Is bulk buying of distressed assets dictating market prices?

Part one — a little history …

Supply versus true demand. Cash flow now versus potential for future sales profits.

The questions and answers for buying South Florida’s distressed properties seemed simple when opportunistic hedge funds, private equity firms, high net worth investors and former Resolution Trust Corporation profiteers hit the South Florida bricks in 2006. Three years later, buyers and sellers now know the market is highly complex and filled with risks previously unconsidered.

Can hedge fund grade profits be made in acquisition, management and disposition of real estate assets in South Florida? What product segments, price ranges and locations are the best opportunities? Is it time to buy, or patiently keep your powder dry waiting for prices to drop further? Are the recent bulk buys smart deals, or knife catchers, too early in the game?

Back in 2006, while brokers, mortgage lenders, cocktail party “experts” and elected officials speculated that South Florida would soon join the likes of New York, Chicago, Paris and London, savvy investors had already begun planning for Florida’s unavoidable property train wreck.

Miami and West Palm Beach streets began to fill with the brightest Wall Street MBAs intent on squeezing 18 to 24 percent annual returns out of failing residential towers.

Hundreds of industry professionals attended distressed property seminars to network, study and fish for the perfect deal.

As prices and sales dropped off the table, developers and lenders were inundated with requests for meetings and tours of failing new residential projects.

Commercial lenders holding REO assets and non-performing loans also faced challenging decisions regarding strategies for their portfolios. The bid-ask differential between potential buyers and lenders prohibited bulk transactions from occurring, as lenders were either unwilling or financially unable to accept offers substantially below note values.

In 2008, banks tested auctions as an avenue to sell condominium units to individual investors. While hoping to sell at prices higher than hedge funds and equity firms offered, early auctions yielded sales prices at 50 to 80 percent below previous unit closings.

As credit markets froze and bank failures increased late in 2008, some early bulk sales of unit packages ranging from 10 to 150 units were transacted in South Florida condominiums. So far in 2009, the pace of transactions has accelerated with over a dozen deals completed in recent months.

In my next column, I’ll discuss these transactions, who the players are, pricing in today’s market and what’s ahead for bulk transactions.

Jack McCabe is CEO of McCabe Research & Consulting in Deerfield Beach, Fla. He is an independent real estate analyst and consultant to major developers, lenders, and investors.