Burl East is looking for a good deal on a foreclosed house. Make that a good deal on 1,500 foreclosed houses.

Mr. East, a managing principal of Silver Portal Capital LLC, a small real-estate investment bank, is raising $150 million to purchase foreclosed houses in and around the firm's hometown of San Diego. He is scouring lender portfolios and real-estate listing services -- as well as spots to get a cup of coffee -- for houses that he can rent out and then resell in five years. That is when he bets that the local housing market will have recovered.

"It's like the infantry," says Mr. East, 48 years old, who plans to buy his first house later this month. "We've made a list, and we are going house to house."

Mark Brewer

Silver Portal is raising money from pension-fund advisers and opportunity funds and has completed about 75% of its fund-raising process, Mr. East says.

At a time when investors are culling through the wreckage of distressed debt instruments and delinquent subprime mortgages, Silver Portal is venturing into largely uncharted territory. The business of buying and managing foreclosed single-family houses has typically been dominated by mom-and-pop landlords because it is considered too costly and labor-intensive for institutional investors.

But with the prices of foreclosed houses plunging in cities with healthy rental markets and good-quality housing stock, a few investors and operators are testing the waters.

Richard Campo, chief executive of Camden Property Trust, one of the nation's largest multifamily real-estate investment trusts, is looking into the possibility of amassing foreclosed houses to rent in markets where his company already manages apartments, including Las Vegas; Orlando, Fla.; and Phoenix. "There are clearly a lot of people looking at this," Mr. Campo says. "But there are serious challenges to getting it done."

In addition to the logistical problem of maintaining a sprawling collection of houses, there is the risk that prices -- which dropped 25% in San Diego County in June from a year earlier -- could fall further and that an economic recession could depress rents.

There are other issues that investment bankers typically don't deal with. Mr. East visited one house where the previous owner had punched his fists, knees and shoulder through the drywall in four of the six rooms. "You might think it was a disaster, but our guys say it will cost 1,500 bucks to fix," he says.

Mr. East's staff includes five sales agents and a former division president at Olson Co., a Southern California home builder. They are targeting properties that were priced at less than $600,000 at the peak of the housing boom and have fallen in value by about 50%. That puts them well below "replacement cost," or what it would cost to construct an equivalent house.

Their strategy takes them away from the shiny new condominium towers in downtown San Diego and into the more-modest suburb of Chula Vista and other nearby California cities where lax lending and big price swings have led to high foreclosure rates. Across San Diego County, there were 9,519 default notices filed in the second quarter, up 117% from a year earlier, according to the research firm DataQuick.

A former securities analyst, Mr. East has devised models to forecast house prices and foreclosures in San Diego, but selecting the houses can be more art than science. For example, he says, the houses must be located within a five-minute drive of a Starbucks coffee outlet. "That is a sign of being near civilization," he says. "We are not looking at tract houses built in the middle of nowhere."

There are other requirements. His staff was recently stuck inside a house while a neighborhood pit-bull terrier ambled down the street. "If there are free-range pit bulls, we cross the neighborhood off the list," he says.

The conditions of the houses vary. Mostly, he says, the houses need new carpets and paint, and the lawns are dead from lack of watering. He has allocated $25,000 for maintenance on each house, over the five years he intends to hold the property.

Over the next 12 months, Mr. East plans to purchase as many as 1,500 homes in San Diego and nearby Orange and Los Angeles counties. They plan to rent them to teachers, police officers and health-care providers earning around the median household income in San Diego of $68,000.

He is banking that most of his profit will come from price appreciation when he resells the houses starting around 2013. He is betting that houses in coastal Southern California will recover much of their value because the area is a desirable place to live and has a solid employment base anchored by the biotechnology industry and the military.

Of course, there is a risk that Mr. East could be striking too early. Ramsey Su, an investor who bought up foreclosed houses in San Diego in the 1980s, says foreclosures have yet to peak and home prices are likely to keep falling, so he is waiting to start buying again.

Write to Michael Corkery at michael.corkery@wsj.com

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