We've all heard the phrase "creative financing" used in describing some of the horrors visited upon innocent borrowers, who blindly (Ohio is a Buyer Beware state, as are most) listened to fact-twisting lenders (there are actually only a few but they give everyone in this industry a bad name) who got them neck deep in financial crap.
Interest only loans. "NINJA" loans. Everything you can imagine was visited upon a handful of naive buyers who didn't do their homework, or didn't read the paperwork, or didn't take a calculator with them to see what might happen if they signed the papers.
And yet, many well-off investors have done well using legal creative financing to make transactions happen. Unfortunately, there is legislation in Congress that would limit some of this creativity all in the name of protecting consumers. The fact is, the people who wrote the bill don't understand commerce, or they don't like it.
Some provisions of the legislation actually will harm the commercial/investment real estate market even through it is aimed at protecting consumers. Confused yet? Frankly, I'm confused that the powers that be in Washington who purport to be smarter than everyone else are visiting this contrived piece of proposed law upon the public and thinking the usual that those in power think . . . "how can anyone possibly be opposed to this?"
In this market, creative financing is more important than ever. Exchanges are becoming more the norm than the exception. Offering in other land, properties or even chattel -- boats, cars, etc. -- is what is making deals happen. Lenders have so tightened the screws on borrowers that it has ground commercial real estate to a virtual halt. Not because the borrowers aren't good risks. It's because lenders are suddenly terrified of risk. Something that their entire industry is built on.
So it is up to creative real estate agents, and lenders who truly understand commerce (if a lender is even involved) to make a proposed transaction a reality. Second mortgages held by the seller are occurring with far more frequency. Land contracts are occurring with far more frequency.
Sellers who expect an all cash deal might still get it. But it will take longer. Or they might not get their price.
The watchwords in this environment are: Patience . . . and Creativity.
Thursday, July 23, 2009
Friday, July 10, 2009
Shameless Self Promotion
Recently I learned I have been named to the city of Columbus, Ohio's Property Maintenance Appeals Board. This Board, comprised of seven representatives from around Columbus, meets monthly to review appeals by property owners who have been cited for violating Columbus Housing Code, Health, Sanitation and Safety Code, Streets, Park and Public Properties Code and the Nuisance Abatement Code.
I am the representative to the Board for the real estate industry, and my first meeting comes next Monday. I am truly honored to have been appointed to this post by Mayor Michael Coleman.
Most of all, I thank the late Bob White for nominating me to represent the real estate industry on this Board. It does important work and makes a difference. I will do no less.
I am the representative to the Board for the real estate industry, and my first meeting comes next Monday. I am truly honored to have been appointed to this post by Mayor Michael Coleman.
Most of all, I thank the late Bob White for nominating me to represent the real estate industry on this Board. It does important work and makes a difference. I will do no less.
Friday, June 19, 2009
Commercial R.E. Landscape Changing
The credit crisis has changed for the time being how commercial/investment real estate is bought and sold.
As one mortgage broker friend of mine opined at a meeting yesterday morning: "If you need to borrow money, bring cash!"
As silly as that sounds, its not far off the mark. The credit mess caused by the residential derivatives market virtually shut down the issuance of commercial mortgage-backed securities. Capital is scarce, and hard money lenders have emerged. Hard money lenders are private sources of revenue.
What is amazing in the credit controversy is how delinquencies rates on commercial loans remain low. Not unexpected. But change on the horizon is how they are rising. Increased defaults are frequently occurring, according to Realtors Commercial Alliance, even though payments are being made on a timely basis.
"Lenders are labeling loans as 'non-performing' because of a perceived decline in market-to-market collateral value, and demanding that borrowers come up with cash to cover the short-fall." Accordingly, says RCA, the number of defaults are increasing. This situation contrasts grealy with the situation facing homeowners in default, who most often could not pay their higher resetting mortgage payments.
So what to do? There still are great opportunities out there. Reconsider your source for investment funds. Self-directed IRA/401(k) monies can be used to invest in income-producing properties. Look at particular sectors in which to invest. As I have stated ad infinitum on this blog, multifamily remains a strong investment category. Home sales are at a 12-year low and foreclosure rates continue to rise but may be leveling off soon. As a result, the demand for rental units remains strong. Office and industrial vacancies will likely rise, but there still are good opportunities on the horizon.
I have real doubts about any net positive affect of the Obama administration's "stimulus package" upon commercial/investment real estate. right now, the public is learning that there are a lot of boondoggle projects in which stimulus money has been injected.
