How to find distressed real estate

Eight steps to getting in on properties and notes

Morris Moinian, president of Fortuna Realty Group
Morris Moinian, president of Fortuna Realty Group

Shopping for distressed buildings isn’t as easy as pointing and clicking through a listing service — or is it? Investors who have picked up projects that ran out of money before construction was complete or simply couldn’t keep pace with their bank payments — read: distressed assets — shared how-to advice with The Real Deal that contains a surprising amount of common sense.

Yes, the average real estate Joe might not be able to waltz into a corner bank and demand to see what troubled notes it holds. Instead, distress investing, like many high-level business propositions, seems to require membership in a clubby circle. Still, picking up a half-built, low-rise rental for a song may be in the realm of possibility.

Here are some basic avenues of attack:

1. Call brokers

Seems obvious, maybe, but unlike buying a short-sale home, you can’t always just pull up a brokerage’s website and check out a listing that’s in financial trouble. Plus, banks usually won’t take unsolicited calls. Note sales — when an owner is forced to sell the property that secures a mortgage because he can no longer afford to make payments on it — are not typically recorded in the public record in any clear-cut way.

Eastdil Secured, Massey Knakal Realty Services and Jones Lang LaSalle are in the know about possible New York deals, said Morris Moinian, president of Fortuna Realty Group, which has invested in troubled buildings during past downturns. Also, chatter among developers suggests that Grubb & Ellis “has been very successful at these types of transactions,” he said.

2. Look beyond Manhattan

Great deals can be had in the outer boroughs from agents who might double as insurance salesmen and travel agents in “one- or two-man shops,” said Bob Knakal, chairman of Massey Knakal, which has seen distressed sales spike from 4 percent of its total business in 2009 to 20 percent this year.

“The smaller brokers will be able to source transactions that might not be widely marketed,” Knakal said. Plus, with less competition for these properties, “they could present a better buying opportunity.” And there’s no complex science behind tracking down these mom-and-pop shops, Knakal said, who adds that one might luck upon them on, say, a drive through Queens, with eyes peeled for brokerage signs on storefronts.

3. Scour banks’ websites

Most real-estate owned, or REO, properties that are advertised on the websites of major retail banks are individual homes. But, brokers point out, Bank of America’s website offers commercial properties, too, with a menu that seems easy to use, even if local offerings appear thin. Indeed, selecting “commercial — office” and “commercial — apartments/condos” yielded no results for Manhattan. (Individual condos in Brooklyn did turn up, though.)

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Rick Simon, a spokesperson for the bank’s mortgage team, said the listings migrated to the site after the 2008 purchase of Countrywide Financial, and that anecdotal evidence suggests that the listings are popular with buyers, though he had no specific site traffic numbers.

4. Tap relationships with previous lenders

“Let’s say client seven goes under. They may offer client eight to come in and take a look,” said Moinian, who has been in that eight position himself. This is especially true at smaller banks, where personal relationships are more typical than at “UBS and Credit Suisse and so forth and so forth,” he said. But being in New York is a good thing — there is more money in the city because there are solid developers with good track records.

5. Develop different relationships at the same bank

“One of the most difficult things to figure out is who to speak to” at a bank, said Knakal, who recommends cultivating contacts in all the departments that a piece of real estate might bounce through, whether special assets, note sales, or REO.

In the course of dealing with people at a lender, a buyer might discover that “all of a sudden the bank has foreclosed, and the note has been handed off from a workout group to the REO area,” he said. “If you don’t have a relationship with that person, you can lose track of that property.”

6. Demand a discount

If a meeting does eventually take place, consider that buying most foreclosed properties in New York requires paying a 2.8 percent transfer tax, plus other steep carrying costs. “If the bank is not giving you the deed at par, you need a discount to make the numbers work,” said Sam Suzuki, a Bronx landlord who is attempting to reinvent himself after legal troubles by raising a distressed fund.

7. Prepare to pay in cash

Buying bad mortgages isn’t usually done with other mortgages, as banks don’t really crave the possibility of putting underperforming assets on their books, so expect to seal the deal in cash. If financing is used for the deal, meanwhile, buyers shouldn’t expect loans to cover more than 50 percent of the cost, Knakal adds. And that financing will likely come from “a hard-money lender or a fund, or a lender who is looking beyond cash flow.”

8. Read all documents carefully

Many parties, like insurance companies and loan servicers, can have ownership stakes in distressed buildings, so poring through the paperwork to find out who’s owed what is essential. “You have to deal with all these unintentional owners,” said Noble Carpenter, who runs the loan-sale business at Jones Lang LaSalle. “Understand the fundamentals.” And check out real estate data websites like PropertyShark, which has the names of lenders, as well as information about liens, attorneys and title histories.