Navigating The Distressed and Bank Owned Property Market

Part II of the Land Evaluation Series

Bank Owned Properties and Distressed Sales

Spoiler Alert! Since 2007 the Florida real estate market has declined sharply. There is not a single segment of the real estate industry that has remained unaffected by the recession. Real estate values across the board were hyper inflated; based upon speculation, unreasonable return expectations and subprime loans which were mandated by our government. The height of the market was unsustainable and destined to fail. The past 6 years have been a direct reflection of a massive market correction.

One of the most challenging aspects of the current land market is assisting sellers in understanding the actual and realistic value of their land, not what they think or believe it is worth. Many distressed owners have unrealistic, preconceived pricing expectations based upon the hyper inflated past. Too often I hear something along the following: “Well, in 2006 I was offered {enter some insane amount} for my property. I won’t take less than {enter insane amount}”. The ironic and most frustrating part of this is that these owners HAVE to sell their properties, or face financial ruin and eventual loss of their asset. Simply put, if distressed sellers do not sell their property, they will face the harsh reality of losing everything (foreclosure).

Shift, a real estate book written by Gary Keller, explains the concept well. Keller explains that the real estate market, across the board, has essentially entered into a paradigm shift. Things are not what they used to be. In fact, they are 180 degrees different. For the most part, values have returned to realistic and affordable levels. Those who fully understand this new reality are successful in the current market. Those who do not understand this reality face an uphill battle.

Distressed Sellers Mostly Fit Into Two Categories:

1. The Unrealistic Distressed Seller – The unrealistic distressed seller believes their property is worth {enter insane amount}. The foreclosure process starts. They do not sell their property in the time available. Many times these land owners fight the foreclosure process. Many times I ask them, on what grounds? You borrowed the money didn’t you? Have you returned it? The foreclosure process comes to fruition, and they often lose everything. Many times, these sellers receive offers on their properties during their foreclosure process that would allow them to be free and clear of their mortgage and personal guarantees, and many times these offers would allow for extra cash left over to be paid to seller. Unfortunately, I have witnessed stubborn and unrealistic sellers take their properties to the end of the rope; not take advantage of their opportunities, lose it all and be on the hook for a deficiency judgment.
2. The Realistic Distressed Seller – The realistic distressed seller recognizes and understands their situation. They also understand the current market. The realistic distressed sellers are very aggressive with their pricing strategy and open to all offers. They move decisively and quickly towards a solution. These sellers typically move their property quickly. They understand that they are competing against other sellers and other properties. When they price their property competitively, they are successful in making a sale.

Where is the silver lining in all of this? My economics teacher used to tell our class “A bad event economically for one person can be a great event economically for another.” Buyers and investors who have capital to invest can benefit from this market.

Every transaction isn’t “a deal of a lifetime”, but over the past few years there has been tremendous opportunity to purchase properties at distressed prices. Buyers have to be in the right place, at the right time. There are “good deals”, and then there are “steals”. Most distressed land sales fall into one of those two categories. They are typically all good, but it just depends on how good. Investors in this market always believe they will get their “steal”. Often times they end up passing up “good deals” because of their obsession with a “steal of a deal”. Because of their indecisiveness and inaction, buyers and investors ultimately end up passing on and losing good opportunities.

An example of a land deal that was considered a steal was brokered by Daryl Carter of Maury L. Carter & Associates, Inc. in the summer of 2011. Daryl Carter represented a bank in the sale of 1,395+/- acres located in Lake County, FL just minutes from the back side of Disney. The property is in the immediate path of progress for the next wave of logical development. This ideal site sold for $4.5 million or $3,225/acre. At the height of the Market, the land previously sold for $32,000,000 or $22,939/acre. The investors in this land paid agriculture prices for “Grade A+” property. Does this mean that all of the large acreage property in this area is worth $3,225/acre? Absolutely not. The point is that certain circumstances in the real estate world have provided for outstanding opportunities. In fact, the Wall Street Journal picked up the story. The following is an excerpt from the article.

[quote]”Mr. Carter knows the site well. About 20 years ago he represented a group that considered paying $4.1 million for the site. But there was no deal. “How could it not be a good deal if you can buy it 20 years later for roughly the same price?” he asks. “The state of Florida is on sale right now.”[/quote]

Often, owners in default abandon their properties seemingly overnight. Typically, banks are not equipped to deal with the foreclosed properties as this is not their core competency. This leaves the land (or other asset class) neglected and vulnerable to further deterioration. Many times, there are specific reasons these properties can be purchased at such low prices. Nearly every bank owned property I have worked on has had some sort of environmental issues (severe to minimal), regulatory issue (land use, zoning, permitting), legal issue, access problem, cloud on the title that need to be vacated or trespassers. Buyers often make the decision to purchase the property with full knowledge of these problems. Typically, these issues can be mitigated. Banks do not want to deal with such issues themselves as they are expensive, time consuming and distractions from normal bank work. Because of these issues, there is often opportunity for investment at a heavily discounted rate.

The first wave of bank owned deals has come and gone. However, it is believed that there will be another round of properties entering the market as bank owned assets or distressed properties. Many loans created during the boom years had five or ten year balloon payments. Due to the real estate crash of 2007, many of these owners need massive amounts of capital right now to pay down their debts. In the present capital constrained market, often times the funds are not available to current owners. This second wave of distressed and bank owned properties might not be as large as the first, but it will provide for opportunities for investors in today’s challenging real estate market.