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68 Knowing which questions to ask is a critical piece to investor success in the changing marketplace. ere is little doubt that the single-family residence rental market should continue to bring opportunities to savvy institutional investors through at least the next several quarters. However, unlike the victories in 2012 and 2013, these opportunities will have less to do with scaling acquisition capabilities and raising money. Instead, the name of the game is really about the next moves, including securiti- zation, IPOs, or even selective divestiture. e initial public offering (IPO) success of Ameri- can Residential Properties Inc. and American Homes 4 Rent—along with the securitizations for Blackstone's Invitation Homes LP, Colony American Homes Inc., and AH4R—provide a market endorsement of these equity events. While always vital during the mass aggrega- tion, renovation, and leasing of these portfolios, the art and science of cost and risk management is now front and center. Yes, the large institutions were able to employ significant resources during these initial phases, but that was not so much about the assets these firms could quickly deploy as it was about how much the market smiled on such activity. However, now that the "land grab" of 2013 is behind us, these firms now face the more strident jury of ratings agencies and the public markets. eir successes and returns now hinge on how well they manage costs and risks. e good news is that the significant capital outlays have been executed. More than 300,000 SFRs have been acquired by these larger institutions, and the majority of properties have received the rehabilitation required to bring them back to the comparative quality of their neigh- borhoods. Generally, the capital infrastructure to manage the cash, the legal documents, and the data has been built and deployed as well. So the focus turns to ongoing management of these valuable assets. is requires discipline, if not vigilance, to be ever-mindful of risks and costs. As complex as the acquisition, rehabilitation, and marketing processes have been, the ongoing management is even more complicated. Most firms recognize the need to bring in partners to assist them with these massive tasks. ese third-party field service providers can run the gamut in size and scope from smaller regional companies to privately held corporations to publicly listed companies. Making the right choice in a field service provider is a critical part of the investor's risk management strategy. Institutional SFR investors can avoid some common risk pitfalls by adding the following 10 questions to their due diligence checklists. Identifying these qualities early in the vendor selection process reduces risk exposure, which is beneficial to making smarter choices. Lower risk also improves long-term outcomes if and when investors decide to seek out a potential securitiza- tion or IPO. 1. HOW FINANCIALLY SOUND IS THE COMPANY? Financial stability is a very important marker of a field service provider's strength. Ratings agencies closely evaluate this characteristic when they're looking at risk levels in property portfolios. Small or privately held companies, as well as larger companies with unstable leadership, tend to present more risk in the agencies' view. Investors want to look for field service providers that have a strong reputation and are well-recognized by their peers in the financial community. ey should be well managed, have strong balance sheets, have established credibility and integrity, and have demonstrated strong sup- port for the communities that they serve. 2. HOW IS RISK DEFINED AND HOW IS IT MANAGED? To properly manage risk, investors need a com- pany with demonstrated skills in how to quantify it, and most importantly, how to avoid it. e many types of risk can be categorized into three arenas: headline risk, financial risk, and legal risk. Headline risk occurs when something hap- pens that could put an investor's public reputation in jeopardy. e housing market has suffered from any number of PR challenges through the years, whether it's black mold, safety hazards, personal property removal, or eviction stories. To be the latest negative news headline is something to be avoided. en there's financial risk. If a home has suffered from poor workmanship, neglect or inadequate maintenance, the cost to cure is often many times more expensive than "doing it right the first time." Lastly, there's legal risk. Properties not in compliance with local codes can be subject to hefty fines, homeowners' association penalties, and any number of other litigious issues. So a field service provider needs to be able to help investors stay out of the headlines, improve compliance, and address safety concerns before these things become a problem. Ask providers how they can help quantify and preempt these types of risks. 3. ARE THE BIDS MANAGEABLE AND THE PRICING FAIR? Perhaps more than other aspects of provid- ing service, bids and pricing require a scalable, reliable approach. Large investors can have thousands of properties that are between tenants at any given time. ey may only have a week I N D U S T R Y I N S I G H T / T E R R Y S A D O W S K I Q&A SESSIONS GOOD FOR BUSINESS P

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