In talking to some potential investors recently I heard two reasons repeatedly being given as to why they are holding back on investing just yet. First, the belief that we have not yet hit bottom. Frankly, I think we are near that trough. I would get in now only if the price makes sense. Not necessarily that you can get a "steal," but that the numbers work and there is a strong upside when the economy recovers. Second, I have heard more than one person say they are waiting for interest rates to drop farther.
Sorry to bust your bubble on that one, but that ship has sailed. Interest rates are on the rise and will continue to increase over time. We also are facing the prospect of massive inflation, in my opinion, because of the spike in the money supply. By some estimates, there is four times the amount of money in the economy right now (can you hear the U.S. Mint printing presses running round-the-clock?) than at any time in recent history.
My advice? Hook up with a knowlegable real estate adviser, and look at a number of investment possibilities.
As one mortgage broker friend of mine opined at a meeting yesterday morning: "If you need to borrow money, bring cash!"
As silly as that sounds, its not far off the mark. The credit mess caused by the residential derivatives market virtually shut down the issuance of commercial mortgage-backed securities. Capital is scarce, and hard money lenders have emerged. Hard money lenders are private sources of revenue.
What is amazing in the credit controversy is how delinquencies rates on commercial loans remain low. Not unexpected. But change on the horizon is how they are rising. Increased defaults are frequently occurring, according to Realtors Commercial Alliance, even though payments are being made on a timely basis.
"Lenders are labeling loans as 'non-performing' because of a perceived decline in market-to-market collateral value, and demanding that borrowers come up with cash to cover the short-fall." Accordingly, says RCA, the number of defaults are increasing. This situation contrasts grealy with the situation facing homeowners in default, who most often could not pay their higher resetting mortgage payments.
So what to do? There still are great opportunities out there. Reconsider your source for investment funds. Self-directed IRA/401(k) monies can be used to invest in income-producing properties. Look at particular sectors in which to invest. As I have stated ad infinitum on this blog, multifamily remains a strong investment category. Home sales are at a 12-year low and foreclosure rates continue to rise but may be leveling off soon. As a result, the demand for rental units remains strong. Office and industrial vacancies will likely rise, but there still are good opportunities on the horizon.
I have real doubts about any net positive affect of the Obama administration's "stimulus package" upon commercial/investment real estate. right now, the public is learning that there are a lot of boondoggle projects in which stimulus money has been injected.
In talking to some potential investors recently I heard two reasons repeatedly being given as to why they are holding back on investing just yet. First, the belief that we have not yet hit bottom. Frankly, I think we are near that trough. I would get in now only if the price makes sense. Not necessarily that you can get a "steal," but that the numbers work and there is a strong upside when the economy recovers. Second, I have heard more than one person say they are waiting for interest rates to drop farther.
Sorry to bust your bubble on that one, but that ship has sailed. Interest rates are on the rise and will continue to increase over time. We also are facing the prospect of massive inflation, in my opinion, because of the spike in the money supply. By some estimates, there is four times the amount of money in the economy right now (can you hear the U.S. Mint printing presses running round-the-clock?) than at any time in recent history.
My advice? Hook up with a knowlegable real estate adviser, and look at a number of investment possibilities.
Monday, May 18, 2009
Foreclosure and Fairness
Here in the Buckeye State, lawmakers are moving a bill forward that would require property owners to notify renters if the property goes into foreclosure.
This is not the worst idea in the world, and stems from a growing multitude of renters, particularly multifamily and single family residents (I even read where this is affecting trailer owners in a mobile home park) who are being forced out of homes they don't own but have paid dutifully on through their monthly rent. Currently, at least in Ohio, there is no mechanism that forces a landlord to notify tenants that the property has gone into foreclosure, ostensibly giving them a heads up that their world may be changing.
It has passed the Ohio House of Representatives and is moving through the Ohio Senate.
Similar bills have either been passed or are being considered in a number of other states.
Responsible owners will have no problem with this measure.
This is not the worst idea in the world, and stems from a growing multitude of renters, particularly multifamily and single family residents (I even read where this is affecting trailer owners in a mobile home park) who are being forced out of homes they don't own but have paid dutifully on through their monthly rent. Currently, at least in Ohio, there is no mechanism that forces a landlord to notify tenants that the property has gone into foreclosure, ostensibly giving them a heads up that their world may be changing.
It has passed the Ohio House of Representatives and is moving through the Ohio Senate.
Similar bills have either been passed or are being considered in a number of other states.
Responsible owners will have no problem with this measure.
Monday, May 11, 2009
Think About It
Any time you wisely purchase a piece of income producing property, you are enabling other people to make payments into your private pension plan.....
America On Sale
Is America for sale? Not in a bad sense, but for investors, this is a time of unparalleled opportunity.
There are bargains galore, and my good friend and colleague at Prudential Commercial, Tim Mehan, has penned a great piece on how people who recognize the economic signs are buying everything they can get their hands on.
