Influx of Institutional Investors

Real estate investors have flourished in the high-demand, single-family housing market. In 2021, 28% of homes sold in Texas were bought by corporations, companies, or limited liability companies (collectively, “institutional investors”), which is a 4.6% increase from 2020.1  Notably, 43% of the homes in Dallas County and 52% of the homes in Tarrant County were purchased by institutional investors in 2021.2  Texas is currently the state with the most home purchases made by institutional investors.3

The proliferation of institutional investors in the single-family housing market is not exclusive to Texas though. In May 2022, the National Association of Realtors published a report indicating that the national percentage of residential home purchases involving institutional investors increased from 11.8% in 2020 to 13.2% in 2021.4  Institutional investors typically purchase single-family homes and communities on a large scale, so they can rent the houses for profit.5  The rental properties take the form of either a long-term rental or a short-term rental. A short-term rental (STR) is a residential property available to rent for fewer than 30 days. Common STR platforms used by property owners include Airbnb and Vrbo.

Institutional investors “tend to purchase in markets with rising household formation, strong housing and rental markets, high income markets, but also with a high density of minority groups, especially Black households, with twice as many Black households in markets with higher share of institutional buyers.”6  The average offer price from an institutional investor is nearly the same as a non-institutional investor’s offer.7  However, institutional investors are particularly appealing to home-sellers because of institutional investors’ ability to offer cash and their willingness to accept a property as-is.8

Resistance to Institutional Investors

The impact of institutional investors on communities has provoked some Homeowners’ Associations (collectively, “HOAs”) and local governments to limit institutional investors’ ability to purchase single-family homes.

Various HOAs in communities that experienced a spike in institutional investor purchases in 2021 contend that institutional investments adversely affect neighborhoods in three ways: (1) property maintenance declines due to infrequent homeowner presence; (2) property values diminish in predominantly institutional investor-owned communities; and (3) it is more difficult for local families and first-time-home buyers to compete with institutional investors when purchasing homes.9

HOA Amendments

Generally, the purpose of homeowners’ associations is to maintain the neighborhood and protect property values. HOAs are now making amendments to dedicatory instruments governing their respective communities that would be unfavorable for institutional investors. For example, in Walkerton, North Carolina an HOA is attempting to amend its covenants to require new buyers to live in a home or leave it vacant for six months before they can rent it out,10 effectively stalling any rental efforts for a short period of time. In California, a state representative attempted to pass a bill entitled, “The California Housing Speculation Act,” that would impose a tax up to 25% on an investor’s net capital gain from the time of purchase until the final sale or exchange of the property.11 Although the bill was ultimately denied a vote, the bill represents a concern echoed by other states regarding institutional investor home purchases.

Since 2019 nearly 30% of over 1,000 Amendments from HOAs in 21 counties across Texas, California, Arizona, Florida, and Florida concerned both short-term as well as long-term leasing and usage restrictions.12 Texas HOAs are within their rights to establish restrictions related to occupancy or leasing in their bylaws, but the restrictions must be unambiguous and uniformly enforced.13 However, Texas law does somewhat limit HOAs’ rights regarding potential tenants. Specifically, Texas law mandates the following:

  • HOAs may not require a lease or rental applicant or a tenant to be submitted to and approved for tenancy by the HOA; and
  • HOAs may not require the following information be submitted to HOAs related to lease/rental applicants or current tenants: (1) consumer or credit report; or (2) the rental or lease application completed by the applicant.14

City Governments Address STRs

Additionally, Texas’ local governments are taking steps to influence the buyer pool for single-family homes. Specifically, the city of Conroe, Texas, voted on May 26, 2022, to increase its minimum width size for lots in subdivisions from 40 feet to 50 feet.15 An increased lot size could potentially encourage higher price points for housing and that would price out institutional investors seeking to purchase lots in large quantities.16 Dallas city officials are also contemplating legislation to potentially restrict institutional investors similar to the two-year sales ban on institutional investors implemented in Canada.17

Although long-term rentals are a significant component of institutional investing, issues associated with STRs remain at the forefront of local lawmakers’ agendas. Some cities, such as Fort Worth, Texas, do not permit STRs in districts zoned exclusively for residential purposes.18 STRs are only permitted in Fort Worth districts that are zoned to permit both commercial and residential uses similar to hotels.19 The ordinance restricting STRs was enacted in 2018 and the Fort Worth City Council is currently taking additional measures available to enforce the restriction as the institutional investor market continues to expand.20

Other cities are implementing policies to set higher standards for STR property owners. For example, in August 2021, Frisco City Council of Frisco, Texas, adopted an ordinance that establishes requirements and regulations for STRs in Frisco.21 The ordinance requires property owners to procure a short-term rental permit and provide the city with the “name, address and 24-hour telephone number of the contact person who is the owner, operator, or designated agent responsible and authorized to respond to complaints concerning the [STR] within one hour or less.”22 Further, STRs cannot be rented to anyone younger than 21 years-old.23 The overarching purpose of the ordinance is the ability to create a database of STR’s in Frisco for the city so it may protect property values and prevent property damage.24 Should a property owner fail to comply with the ordinance, the permit can be revoked.25 Notably, the ordinance does not prohibit HOAs from banning STRs within their respective communities.26

Similarly, the Mesquite City Council enacted an ordinance in May 2022 distinguishing STR requirements from long-term rental requirements.27 Under the new ordinance STR property owners will be required to submit to annual license and inspection requirements, and commercial events will be prohibited at the property.28 STR property owners will also be required to post on the exterior of the property the name and phone number of a designated agent for the property who can address any issues at the property within 45 minutes of notice.29

STR regulations are currently up for debate in Dallas. Dallas City Council members are considering three options for revisions to current zoning regulations:

(1) STRs may be permitted in residential districts so long as the property owner occupies the property (e.g.., the property owner rents out a room or garage apartment as an STR), mandatory off-street parking, no more than one STR per dwelling, the STR property may not be used as an event venue or other entertainment unless the rental is an area zoned for that and the property owner is properly certified;

(2) Mandatory off-street parking, no more than one STR per dwelling, the STR property may not be used as an event venue or other entertainment unless the rental is an area zoned for that and the property owner is properly certified; or

(3) No STRs in any zone designated as single-family residential.30

No decision has been made regarding which option will be selected, but it seems unlikely that STRs will be permitted in all zoning districts based on the complaints raised the Dallas City Council’s constituents.31 Any decision regarding zoning will likely directly impact institutional investors.

