Beazer Homes USA, Atlanta (NYSE:BZH) on Monday announced it has entering the home-rental business in the Phoenix market in an effort to capitalize on the surfeit of properties being offered at below-market prices due to foreclosure and short-sales. The company said it would also acquire and rent properties in other markets where it operates and is considering expanding its geographic reach into Nevada and/or California.

Dubbed the Pre-Owned Homes Division, the new unit has already begun acquiring and improving recently built pre-owned homes in the Phoenix market and renting them out. Beazer cited a strong rental market for newer homes in the Phoenix market, where vacancy rates for these types of homes is below 5%.

The criteria the company is using to evaluate potential acquisitions includes homes "built since 2004 by a reputable builder, including homes built by Beazer." It also stated that "all Beazer Pre-Owned Homes will receive necessary repairs and upgrades to bring them up to strict company standards."

Beazer said the new unit began operating in March and that some tenants have already moved it. It anticipates "increasing the size of its Pre-Owned Homes portfolio to more than 100 homes in Phoenix by the end of fiscal 2011."

Rich O'Connor, a longtime Beazer executive, has been appointed to head the Pre-Owned Homes Division.

"As a public homebuilder with significant financial resources, Beazer has the expertise to identify, acquire and improve this select group of previously-owned homes," said O'Connor. "And by working with third party local property management companies, we will be creating a best-in-class rental experience for consumers."

Its target for rentals includes consumers who may be delaying a home purchase due to the tenuous state of the current housing market as well as those who may not qualify for mortgages.

The company said it intended to sell the homes once prices recover and demand for rentals recedes either to the current renters or on the open market.

The company is positioning the new division as "an attractive investment proposition for a portion" of its cash reserve.

"While many prospective home buyers recognize that this is an excellent time to purchase a new Beazer eSMART high performance home -- with all of its award-winning energy-saving features -- other consumers want or need different home alternatives," said Ian J. McCarthy, Beazer CEO. "With the Pre-Owned Homes Division, we look forward to addressing this demand."

Carey Phelps, Beazer's director of investor relations and corporate communications, said the company had no plans at present to move any of its new-home inventory into the new rental unit.

Adam Rudiger, who recently took over as home building analyst for Carl Reichardt at Wells Fargo, was not impressed by the move. In a research alert, he wrote, "While we appreciate every effort by builders to think of creative ways to generate income during the downturn, we do not believe today's announcement will have a meaningful financial impact within FY 2011 or 2012. The average sales price of the 22 floorplans in Phoenix listed on BZH's website is $182,500. Assuming BZH pays 60 to 70 cents on the dollar for distressed properties (Wells Fargo estimate) suggests that BZH could deploy $10MM-$15MM by year end. We expect that BZH's target rental price will be below the monthly cost to own an average BZH home in Phoenix, which we estimate is sub $1,000. Gross income in such a scenario could total $1MM a year, or 8-10% of purchase price. After layering in operating expenses, we do not believe the return is that attractive, given the potential risks of acquiring additional inventory. Note, we are skeptical of any homebuilder's ability to efficiently manage maintenance of a diverse set of properties in a cost-effective manner."

Learn more about markets featured in this article: Phoenix, AZ.