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Private Equity Readying a Run on Foreclosures

As the Obama administration and federal regulators work on a program to sell government-owned foreclosures in bulk to investors, those investors aren’t wasting any time stockpiling cash and buying foreclosed properties at auction and from the major banks.

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Oakland, California-based Waypoint Real Estate Group, a major acquirer of so-called “REO to Rental” (Real Estate Owned) just announced a partnership with a private equity firm, Menlo Park, California-based GI Partners, to buy foreclosed properties.

GI Partners has approximately $6 billion of capital under management, according to its website.

“Our approach to buying distressed single-family houses, renovating them, and leasing to residents who are committed to a path to future home ownership is a viable solution to our nation’s housing crisis,” said Colin Wiel, managing director and co-founder of Waypoint in a press release. “Our partnership with GI Partners ensures we can take the next step in our company’s evolution.”

GI is taking an increasingly popular bet on distressed real estate, closing on a $400 million fund with Waypoint, which has plans to purchase $1 billion in distressed real estate assets over the next two years, according to its release. Waypoint already owns nearly 900 single family rental homes in California.

This deal is clearly a sign of things to come, as millions of distressed properties will likely come to market over the next few years. As reported yesterday on CNBC and on this Realty Check page,the conservator of Fannie Mae and Freddie Mac is working with the Obama administration on a plan to sell not just the quarter of a million foreclosed properties already owned by the GSE’s, but hundreds of thousands more in the pipeline heading to foreclosure.

Waypoint is likely positioning itself to be a player in a government bulk REO program. When the Federal Housing Finance Agency (FHFA) last August put out a request for information regarding what to do with all the foreclosed properties on the GSEs’ books, Waypoint filed a response. Those responses are so far not public.

Other private equity firms, such as Greenwich, Connecticut-based Carrington Mortgage Services, are working on deals with major banks to buy foreclosures in bulk. Carrington says it is planning to invest nearly $1 billion in foreclosed single-family homes and turn them into rental housing.

“The market is going to move down this path with or without the FHFA program. We’re seeing movement on the part of some of the larger lenders, and we’re ready to go out and buy properties,” says Carrington executive vice president, Rick Sharga.

This emerging industry of investors in distressed real estate face large management issues, as unlike multi-family apartment buildings, the investors have to deal with many properties spread over wide areas.

“One of the biggest problems investors have executing these programs is that they will underestimate the difficulties of deploying property management on a local level across the country,” says Sharga.

That’s one of the advantages Carrington has, since it already manages several thousand Fannie Mae properties across the country under the mortgage giant’s “Tenants in Place” program and its deed-for-lease properties. Carrington uses its own staff and contract employees for property management as well as a proprietary software system that lets them monitor properties from a central location.

Waypoint is also well-positioned to take advantage of this new market, having acquired 900 properties already and putting many of them up for rent. After buying the properties, Waypoint renovates them and then offers a “lease rewards” program, which they say helps to put families on a path to future home ownership and keep families connected with their communities.

“We believe Waypoint has the potential to thrive given the current market dislocation in single family housing and the sustained tenant demand for rental property,” said Rick Magnuson, executive managing director of GI Partners in the release.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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