nvestors interested in buying distressed properties are increasingly
using a different tactic to purchase desirable assets at a deep
discount — buying the defaulted mortgage.
are making an end-run around owners, buying mortgages on well-located
commercial and residential properties, foreclosing and taking ownership
of projects some lenders are increasingly desperate to unload.
are going to the mortgage companies and asking to purchase their
nonconforming loans for 50 to 60 cents on the dollar. Sometimes even
less,” said David Serle, vice president and managing broker at Re/Max
Services in Boca Raton. “They then package these loans and foreclose on
the properties. Now they have homes 40 percent to 50 percent below
market value. They fix them up, and sell them for a profit.”
the strategy works for all kinds of properties and investors,
commercial real estate is getting the most attention from big players
with large pools of money who can buy mortgages in bulk.
the amateur investor did this it may not be worth the risk,” Serle
said. “But when a hedge fund or a large group of investors do this they
can keep several properties that do not sell, because they are making
huge profits on the ones that are selling.”
mortgage debt can put the buyer in a position to foreclose on the
property. Then they can either acquire the asset at a discount or
auction it off to the highest bidder.
one prominent recent deal, property manager and investor ACF Riverfront
LLC obtained the mortgage debt of Fort Lauderdale’s Las Olas Riverfront
downtown entertainment and retail complex from Wachovia Bank. The buyer
was assigned the mortgage with a principal of $22 million, as well as
all leases and rents for the property.
The complex had sold for $31.9 million in July 2005.
Ocean Bank, which in June 2007 filed a foreclosure against Villa Mare,
a failed residential condo conversion project in Boca Raton, sold the
loan to Laramar Group, a Chicago-based apartment investment company in
foreclosure auction is scheduled for June 26, according to court
records. Laramar Group, which has been operating the property as rental
apartments since acquiring the loan, is expected to keep control of the
property after the auction, said sources familiar with the property.
estate insiders like Serle view the trend as a sign that the standoff
between sellers seeking the highest value and buyers looking for the
deepest discounts is starting to thaw, breaking the freeze on deals in
the real estate crisis.
see a lot more investors in our marketplace, which usually is one of
the signs that the market will start to stabilize, and appreciate,”
Serle said. “The South Florida real estate market is nearing the
bottom, and the investors are trying to time it.”
While lenders and buyers are increasingly seeing eye-to-eye on such deals, lenders are not always surrendering unconditionally.
finding that banks are more and more sophisticated nowadays in terms of
the economics of the deal. They don’t want to just give these away,”
said Tom McCarthy, managing director of Carlton Advisory Services’ Palm
Beach office. The New York City-based firm brokers deals between
lenders and buyers of their debt. “They’re more than prepared in many
instances to hold on to these assets and work them themselves, whether
that entails foreclosure or workouts with the borrower.”
said that’s a change from downturns in the ’80s and ’90s when, for
example, the old Resolution Trust Corp., formed in the wake of the
savings and loan crisis, brought a fire sale mentality to the disposal
of nonperforming assets.
ideal situation for a bank is to sell a nonperforming loan to the
end-users,” McCarthy said. “These banks get an awful lot of calls from
buyers that are looking to spend 30 to 50 cents on the dollar and then
flip it. They really don’t want to sell to a vulture looking to steal
something under a duress situation. Most institutions are not in that
position and most are not so anxious that they’re going to have to
seeking to use a property themselves generally are willing to pay more
for it, and plan to make most of their money from developing it
themselves, giving sellers more leverage in the deal as they seek to
clean their balance sheets, McCarthy said. For the buyer, a debt
purchase is a cost-effective way of acquiring the land they want.
do better on some deals than others. McCarthy said Carlton recently
helped a lender obtain close to the full value — “in the upper 90
percent” — for debt on a particularly desirable Gulf Coast property.
“Someone really wanted that collateral, and it could be worth multiples of what it is today,” he said.
Many lenders aren’t waiting to be approached with offers, but are actively marketing their debt through brokers like Carlton.
one example of a current proposal provided by Carlton, an
“institutional seller” whose identity McCarthy would not reveal is
offering $95 million of sub-performing and nonperforming commercial
mortgage loans and $57 million of real estate-owned properties across
Florida and five other states. Many of the assets have a land component
in addition to partially completed townhouses, warehouses, retail and
office space, or condominiums.
The assets are being offered on a competitive, sealed-bid basis.
the size of the buyer’s discount is tied to the seller’s motivation and
the desirability of the properties in the debt package, said Ron Kriss,
a real estate attorney with Akerman Senterfitt in Miami.
“Everything is supply and demand,” Kriss said. “Some of them are very nice properties and some are garbage.”
best bet for buyers is to target banks with the highest rate of
nonperforming loans, burgeoning real estate-owned property portfolios
and concerns about liquidity and potential regulatory issues.
“That’s a seller that’s going to be very highly motivated,” Kriss said.
