead of paying their private equity landlord, Pretium Partners, who failed to make necessary repairs. Pretium was the subject of a lawsuit by the state’s attorney general, Keith Ellison.

The Merkley/Smith legislation limits ownership of all pooled mutual funds to 50 single-family homes. Merkley told Next City/Shelterforce that the number was “arbitrary” but chosen so that large hedge funds do not form smaller companies to evade detection.

“We didn’t want the big billion-dollar hedge funds to create the same board of directors and a smaller hedge fund,” he says.

Private equity owners of single-family homes have consistently argued that they create supply in the rental market, especially for growing families who feel cramped in a small apartment. Merkley says the legislation debunks this argument by requiring private equity landlords to sell their properties to new homeowners.

“That’s a completely nonsense argument,” he says. “You take a family out of the rental market when they become owners of this house.” He says allowing would-be homeowners to buy homes “systematically reduces demand for rental properties.”

Merkley had a front row seat until the beginning of this crisis. He joined Congress in 2009, during the financial and mortgage crisis, when the federal government had acquired hundreds of thousands of single-family homes with predatory mortgages that it had to get rid of. After the financial crisis, the Obama administration began selling hundreds of thousands of single-family homes it had foreclosed on. Instead of selling them to homeowners, they sold them to hedge funds and private equity at huge discounts. At the time, Merkley says he pressured the Obama administration to make the homes available to Americans who had fallen victim to the subprime mortgage crisis.

The Obama administration, Merkley says, responded that they didn’t have time to build capacity for a discounted homeownership program before the buildings fell into disrepair.

“I understand the arguments that the government was putting forward… they were also concerned about pipes freezing, they were concerned about houses being broken into, they were concerned about houses being owned by their buyers. be stripped,” says Merkley.

But he says that regardless of the Obama administration’s restrictions, “the process of selling houses in these big bulk sales, which only big hedge funds can buy, has really set this in motion.”

Hedge funds and private equity firms make money from these houses, with or without tenants; the buildings increase in value, and that increase in value is only taxed upon sale.

Merkley then joined the Banking Committee, where he worked to regulate subprime mortgages. “We made them illegal, they turned the dream of home ownership into a nightmare,” Merkley says. (This isn’t entirely true, but the Dodd-Frank Wall Street Reform and Consumer Protection Act created more guardrails for subprime mortgages, bringing them under the purview of the Consumer Financial Protection Bureau. Merkley, along with Senator Amy Klobuchar, contributed language in the bill that prohibited mortgage lenders and brokers from receiving financial incentives to offer high-risk loans.)

The Merkley/Smith bill also does not address private equity ownership in the multifamily housing market, where it owns a larger share of the market. Because multi-family homes are largely rental properties, private equity does not have the same effect on the total supply. But consolidation of housing by companies can lead to higher rents. Merkley says he doesn’t have a plan for multifamily housing yet.

“I don’t feel like I understand the multifamily problem well enough to propose a specific strategy for it,” he says.

The End Hedge Fund Control of American Homes Act does not provide a strong solution to one of the biggest barriers to regulating corporate ownership: keeping track of who owns what. Many rental properties are owned by shell LLCs, making ownership difficult to distinguish. The bill establishes a reporting requirement around acquisitions and imposes a $20,000 fine for failure to report. But it doesn’t create a mechanism to find out who owns the units, nor does it create a new database of rental properties.

In an email statement to Next City/Shelterforce, Merkley’s office said: “LLC transparency is an important piece of the puzzle to ensure that homes in our communities are homes for families, not profit centers for Wall Street” and that the senator “examines the options for the most effective transparency and reporting strategy for monitoring future acquisitions.”

“It’s hard to really hold someone accountable when you don’t really know what the actual ownership is,” said Chris Noble, policy director at the Private Equity Stakeholder Project. The group has endorsed the legislation, saying it addresses the “root cause” of corporate housing consolidation.

Noble says any mechanism to track homeownership must be as “robust” as the tax portion of the bill for the legislation to work. PESP has advocated for a national register of landlords. “There has to be a way to keep track of what everyone has because often it’s an LLC owned by something else that’s ultimately owned by a real estate investment trust or something like that,” he says.

This story was created in collaboration with Shelter powerthe only independent, non-academic publication covering the world of affordable housing, community development and housing justice.

This story was produced by Next city and reviewed and distributed by Stacker Media.