Institutional Investor Trend Turning Permanent

With all that said, institutional investors are becoming a pervasive presence within certain price brackets for residential real estate. In February 2022, PereNews published a report based on data from the investment management firm MetLife Investment Management that stated at least 40% of single-family homes could be owned by institutional investors by 2030.32 Institutional investors are the new norm, absent widespread HOA and/or local government restrictions.

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  1. Impact of Institutional Buyers on Home Sales and Single-Family Rentals, NATIONAL ASSOCIATION OF REALTORS, 3 (May 2022), https://cdn.nar.realtor/sites/default/files/documents/2022-impact-of-institutional-buyers-on-home-sales-and-single-family-rentals-05-12-2022.pdf.
  2. See id.
  3. See id.
  4. Id.
  5. Gabriella Ybarra, Investors Bought Nearly a Third of all Homes in Texas Last Year, TEXAS PUBLIC RADIO (June 14, 2022), https://www.tpr.org/business/2022-06-14/investors-bought-nearly-a-third-of-all-homes-in-texas-last-year.
  6. NATIONAL ASSOCIATION OF REALTORS supra note 1 at 4.
  7. See id. at 5.
  8. See id.
  9. Will Parker & Nicole Friedman, Homeowner Groups Seek to Stop Investors From Buying Houses to Rent, THE WALL STREET JOURNAL (last updated April 18, 2022), https://www.wsj.com/articles/homeowner-groups-seek-to-stop-investors-from-buying-houses-to-rent-11650274203.
  10. See id.
  11. CALIFORNIA HOUSING SPECULATION ACT (last updated May 18, 2022), https://www.cahousingspeculation.org.
  12. See Parker & Friedman supra note 7.
  13. See Tex. Prop. Code § 209.016(d); see also Tarr v. Timberwood Park Owners Ass’n, 556 S.W.3d 274, 281 (Tex. 2018).
  14. See § 209.016(b).
  15. Rachel Carlton & Jishnu Nair, Increasing Investor Purchases of Single-family Homes Contributes to Rise in Rentals Across Houston, CI COMMUNITY IMPACT (last updated July 8, 2022), https://communityimpact.com/houston/bay-area/city-county/2022/07/08/increasing-investor-purchases-of-single-family-homes-contributing-to-rise-in-rentals-across-houston/.
  16. See id.
  17. Antoinette Odom, Dallas May Consider Limiting Real Estate Investors’ Home Sales, SPECTRUM NEWS 1 (May 1, 2022), https://spectrumlocalnews.com/tx/dallas-fort-worth/news/2022/04/30/dallas-may-consider-limiting-real-estate-investors–home-sales.
  18. Short-Term Rentals, FORT WORTH (last visited August 7, 2022), https://www.fortworthtexas.gov/short-term-rentals.
  19. See id.
  20. Lili Zheng, Fort Worth to Hold Meetings on Short Term Rental Regulation, 5 NBC DFW (last updated July 26, 2022 at 6:47 P.M.), https://www.nbcdfw.com/news/local/fort-worth-to-hold-meetings-on-short-term-rental-regulation/3032272/.
  21. FRISCO, TEX., ORDINANCES ch. 18, art. VIII, § 18-460, https://www.friscotexas.gov/DocumentCenter/View/26274/Short-Term-Rental-Ordinance.
  22. Id. at § 18-465(b).
  23. Id. at § 18-465(c)(6).
  24. Grant Johnson, Frisco Rolls Out Short-term Rental Portal for Registration, Complaints, CI COMMUNITY IMPACT (July 23, 2022), https://communityimpact.com/dallas-fort-worth/frisco/government/2022/07/23/frisco-rolls-out-short-term-rental-portal-for-registration-complaints/.
  25. See § 18-469(a).
  26. See § 18-467.
  27. Mesquite City Council Approves Stronger Regulations on Short Term Rentals, CITY OF MESQUITE (May 3, 2022), https://www.cityofmesquite.com/CivicAlerts.aspx?AID=2036.
  28. See id.
  29. See id.
  30. Bethany Erickson, After Years Without Regulation, Dallas Asks What It Can Do About Short-Term Rentals Near You, D MAGAZINE (June 3, 2022), https://www.dmagazine.com/frontburner/2022/06/after-years-without-regulation-dallas-asks-what-it-can-do-about-short-term-rentals-near-you/.
  31. Bethany Erickson, Airbnb Bans Party Houses, But Will Dallas Officials Care?, D MAGAZINE (June 30, 2022), https://www.dmagazine.com/frontburner/2022/06/airbnb-bans-party-houses-but-will-dallas-officials-care/.
  32. Kyle Campbell, When will Single-family Rentals Reach Institutional Scale?, PERE (February 22, 2022), https://www.perenews.com/when-will-single-family-rentals-reach-institutional-scale/.

About the Author: Morgan Crider

Morgan Crider is an Associate in the Tort Litigation section at Cowles and Thompson.