He said buyers come in every size and shape.
hedge funds take $15 [billion] to $20 billion and buy, in bulk, a huge
$20 billion or so pool of defaulted notes,” Kriss said. “At the extreme
other end of the gamut is the person who is willing to tolerate some
risk, willing to roll up his sleeves and do some sweat equity and buys
a foreclosure, maybe in his own neighborhood, and fixes it up himself
on the weekend.”
person finds a broker to sell it or rent it out in the meantime and
makes a minor investment, makes a modest profit and does it again.
you know it, he owns two or four foreclosed houses or condo units and
he’s got a little business going on,” Kriss said. “He’s got tenants,
some houses for sale and he didn’t even pool.”
In the middle are companies who are buying debt with $25 million or $30 million.
“This is happening and I’m seeing it at every single end of the range,” he said.
Not every buyer of debt is looking to foreclose on or take ownership of the properties whose debt it acquires.
Benaroya, president and managing partner of Biltmore Capital Group, a
New Jersey-based bulk buyer and seller of nonperforming mortgage
portfolios throughout the country, said his firm works to restructure
and rehabilitate the loans. Once those loans are performing again, they
can be traded for a higher rate — and a profit for the company.
cost of foreclosure and the holding period of defaulted paper that’s
going through foreclosure can be up to a year in some states,” Benaroya
said. “It might take a year to foreclose, there might be a six-month
redemption after foreclosure, where we’re not allowed to do anything,
which the borrower has a chance to redeem, and then there might be an
eviction process on top of that.”
18 months or so, the buyer ends up with a property that it puts on the
market, “all the while maintaining, preserving, paying all the taxes
and the insurance and then waiting for it to sell at a price that
hopefully can generate a profit after all of these expenses and the
cost of that loan.”
The discount rate also can be deceptive, he said.
because somebody’s debt is selling at 60 or 70 cents on the dollar
doesn’t necessarily make it a good deal,” Benaroya said. “For instance,
if you had a $200,000 mortgage on a house that’s now worth $100,000 and
you go buy that debt for 70 cents [on the dollar], you’ve just lost
Serle said he sees debt purchasers gaining a stronger hand before the downturn ends.
lenders will be increasingly willing to sell debt at discounts, he
said, “because they’re either going to have just an absurd amount of
property, maybe double or triple what they have now, or they’re going
to be forced to give these away at 30 or 40 or 50 cents on the dollar.”
Benaroya said sellers and the end-users they most covet have some hurdles to overcome if they are going to find each other.
end-users, there’s a high barrier to entry with the lending
institutions that are holding the paper to sell you the debt,” he said.
“It’s not like an REO property where it’s a piece of property they want
to get rid of. If you have money, they’d be happy to sell it to you.
When you’re buying debt, there’s a lot of regulation and there’s
usually an extensive approval process by the seller of the debt. You’re
buying someone’s mortgage and there’s a homeowner at the other end of
it who needs to be treated fairly.”
As is often the case in economics, the big players are in the best position.
they buy in tremendous bulk, they’re not going to be able to entice the
bank to take the hit,” said Michael Sichenzia, chief operating officer
at Dynamic Consulting Enterprises, a Deerfield Beach firm that helps
consumers work out mortgage debts.
the same time, he calls debt purchases “the future of the banking
business from an entrepreneur’s point of view. This is a golden
opportunity for investors who know how to compensate for risk.”
of debt in South Florida stand to do well because, he said, “bricks and
mortar and land have a certain value. There’s a limited quantity of
dirt. In Florida, it’s getting to the point where you can buy condos
for less than the dirt price.”
Wayne Tompkins can be reached at firstname.lastname@example.org or at (305) 347-6645.
David Serle photo by Richard M. Brooks
Ann said:Typical of a realtor to
say it is bottom and that is why the investors are buying..yet if you
read his article, the investors are really hedge funds that can handle
the wait game for the market to finish its correction whether it be
1,2,3,4 or 5 years(they are also buying at enough of a discount that
the revenue produced by the property can provide a positive or flat
cash flow)..a correction does not mean a automatic curve up..a
correction also means a period of a flatline..where no appreciation or
depreciation exist..until we hit that, this market is not near the
bottom.... . June 4 at 11:07 a.m.
Me in Mass said:So they are willing to take $.60 on the dollar from investors but not write down the pricipal for the current owner - great. June 4 at 11:15 a.m.
the article, “The ideal situation for a bank is to sell a nonperforming
loan to the end-users,” McCarthy said. “These banks get an awful lot of
calls from buyers that are looking to spend 30 to 50 cents on the
dollar and then flip it. They really don’t want to sell to a vulture
looking to steal something under a duress situation. Most institutions
are not in that position and most are not so anxious that they’re going
to have to sell.” most institutions are not in that anxious position
YET. they will be soon enough and those offers at 50 cents will start
to look generous. why do you think the FDIC is warming up for record
bank failures over the next few years?? and by "record" i don't mean
the number of banks that fail, i'm referring to asset volume that goes
into FDIC receivorship. June 4 at 12:33 p.m.