As Tim says, "Some of the richest men in history made their fortunes in times just like this. The greatest factor in achieving their goals was, and is, overcoming fear. Fear will cripple even the best of plans, if not managed effectively."
Click here to read Tim's excellent essay, "America on Sale."
There are bargains galore, and my good friend and colleague at Prudential Commercial, Tim Mehan, has penned a great piece on how people who recognize the economic signs are buying everything they can get their hands on.
As Tim says, "Some of the richest men in history made their fortunes in times just like this. The greatest factor in achieving their goals was, and is, overcoming fear. Fear will cripple even the best of plans, if not managed effectively."
Click here to read Tim's excellent essay, "America on Sale."
Friday, May 8, 2009
Private Investors Drivung Equity Market
There is money coming back into real estate investment. Funding sources that is. But make no mistake -- private investors are driving the equity market these days.
Small private equity groups are flooding the marketplace and investors are targeting cash-on-cash returns over internal rates of return, according to panelists on the equity investment session at the recent Apartment Finance Today Conference.
According to Apartment Finance Today magazine, the most active equity investors today are smaller private syndicators or funds raised more at the grassroots level in country clubs and other groups of wealthy individuals. In fact, a lot of money is being taken out of the stock market (what is left of investments there) and moved into private investments.
What is most interesting is that lenders have changed their tactics and are giving extensions. Plus the government is getting involved, says Eric Snyder a senior VP with Buchanan Street Partners, an investment management house. "I'm not sure the distress will be the level that is generally thought of." He suggests that the perception that distressed multifamily assets are going to flood the market is misplaced.
While more distressed assets may hit the market, lenders are trying a new model: "Amend, Extend, and Hope." Many of the distressed assets coming to market are on the low end. And lenders, who used to foreclose then dispose of properties, are instead moving to the above philosophy, tending to only bring to market low-end, Class C assets. Tyler Anderson at CB Richard Ellis' institutional group, says banks generally are not begging people to take these properties off their hands. Instead, they are "trying to figure out what the asset is, manage it as best they can, and sell it at the appropriate time."
Says Apartment Finance Today: "While some institutional buyers are asking for internal rates of return of more than 20 peercent over a five-year-term, the active investors today are focusing on cash-on-cash returns of between 8 percent and 12 percent."
Keep in mind this change is because cash-on-cash returns are easier to underwrite. They look at immeidate cash flow, as it works like a certificate of deposit (CD). When a bank pays a 5 percent return on a CD, it means you get 5 percent of the deposit amount. Internal rate of return (IRR) deals are more complex and underwrite for differeing amounts of annual cash flow.
The magazine piece agrees with my long-time philosophy -- Sellers should target cash-on-cash buyers, who will typically pay more for an asset than IRR driven investors.
Small private equity groups are flooding the marketplace and investors are targeting cash-on-cash returns over internal rates of return, according to panelists on the equity investment session at the recent Apartment Finance Today Conference.
According to Apartment Finance Today magazine, the most active equity investors today are smaller private syndicators or funds raised more at the grassroots level in country clubs and other groups of wealthy individuals. In fact, a lot of money is being taken out of the stock market (what is left of investments there) and moved into private investments.
What is most interesting is that lenders have changed their tactics and are giving extensions. Plus the government is getting involved, says Eric Snyder a senior VP with Buchanan Street Partners, an investment management house. "I'm not sure the distress will be the level that is generally thought of." He suggests that the perception that distressed multifamily assets are going to flood the market is misplaced.
While more distressed assets may hit the market, lenders are trying a new model: "Amend, Extend, and Hope." Many of the distressed assets coming to market are on the low end. And lenders, who used to foreclose then dispose of properties, are instead moving to the above philosophy, tending to only bring to market low-end, Class C assets. Tyler Anderson at CB Richard Ellis' institutional group, says banks generally are not begging people to take these properties off their hands. Instead, they are "trying to figure out what the asset is, manage it as best they can, and sell it at the appropriate time."
Says Apartment Finance Today: "While some institutional buyers are asking for internal rates of return of more than 20 peercent over a five-year-term, the active investors today are focusing on cash-on-cash returns of between 8 percent and 12 percent."
Keep in mind this change is because cash-on-cash returns are easier to underwrite. They look at immeidate cash flow, as it works like a certificate of deposit (CD). When a bank pays a 5 percent return on a CD, it means you get 5 percent of the deposit amount. Internal rate of return (IRR) deals are more complex and underwrite for differeing amounts of annual cash flow.
The magazine piece agrees with my long-time philosophy -- Sellers should target cash-on-cash buyers, who will typically pay more for an asset than IRR driven investors.
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