Despite the recent slowdown in the real estate market, there are companies and individuals that are finding an upside.
The current troubled credit market has inspired a number of initiatives on the part of opportunistic New York City-based companies hoping to make lemonade from lemons. For instance, The Carlton Group, an international real estate investment banking firm, has started a $1 billion division to buy distressed debt, and the Blackstone Group has topped that with the creation of a $1.3 billion distressed debt fund. These funds are designed to snap up debt trading at cheap prices in the wake of 2007’s lending crisis.
“You do hear about huge discounts and huge sales from the major – particularly, publicly traded – builders, who are clearly struggling and really want to off-load a lot of their inventory,” said Pete Flint, the chief executive officer of Trulia.com, an Internet real estate search engine, which recently added more than 400,000 foreclosed properties to its database. “But I wouldn’t say there are obvious examples of consumers or businesses profiting from that, though I have heard of these vulture funds, which are setting up.”
A vulture fund is a financial group that purchases securities in distressed market conditions or properties that are in bankruptcy. In anticipation of a possible real-estate market downturn, David Schechtman, a former bankruptcy lawyer, was hired more than two years ago by the commercial brokerage Eastern Consolidated to run the firm’s turnaround and distressed group.
“The idea behind this group was whenever there are bankruptcies, or financial distress, or whenever the market finally did change, I would have an in with lawyers,” Schechtman said. “And whenever there would be real estate involved, I would get involved with a sale or a refinancing or advise on things like that.”
There have been few distressed securities or equities trading at discounts as yet, he said. “Every day, I get calls from new funds and existing funds, which are allocating hundreds of millions of dollars to purchase any and all discounted real estate, debt or ownership positions tied to distress,” Schechtman said. “The problem is there isn’t product. There are a ton of vultures, but there’s nothing on the ground for them to eat yet. And my heart says there won’t be nearly the amount of carcasses as they expect to get.”
Jack R. Berquist, managing partner and co-founder of Presidio Partners, a San Francisco-based investment bank focused on providing capital-raising and advisory services to real estate clients, agreed that there have been few deals available for funds looking to capitalize on the recent credit turmoil.
“There may be three or four new funds, out of a universe of a couple of hundred,” Berquist said. “There’s talk about distress, but there haven’t been many trades that have happened where the seller is so highly motivated, he’s been willing to mark it down something substantial so that it can get sold. These things take a while to work through the system.”
Also, to raise a pool of funds, it can take a significant amount of time, so most funds are still raising money, Berquist said.
“Although it might be a popular technique to raise the funds to pursue this strategy” of buying distressed assets, he said, “it takes at least six months, and more likely closer to a year, to raise the funds.”
One area where Berquist said he has seen activity is in distressed land sales. For instance, in early December, homebuilder Lennar Corp. hastily sold a portfolio of 11,000 properties to a joint venture largely owned by Morgan Stanley for $525 million, or 40 percent of their previously stated book value.
“It’s always been difficult to raise a blind pool fund for land, but now, because homebuilders, primarily public homebuilders, have so much inventory, they’ve got to get rid of it, and they’re marking it down significantly,” Berquist said.
“The residential homebuilders are so distressed with debt that they have to unload land parcels, so people are looking for ways to buy that land at a distressed price. That’s one area where you’re seeing trades happen, and now some funds are being targeted for that.”
Jon Moore, vice president for development at Value Companies, a Clifton, N.J.-based business that buys, builds and manages multi-family properties, said that the firm has taken advantage of past market downturns. Of the company’s 14 apartment communities, three were acquired distressed.
But this time, the company is taking a new tack: It is establishing a new fund that will be dedicated solely to buying properties that fall victim to recent illiquidity in the real estate market.
“We’re right now in the process of raising our first fund ever to capitalize on what we think are going to be tremendous buying opportunities in the multifamily rental side of the market,” Moore said.
Currently, the firm is working on a number of distressed situations, Moore said, including one in Yonkers and one in Beacon, N.Y. The fund aims to raise $25 to $50 million of equity, providing about $125 to $150 million worth of buying power, he said.
Moore said the company’s goal is to make value-added investments throughout the market downturn, thereby gaining the attention of institutional backers.
“You see funds like these formed on the institutional side, but you don’t see it too much with larger private enterprises like our own,” he said. “So we think we’re doing something a little different, and putting ourselves in a different sphere in the investment marketplace.”
Credit crunch reshaping industry
While New York City has largely been spared from a high number of foreclosures
as a result of the credit crunch, a steep increase in the number of foreclosures on homes nationwide is prompting change in the residential real estate business.
For instance, Trulia, the residential real estate search engine, responded to consumer demand in November by working in partnership with RealtyTrac to add more than 400,000 foreclosure properties to its database of more than two million homes for sale. Visitors to Trulia.com can now include foreclosures in their search criteria when looking for information on homes for sale on the state, city and neighborhood level in U.S. markets.
“It’s very clear that from a national point of view there’s a major impact from the credit crisis into the foreclosure market,” said Pete Flint, the co-founder and chief executive officer of Trulia. “But what we’ve really noticed was within our Trulia Voices section, which is our real estate Q & A service, we’ve seen a massive increase in the amount of questions about foreclosure.”
Trulia Voices enables consumers to consult directly with other consumers and real estate professionals about their local foreclosure market.
“At Trulia, we recognize that the foreclosure process is an extremely complicated one for both buyer and seller,” Flint said. “By adding foreclosure data to Trulia.com, we are providing a one-stop destination where consumers can locate properties, research their local market and get qualified advice from local professionals on the complexities of buying a foreclosure property.”
Flint said that through Trulia Voices, he’s also noticed the number of real estate agents marketing themselves as “foreclosure specialists” or “foreclosure experts” has also grown.
“There are certainly enterprising agents who are billing themselves as foreclosure specialists or experts, and saying, ‘I can really help out the amateur investors,’” he said.
Jim Walker, a realtor with 1st American Realty, near Sacramento, said he markets himself as a foreclosure expert on Trulia.com and uses an email address with “foreclosure realtor” in it.
“I do have a number of years of experience as a realtor going back to the mid-90s, when we had a milder version of this foreclosure crisis,” he said. “So now I do market myself as a foreclosure consultant. You want to get business. It’s very competitive out there. The real estate boom nearly doubled the number of real estate agents that are working, so agents are very hungry for business, especially listing business.”
Walker said he has a mailing campaign he is conducting targeting REO (Real Estate Owned) asset managers, or lenders that own the property that was foreclosed upon and didn’t sell at auction.
“The last REO I did was at the turn of the century, and all the people I dealt with then are doing something else now,” he said. “So I’ve got to ingratiate myself with new asset managers that can assign me listings from the banks. You’ve got to be agile and go where the business is.”
One realtor, Patrick Mahoney, left the firm he worked for last summer and joined Investors Trustee Services, Inc. in Phoenix as a foreclosure expert.
“In July, I went to work for a trustee service, because I saw this business changing,” he said. “Foreclosures are big. They’re what every buyer wants.”
Mahoney said that some buyers are eager to do short sales, which occur when a homeowner is in foreclosure, but before the property goes to auction. Though some real estate agents are billing themselves as short sale experts, he said he tries to avoid those types of tricky sales, which are often more full of pitfalls then benefits.
Mahoney said that he believes lender-owned auctions will be where the biggest deals can be found this spring. He is already setting up classes on the auctions for his clients.
“Six months ago, there were almost no foreclosure experts and short sale experts,” he said. “Now, we will have auction experts.”