The quiet little community of Beaver Creek on the north side of Denton Texas offers a perfect portrait of what’s wrong with the current housing market in the United states. Beaver Creek is an LGI Homes community that specializes in affordable starter homes priced in the mid to upper $200’s. Having viewed the community earlier this year, I was interested to see how sales would progress since Denton Texas is a popular destination for DFW home shoppers looking for affordable homes. Denton home prices are generally more affordable than the average prices in the Dallas-Fort Worth area.

LGI Homes recently posted a 10% drop in closings for the third quarter according to a recent press release. September closings for LGI were softer as well. After seeing LGI Homes’ soft sales numbers for September and the third quarter, I thought it would be interesting to see how LGI Homes are selling in Beaver Creek here in Denton Texas. As it turns out, the more important question is who is buying the homes which LGI is selling. While I was anticipating fairly active investor appetite for these starter homes in Denton, I was surprised to see that American Homes 4 Rent (one of America’s largest single-family landlords) is mopping up a decent amount of Beaver Creek new home sales.

AH4R has amassed the second-largest empire of single-family rentals in the country. Their most recent quarterly filing shows American Homes For Rent owns 52,049 homes which helped to generate revenue of $264.5 million for the second quarter. Along with other players like Invitation, Progress Residential and other Wall Street players, these cash-rich investors have been mopping up tens of thousands of modestly priced single-family properties across the U.S. that might otherwise be purchased by families who are trying to find an affordable home to buy. After Ben Bernanke and the Federal Reserve jump-started the “buy to rent scheme” for PE firms and Wall Street’s mega-landlords after the last housing bust, this new wave of single-family rental activity just adds insult to injury for first-time home buyers. The insult is multi-layered in this particular case.

Local MLS data confirm that AH4R is getting some sweet deals on their Beaver Creek new home purchases while owner-occupant buyers in this Denton community are paying top dollar for their homes. MLS sales numbers show 59 closings so far this year in Beaver Creek, more than double the amount of homes sold last year when the development was starting. Average prices of the homes sold in Beaver Creek are up a little more than 5% compared to last year. Here’s where things get interesting. Current numbers on lease activity in Beaver Creek show 15 closed leases in 2018 and 2 more pending. While MLS data show 86 homes sold in Beaver Creek since the second half of last year, Denton County Appraisal District records show that 15 Beaver Creek homes are owned by AH4R.

From the perspective of this practicing real estate broker, this is a recipe for disaster for the owner occupants buying a home in Beaver Creek. One of America’s largest landlords, AH4R, already owns more than dozen homes in the community of Beaver Creek. This is disturbing, especially when you consider there are other mom & pop investors who also own rentals in this community. The owner-occupancy levels of Beaver Creek are already disappointing, and LGI Homes is selling directly to a mega-landlord.

What concerns me as a real estate broker who represents home buyers, is what happens to the owner occupants who are leveraging up to their eyeballs on a zero-down mortgage to buy a Beaver Creek home. You may have seen one of LGI’s billboards touting zero-down mortgages for home buyers. From the MLS sales data I can see there are some home buyers paying slightly over $150 per square foot for some of these smaller Beaver Creek starter homes. I would call this absurd, but they say beauty is in the eye of the beholder. Now here’s where things get REALLY interesting.

NTREIS data for closings in Beaver Creek this year show that in May LGI Homes sold two homes to AH4R at just a little over $84 per square foot. These were two of the larger floor plans in Beaver Creek that American Homes 4 Rent picked up for a song as other buyers were apparently paying over $100 per square foot for the same floor plan. I certainly hope these other buyers received some nice upgrades on their homes, because the apparent 18 percent discount that AH4R received on similar properties seems like a slap in the face. It would have to be disheartening to learn that you paid as much as $51,000 more for the same floor plan as your Wall Street owner/neighbor.

I called a local LGI representative this morning to confirm the partnership with American Homes For Rent. I expressed my concerns as a real estate broker, and the representative was quick to point out that average prices in the community were higher than last year. The phrase “moral hazard” doesn’t even begin to capture the issues with this development of home builders selling their inventory directly to Wall Street landlords. According to one analyst who covers home builders, LGI is apparently “agnostic” about who they are selling homes to. That may be the case, but if I’m a prospective home buyer or representing someone who wants to buy a home to live in, you better believe I would be concerned about the owner occupancy levels of the community.

From what I can tell, there could well be a new crop of underwater homeowners in the near future right here in Denton Texas. Take some zero-down financing and throw in some high home prices in a community where sales volumes are being stimulated by a giant Wall Street landlord along with other mom & pop landlords, and I would say you have the perfect recipe for it.

If you are a prospective home buyer in Beaver Creek, you might want to know that American Homes 4 Rent, LGI’s most prolific customer in Beaver Creek, shows a to have a two-star rating on Yelp. AH4R’s Agoura Hills California office shows to have one and a half stars according to the BBB customer reviews. Institutional investors like American Homes 4 Rent are known to have exploited tenants across the U.S.

LGI’s stock has dropped over 40 percent so far this year. Maybe LGI Homes should be less agnostic about who they sell their homes to. Just a thought.