“I read this interesting article in this month’s units magazine. Notice that it’s talking about all of the bargains that are available. People say I got a head start because I bought properties so cheap during the last down turn, well they are right and now it’s your turn to have people say that about you!! Enjoy the article and put in an offer today!!”
For many investors, high-quality properties are available for about 50 cents on the dollar.
While apartment owners trying to dispose of properties purchased at the peak of the market may be feeling indigestion from all the red ink, investors with cash are licking their chops at the number of apartment communities available for purchase at sizable discounts.
“If you have access to capital, you can buy properties for 50 cents on the dollar,” says Del Walmsley, an independent rental owner, investor and Founder of Houston-based Lifestyles Unlimited.
A number of factors are contributing to the abundance of discounted properties. Large companies, such as REITs, need to raise cash and increase liquidity to pay dividends and pay off debt. With secured capital so difficult to come by in the current market, they must sell properties in which they have equity.
Tim Naughton, President, AvalonBay Communities, said at a National Multi Housing Council finance forum in early June that his company has been in defensive mode, raising capital and increasing liquidity. Disposition of properties, he says, is “a backdoor way of tapping the secured debt market without bringing more secured debt onto the balance sheet.”
The difficulty with accessing credit also makes it more difficult for real estate owners who purchased with high leverage at the height of the market (2005 to 2007) to refinance loans that have begun to come due. With lenders calling on those loans, the owners must sell to meet their obligations.
Even “traditional” foreclosures—those caused by ineffective operators—are creating opportunities for investors. Because banks also are pursuing liquidity, they are selling apartment communities they have obtained through foreclosure for low prices. Investors may be able to acquire distressed properties from the owner, through a receiver, a share sale or directly from the lender, the bank or insurance company, says Greg Guerrero, an independent rental owner and Managing Member of Apartment Services Co. in Tulsa, Okla. In addition to foreclosures, some properties may be available through bankruptcy, he adds.
“When the tide goes out, you see who’s swimming naked,” Guerrero summarizes. “When economic conditions become tough, inefficient properties fail.”
The number of apartment properties falling into financial trouble is far outstripping the number of distressed communities resolved through sale or otherwise, according to a June report from real estate research firm Real Capital Analytics. Outstanding apartment distress is up $8.1 billion year-to-date and totaled $16.8 billion at the end of May, according to the report. Another $750 million of apartment properties had gone into default or foreclosure through mid-June, the report adds.
Those distressed apartment properties are having an impact on prices, though they do not entirely dominate sales. “The percentage of distressed sales in the apartment sector is up considerably this year,” the report states, “but still only averages between 10 percent and 15 percent of total volume.”
Local Banks Lending
With so many lenders no longer in the apartment market, it may be difficult for investors to find capital to take advantage of these opportunities. But that difficulty in finding financing also means investors may face less competition in bidding for properties, Guerrero notes. Nevertheless, he says he still faces competition in his market. “It’s always a matter of what the market will bear,” he says. “Some people have paid amounts that are greater than I’ve been interested in paying.”
Walmsley says money is still available from local banks to investors who are known and well-regarded in their community. “It’s not what you know, it’s who you know,” he says.
Walmsley asked his mortgage broker to take his financial statement and shop him around to about 50 banks. When the broker finds a bank who might be interested, Walmsley goes in to talk to the banker, who sizes Walmsley up to see if he would make a viable business partner. “It’s going to come down to whether the investor has enough money, enough background, and enough credibility to pull a deal off,” he says. It’s most important that investors have prior experience in apartment investment, he says. “It’s more about you than it is about your credit score.”
Instead of putting all his money in one bank, Walmsley also is putting his money into other banks with which he hopes to do business.
More Equity, Less Debt
Real estate loans that are available may be more conservative—investors might have to put down 30 percent in equity instead of 20 percent, for example. But investors who are hesitant to invest 30 percent equity in a purchase are missing an opportunity, Walmsley says.
A community that cost $2 million last year would require a 20 percent down payment of $400,000. That same community might cost $1 million this year, so even a 30 percent down payment is only $300,000. Even if the NOI of that community is less, the investor will still see cash flow because of the lower debt servicing payments. Plus, the community has the potential to rise again in value.
Special Offer article written by Jeffrey Lee of Units Magazine.
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