David Serle said:Ann
I believe you misunderstood my quote. What I was saying is that it
really has been several years since the investors have entered the
market place, and because of this and several other factors that in
certain areas the market will stablize, and eventually appreciate. Ann,
my question to you is are you in the real estate business or in some
area where you see something different than I am. I see properties
being sold at 2001 to 2002 levels. They may continue to decline, but
when will it stop. Noone knows that nor can they time the bottom. I
look at the most influential investors of our time, and they are
starting to invest in real estate. Would you rather buy in a "hot"
market or a declining market? Ask someone who bought in 2005 that
question. It is much better to do the opposite of what every one is
doing. Me in Mass I agree it would be nice for a bank to give the
discount to the current owner, but than what happens to the owner a few
doors down that has been current on his or her mortgage? Should banks
just reduce the principal of all loans? Do you know nearly 70% of
borrowers that have missed payments on their mortgages never contact
their banks to see if they can help them? Banks are a lot more
motivated to help their struggling borrowers. Banks are not entirely in
the right, but the assertion that banks should just cut the principal
of notes that the customer defaulted on would create a larger problem. June 4 at 1:59 p.m.
think the issue is more that the "owners" have no equity in the
properties so all the loss is absorbed by the banks. And the balance
sheets of many of these banks so are bad that they don't have the
capital to offset the losses on these loans without going chapter 11. I
think this is the more likely reason for hesistancy to sell at a steep
discount. June 4 at 6:05 p.m.
jgl said: I think
the issue is more that the "owners" have no equity in the properties so
all the loss is absorbed by the banks. And the balance sheets of many
of these banks so are bad that they don't have the capital to offset
the losses on these loans without going chapter 11. I think this is the
more likely reason for hesistancy to sell at a steep discount. June 4 at 6:08 p.m.
Real Estate is Finished said:Real Estate is Over. Thank God. June 5 at 1:40 a.m.
Me in Mass said: "So they are willing to take $.60 on the dollar from
investors but not write down the pricipal for the current owner -
great." Disgusting, isn't it? These lenders and "investors" are scum. June 6 at 11:47 a.m.
Zeppelin said:Hang them all!!! June 5 at 2:18 p.m.
Andres said: David,
I think you are mentioning the right points in here. Let me ask you
this, are you seeing SFHs cash flowing as of today? I am starting to
see those deals in the Washington DC area, and I assume the same should
be happening in places like Miami, Ft. Lauderdale, Naples or Tampa.
What is your perception at this point? June 6 at 10:05 a.m.
The Truth said:
Those people that are bashing lenders and investors are the ones that
are most likely upside-down on their own investments or residences,
which they bought hoping to get in on the action but failed because the
music stopped and now they have no chair to sit on. The lenders are
responsible for the bubble because they made it too easy to borrow but
they were just as greedy as most of those who signed the dotted line on
the mortgage documents. You want the banks to give discounts to
homeowners that put $500 down and ended up with a $500,000 property so
when the market comes back that homeowner will get all the upside. How
fair is that? The lenders are selling at the discount to people that
can give them cash today so the banks can survive. Can the borrower
offer them cash? Let those spenders that bought into the frenzy be
foreclosed upon and let the ones that were conservative be rewarded for
saving money and having discipline to wait till things get normal again
so they get a chance to buy at reasonable prices. Did anyone bail out
those who bought hi-tech stocks in 1999 and 2000? Bottom line: you
can't be a capitalist on the way up and a socialist on the way down.
P.S. I am somewhere in between the spenders and the savers so I am
feeling some pain too but I don't expect anyone to give me a free ride.
June 6 at 12:05 p.m.
David Serle said: Andres,
Thank you. I assume you are talking about single family homes having
cash flow? In Florida it is tough because our taxes and insurance are
so high that it hurts the ability to receive positive cash flow from
rental income. However it is starting to be closer, and when you look
at the affordability of purchasing vs. renting it is starting to be the
same. When that happens or it becomes more affordable to purchase than
to rent you will see a small appreciation from year to year. June 6 at 5:06 p.m.
Jonathan Levy said: I'm
a fund manager in Miami and I've met with all of the regional banks and
most of the nationals, and my experience over the last 12 months has
been that the banks have been completely unrealistic in their pricing
expectation of debt backed by multi-family and condo-hotel assets. The
failed condo-conversions are still being marketed by the banks on
condo-conversion fundamentals and not current cash flow underwriting,
so that anyone who acquires the debt today will have an investment that
at best is not yielding any income and at worst is realizing a negative
return. Add the costs to foreclose and the only buyers today at such
pricing must be the least risk-averse and most cash-rich of
speculators. We're taking a wait and see approach. There's absolutely
no incentive to get into the market at this point, the spread between
the bid and ask is that far apart. Look to 2009 and 2010 when the 5
year interest-only loans backed by office and retail assets acquired in
2004 and 2005 come due; pro-formas, lease-up expectation, rental rate
growth and underwriting in those years were extremely aggressive and
much of the secondary and tertiary market product (and some of the
grossly-overpaid for Class A product) is going to be in negative-equity
territory when it comes time for the owners to place new financing. June 7 at 10:37 p.m.
Financial Expert said: Nothing but another ad to sucker fools in at prices that are still to high. Don't pay more than 20 cents on the dollar. Jume 8 at 12:25 p.m.