Institutional investors purchased hundreds of thousands of homes during the Covid-19 pandemic by leveraging debt other than mortgages, which gave them an advantage over traditional homebuyers.

Now, investors are starting to offload those homes as debt has become more expensive. In turn, nonprofits are starting to capitalize on opportunities to buy back homes from institutional investors to create and preserve more affordable housing.

In January, Twin Cities-based nonprofit Brick By Brick and the Boston-based Housing Partnership Network purchased 345 affordable homes from national investor Pretium Partners, which owns about 97,000 homes nationwide. The single-family homes are located in the seven counties surrounding the Minneapolis-St. Paul area. They also have an average property value of $285,000 compared to the market’s median for-sale price of $345,000, according to Redfin.

“This transaction is transformational,” Robin Hughes, CEO of the Housing Partnership Network, said in a press release. “This sale of single-family homes to local nonprofits will improve the lives of current residents and new homebuyers. This is a new model we will replicate in other regions of the country, with local partners.”

The Atlanta Neighborhood Development Partnership, a nonprofit affordable housing development firm, last year launched a first-of-its-kind partnership with Pretium to acquire investor-owned homes. The pilot gives the nonprofit “first look” rights to view and appraise homes in low-to-moderate income neighborhoods and convert them into affordable properties. So far, ANDP has acquired 10 properties through the pilot, and J.P. Morgan Chase has committed $2 million to expand the pilot this year.

This is happening at a time when the rising cost of debt is leading to institutional investors slowing their purchases of residential properties. Data from John Burns Research and Consulting found that institutional investors were behind just 0.3% of all home sales in Q3 2024 compared to an all-time high of 2.4% in Q2 2022. Meanwhile, Freddie Mac measured the average 30-year mortgage rate at 6.8% as of May 15. Even though institutional investors typically borrow at a rate below the market average, interest rates are still too high to make many deals pencil out.

While these nonprofits’ purchases will help address the shortage of affordable homes in local markets, they still face steep challenges. It can be difficult for nonprofits to raise capital for home-buying initiatives because of their unstable balance sheets. And unlike private investors, nonprofits have to get additional approvals before spending the capital they raise.

New financing tool

A financing model developed by The Community Foundation for Greater Atlanta (CFGA) in 2023 could help address many of the financing challenges nonprofits face. CFGA created a $100 million flexible financing fund to help philanthropies and nonprofit housing developers create or preserve affordable homes. Since its inception, the community foundation has committed funds for 4,500 affordable homes across the five-county Atlanta metro area.

“Atlanta went from a place that put affordability on its calling card a decade ago to a place where affordability was deeply threatened, and particularly threatened for legacy residents of the city,” says Sarah Kirsch, CFGA’s managing director of housing funds.

What makes CFGA’s fund different from similar financing mechanisms is that it doesn’t ask nonprofits to fit into a predetermined box to qualify for funding, Kirsch says. Instead, the foundation created a process where CFGA works with nonprofits that apply for funding to make sure the funds they receive are used to solve the individual problems they face.

That structure allows CFGA to play multiple roles in affordable housing deals. The foundation has been a mortgage lender, a provider of gap financing, and an equity investor, Kirsch says. CFGA’s funds have also been used by smaller nonprofits and new housing developers to pay for third-party real estate consulting services, she adds.

CFGA’s financing also comes with social impact metrics that measure things like how many kids attend school and the number of affordable units created. Nonprofits that receive these funds also have to guarantee the homes will remain affordable for 65 years, compared to the industry standard of 30 years through federal low-income housing tax credits.

Through the fund, CFGA has invested $5 million in the Atlanta Neighborhood Development Partnership’s efforts to repurchase affordable single-family homes from institutional investors.

Funding has also been committed to developing affordable housing projects in Atlanta’s historic districts. One project is called Front Porch, which created 33 affordable, fully-furnished micro-units for seniors in Auburn Avenue, a focal point of the Civil Rights Movement. CFGA is also financially supporting Heritage Village at West Lake, an adaptive reuse project that aims to create 102 new housing units for people earning 30% AMI and a community health center.

“There is no silver bullet to addressing our affordability needs,” Kirsch says. “We need a lot of 2% solutions, and I think this type of funding can be a 5% to 10% solution.”

Leveling the playing field

Improving the financial landscape for nonprofits could go a long way to improving affordability, according to Madeline Bankson, senior research and campaign coordinator for housing at the Private Equity Stakeholder Project. PESP is a nonprofit watchdog organization that tracks private equity activity across housing, healthcare, climate change, and other industries.

Bankson anticipates seeing more nonprofits stepping into the arena to buy homes from investors as the cost of debt remains elevated. To that end, the model CFGA developed could help nonprofits acquire more homes because it not only gives them more money but also speeds up the acquisition process, Bankson says.

Money and speed solve just one part of the problem. To truly level the playing field for affordable housing providers, lawmakers also need to increase regulations regarding how institutional investors can participate in the housing market, Bankson says.

At the federal level, lawmakers have introduced multiple bills to curtail private equity activity in the housing market. However, the bills have almost no shot at passing through a sharply divided Congress.

Lawmakers in at least six states have also attempted to curtail private equity homeownership. For example, Minnesota legislators have introduced a bill to restrict corporate ownership of single-family homes during the last two legislative sessions. However, both bills have failed to advance. Similar bills have been introduced in Washington, Virginia, New York, Kentucky, and Utah.

Georgia has taken a more tepid approach to regulating private equity in the housing market. Georgia Republican Rep. Derrick McCollum of Hall County introduced legislation to cap the number of homes institutional investors can own in the state to 2,000 single-family properties. However, the bill was withdrawn in April.

“We’ve seen a lot of steam on that type of legislation around the country,” Bankson says. “If you are limiting how much they’re able to own, then the point of acquisition, the nonprofit competition that we’re trying to foster with this money, becomes moot.”