Where are all The Great Deals?
3 Ways to Compete with Large Private Equity Funds in the Distressed Real Estate Market
Like Poker Players lamenting their latest “Bad Beat”, I hear real estate investors complain to me all the time about deals that traded at steep discounts that they didn’t have a chance to look at. “If I only knew they needed to sell”, or “I would have done that deal in a heartbeat”, are common reactions when they hear about a distressed deal closing. The reality is, if you are a small, or even medium sized investor, the cards are stacked against you. Large private equity funds are not only stepping up and taking large portfolios off of banks’ hands, but they are increasingly buying non performing notes at discounts from lenders, and then reworking terms with the existing owner. These transactions often do not require a deed transfer, and therefore trade under the radar. Without debating the positives or negatives of these “white knight deals, let’s look at some ways the individual investor can still take advantage of today’s distressed real estate market.
#1 Think Small – As I advise all of my clients, even with stabilized assets, look for smaller deals. Regional and national funds are not interested, or even able to do small deals. Each firm’s minimum varies, but looking at deals under $1.5 million is always a safe bet. With the big bidders out of the way, individuals can step up and bid on these assets at a reasonable price.
#2 Consider Secondary and Tertiary Markets – Outside of major metropolitan markets, large institutional buyers start to wince. It’s a tougher story to tell their investors, so they tend to stick with locations that are easily recognizable. Charlotte, NC sounds a lot better than High Point, NC or Rock Hill, SC although both of those cities are about an hour away from Charlotte. There are also property management concerns for these large funds. They do not have the managers in place to handle one property an hour or two away from where they might own three or four assets. This is where you have an advantage. You may live in, or close to one of these secondary markets, and therefore management is not an issue. You also understand the market and feel comfortable with the location. Without the large funds in the mix, prices come down, and you’ll have a clear path towards acquisition.
#3 Contact Developers Directly – A good target for a small investor looking for distressed property is real estate developers. These developers jumped into the market during the boom and now are holding half full two year old properties. These developers are not usually long term holders of their projects, but have been forced into doing it until the market improves. They are motivated because they need to free up cash for future work, or they may want to pay off the bank to preserve their relationship. So, how do you find them? Look for new developments that have had vacancies for a while. In these cases, the discomfort factor is growing. When you first approach a developer, don’t hit them over the head with a lowball offer. Merely introduce yourself and plant the seed that you are looking to acquire distressed assets. As the developer’s situation worsens (if it does) he’ll either seek you out, or tell the bank that you are a possible buyer. This inside track will get you at the front of the line.
Using these three strategies, either separately or together, will take the large competitors out of the process and give you a fair chance and buying a bank owned, or distressed property at a good valuation.