Commercial Real Estate Syndication: Property Selection and Purchase, Part 1

• June 12 -    "The Investors are Back" and "More foreclosures likely in county"
• June 21 -    "More signs housing market is gaining"
• June 23 -    "A building storm: 45,000-plus properties remain in the foreclosure pipeline"

• The low end of the market has definitely hit the bottom.  For a while, viable rental properties for under $80k were plentiful and the best were easy to pick up.  Banks are still offering properties in this price range, but the best ones are being bid up by multiple buyers.  In one case, the bank was picking from offers TWICE the list price! 
• REO inventory has dropped dramatically.  In most areas of the Valley, REO sales account for 60% to 90% of the transactions.  What is shocking is that the number of real estate transactions closing today is higher than it was during the boom years!  These REO properties are being picked up in high volume by first-time home buyers and investors - both looking for bargains.
• Rents are declining.  Valley apartments report record high vacancies and we are starting to see the effects role over to the single-family rental market.
• The foreclosure pipeline is still bursting with inventory.  The banks are not issuing Notices of Default when they could and are slow at moving properties to auction.

1. We still have an extensive window of opportunity - at least 12 to 18 months.  Great deals are available now and will continue to become available.  You just need to work harder to find them and move quickly to secure them.  There are some great cash-flowing 2-,3-,4-plex properties coming available in the $60k to $150k range.  
2. Plan that you will need to offer below-market rents to attract desirable tenants.  Make sure that your cash flow plan works at those rates and that you can afford to make the property a little better than the competition.  This goal is still very achievable at the lower price points and with small multi-family properties.
3. Be selective in where you are investing.  You don't want to be competing for tenants in an area where 80% of the homes are investor owned. 
4. Be very cautious if trying to "flip" properties.  Don't attempt this if you would not be comfortable holding the property long-term if you are unable to find a retail buyer.
5. Invest for cash flow.  Appreciation is the added bonus that today's prices make possible.  (Most properties we are acquiring today are at 30% to 40% of their peak sale prices.)
6. Expect your buy-and-hold investments to be a least 3-5 years and possibly longer.  Don't expect any real change in housing values until the economy recovers.

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Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."

In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as "shadow inventory."

"There is a real danger that there is much more (foreclosure) inventory than we are measuring," said Celia Chen, director of housing economics at Moody's Economy.com in Pennsylvania. "Eventually those homes will have to be dealt with. If they're all put on the market, that will add more inventory to an already bloated market and drive down home prices even more."

More than one-third locally

In the Bay Area, a Chronicle analysis of data from San Diego's MDA DataQuick shows that more than one-third of foreclosures are in shadow territory - that is, they are not registering in county records as having been resold.

For the 26 months from January 2007 through February 2009, banks repossessed 51,602 homes and condos in the nine-county Bay Area, according to DataQuick. Yet in the same period, only 30,823 foreclosures were resold, leaving about 20,000 bank repos unaccounted for.

Turnaround usually quick

Realtors say foreclosures generally go on the market a month or two after the bank takes title and then sell fairly quickly, often getting an accepted offer within a week or two of being listed and then closing escrow within 30 days. That means that foreclosures should register as being resold within three months.

But taking the foreclosures in any given month or selection of months and looking at what happened three months later also reveals a big gap between what banks took back and what they resold.

Tom Kelly, a spokesman for banking giant Chase in Chicago, said the bank sells foreclosed homes in a timely fashion.

"We try not to be in the business of owning homes," he said. "Our goal is to get them back on the market as quickly as possible. We want to maximize what we sell them for and yet do it quickly."

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