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| Comprehensive solutions for today’s real estate market January 2010 - Overall Market As we look back at 2009, I believe the first thought many of us will have is that we simply survived the year. However, after a tortuous beginning to the year, the market did noticeable improve as the year progressed. In the end, many had better years than initially thought after the slow start. This bodes well for 2010, which will be a definite improvement over 2009 and will continue to provide many opportunities in the distressed market. So, with this in mind, let’s review the year and some of our observations on the year: Solutions RE Property Report 1) Your idea of distressed vs. the bank’s idea of distressed: Look at it the way the Supreme Court judged pornography – “I’ll know it when it see it”. The problem with this is that no two people see the same thing. Therefore, investors are looking for good deals to make money and banks are looking to good ways not to lose money. The clash of vested interests have left a lot of LOI’s and contracts in the recycle bin.
2) 1990’s RTC days vs. the 2009+ market revaluation: Many investors look back to the RTC days and want this market to be similar to that market (in terms of product sales). The problem is for 2009 and beyond, there is no “central” exchange whose sole mission is to move “bad” product out of the market. Each bank has their own personnel, their own policies and their own idea of price. This has created some widely divergent pricing of assets and created some real deals (and, at times, regrets on the part of seller). Also, since the main focus now is not necessarily to move assets off the books, but rather, to contain damage to balance sheets in the most effective way possible. This has led to some banks who cannot get something close to their asking price to modify loans for a short period of time in hopes that an improved overall market will enhance value at some point in the not-too-distant future.
3) Cash vs. Debt – Leverage: In the past, many of these deals were attractive because either the seller or a bank would provide financing, therefore allowing a greater opportunity for increased returns off a smaller investment. However, since financing is largely an option of the past (and at some uncertain point in the future), deals are all about cash. Since a larger cash investments requires a larger overall price differential (purchase price vs. potential sale price at “x” point in the future) to make the desired return, this depresses the price investors will pay for a desired asset. Since we all know how cooperative lenders have been so far, this is not the happily ever after scenario.
4) Buyers, Buyers Everywhere: In this market, there are definitely not a shortage of buyers. In addition, there is no shortage of cash as well. This has fostered much competition and created, in some instances, some price inflation for some assets. In addition, there is a significant amount of foreign monies in the market and the weakness of the US dollar gives some of these funds a pricing advantage over some US investors. 5) Product, Product, Product: It’s everywhere you look but it seems more often than not that investors congregate around or chase the same assets. This plays out further when you consider point #4 above. We hear very often, “I want new product on or near the water, A & B neighborhoods only”. The problem is that there is and always has been a somewhat limited amount of that type of product. In addition, this strategy ignore the fact that there are some wonderful opportunities that are not on the water, near the water or (for that matter) in the water.
6) Risk vs. Reward: We all know this is the game; how much risk one should take to get the return one seeks. However, all too often we’ve seen investors wanting outsized returns without wanting to assume much (if any) risk in their investments. Many seem to want a no-risk investment with a 30 or 40% IRR. While we are not advocating a return to the risk strategies untaken to get us to this point, there is going to be a level of risk one must assume in making these investments. When sales are reasonable at $200 a foot, one can’t expect that seller to accept $100 a foot (or less) as a distressed sales price. This leads us to the next point…
7) Short Sale/Foreclosure Pricing vs. Retail Pricing: We’ve noticed many investors don’t differentiate between the two. For all intents and purposes, the short sale/foreclosure market is a wholesale market and the regular market is retail. While this is not an absolute truth, it is a general rule (see the NY Times article http://www.nytimes.com/aponline/2010/01/03/business/AP-US-Home-Prices-Appraisals.html). While this is less true of condo buildings where there are short sale units available alongside retail units (for sale), it does provide the opportunity the investor to buy many of these short sale/foreclosed units in properties they are buying all the remaining units. We’ve seen a couple of investors execute this strategy very effectively. This brings us to the next point… 8) Bulk Pricing: In many instances, sellers are getting a small premium in pricing for bulk units vs. short sale or foreclosed units. Why? Sellers – and some buyers – note the value in purchasing all the units in one block at one time. The savings in time, closing costs and the ability to get many units in one swoop provides a benefit to the buyer. This benefit often has a small price (a premium) attached to it.
9) Mortgages – the future: While the mortgage market largely remains MIA (and that’s not referencing the airport code for Miami), it will someday (in the not-too-distant future<?>) return. When it does so, there is the potential for a release of some of the pent up demand. Coupling this with an improved economy and a general belief the price declines have ended means that buyers may move quickly. This could be a windfall for those investors well positioned to take advantage of such occurrences. This leads us to the next point…
10) Success to date: While many investors continue to search for that perfect product, some have moved ahead, and have been rewarded for their confidence. For example, Caribbean was sold for $350 a foot in August. By the end of the year (less than six months later), most of the project has been sold retain for around $600 per sq ft. No matter how one slices that, that’s a handsome return. Also, many investors thought the Brickell Station deal at $135 per sq ft was expensive at the time. In hindsight and based on more recent transactions, it looks like a pretty good deal for the investor. Also, many lenders took a different approach and allowed retail pricing to be reduced and thereby set new retail pricing levels. 1060 Brickell made the first move and sold out the project for about $225 a foot. Several other Brickell buildings followed suit and also sold out (or substantially reduced inventory). This demonstrates that there is a retail market out there if the price is reasonable. And, most of these sales were without mortgages. Think about what the possibilities are once banks decide that their main business is once again lending money? Granted that many of these observations rely on a belief that we are now headed in the right direction, that we have seen the bottom of the market and that pricing has firmed and will continue to do so in the future. However, after being bearish for much of the past three years, we are generally bullish on the market moving forward. Investing has always been about one’s confidence in the direction of the market. From this vantage point, the only way is up… For more information, please contact Richard Wood. | |
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