Using the Web and social media to sell real estate

In the 1980′s there was a real estate boom, commercial loans had gone from 7% to 12% of banks total assets in the US. The market went up and then it came down again following its typical cycle and the government had to bail things out. They had to spend over 157 billion dollars to protect borrowers and bank’s assets at that time.

Over two thousand banks and savings and loan associations disappeared between 1986 and 1994. More precisely, 1,043 savings and loan associations and 1,248 banks failed with assets of 726 billion dollars which equates to 1,19 trillion dollars in today’s houses. At that particular time, Congress came up with the idea of creating the Resolution Trust Corporation, a united States Government-owned asset management company charged with liquidating mostly real-estate assets that belonged to savings and loan associations declared insolvent by the Office of Thrift Supervision.

The following video is taken from an event I have just helped organize and the first speaker of the event, George Hurst, of Coldwell Banker Commercial, mentions a particular property out of his memory that was about a 200,000 sq ft regional mall that had been built in 1987 in Hudson Florida, very close to US 19 highway.

It was the size of a Super-Walmart and had been never occupied, sitting on 30 acres of commercial property. RTC disposed of it and sold it to GE Capital Corporation for 650,000 dollars, and there was an investor at that time in Saint Petersburg Florida that was willing to pay 2,6 million dollar for it and that was already a steeply discounted price.

From 1990 onward, commercial real estate became again the popular vehicle of investment for several reasons:

1. the economy was growing and therefore there was an upswing demand for office and retail space
2. regulatory problems in the government had been resolved
3. the restructuring of investment in REIT‘s (Real Estate Investment Trust – a corporation investing in real estate in a way that reduces or eliminates income taxes) increased from 10 billion dollars to 176 billion
4. Wall Street investors and banks found it easy to get into these investment projects with low capital
5. the tax reform of 1986 had dropped taxes from 50% to 28% and brought in low income tax credits, a lot of tax deductions for rental properties
6. the technology bubble exploded in 2001 drove investors back to commercial real estate.

During the real estate boom of mid 2000′s we see the same things happening again: interest-only loans, very lax underwriting standards (it was very easy to get a loan), banks being caught up in the dream that the market prices would rise forever. In 2003 large banks had commercial real estate portfolios equal to 156% of their risk based capital (the amount of capital based on an assessment of risks that a bank should hold to protect customers against adverse developments).

By 2006 that figure was 318%, it had more than doubled in three years in commercial real estate alone. In 2007 we had the crisis of the sub-prime residential mortgages, the bubble began to burst and although the FDIC (Federal Depository Insurance Corporation – it guarantees the safety of deposits in member banks) had already identified commercial real estate as a problem, the main focus was on residential.

Congress created in 2008 the Emergency Economic Stabilization Act and the Trouble Asset Relief Program known as TARP.

Now it is time to tackle the commercial real estate crisis and in the next post we will take a deeper look at it.

Roberto Mazzoni

Commercial Real Estate sales in Florida are down about 80% and in general the commercial investment market is off completely, this is the summary given to us by George Hurst a real estate broker with Coldwell Banker that is specialized in troubled assets during and that delivered the opening speech at seminar we organized recently.

Massive amount of commercial foreclosure coming up.

Transactions of commercial properties that are still occurring are mostly owner occupied or REO’s (bank owned), rents are falling and vacancy rates are increasing considerably; therefore we are going to be suffering from the explosion of bubble that took place in 2005, 2006 and 2007, primarily in 2006.

We are getting into a six year term of increasing foreclosures due to the peculiarities of commercial lending which is usually just for five years, and then you need to renegotiate based on the current performance. Therefore if we simply project from 2006 we see that in 2011 many properties will go in default because unemployment and the consequent decrease of rental income will not allow them to renegotiate their loan effectively.

There are two types of risk that get into play in a situation like the one we are going to experience: credit risk, which means that the reduction of cash flow makes it difficult to service the debt (make the loan payments) and credit contraction associated to an economic downturn which is what we are in right now.

Up to about four years ago, both bankers and developers where caught up in a dream a nobody believed there was going to be an end to the continued increase in prices, but it was just all artificial inflation and it reached an end due to a number of things:

Very lax underwriting standards by banks. In 2007 almost 60% of commercial loans granted were interest-only, so you paid only the interest without repaying the principal.

Faulty appraisals just like in residential.

Now these loans are coming for review in a few months and it is very likely that the bank will refinance only 60% of the new value which means much less than the currently outstanding balance. Do you think that the owners will bring cash to the table just to keep the loan going on a property that continues to devaluate: very unlikely.

So a major wave of foreclosures is likely to happen, but it will follow patterns that will be quite different from the residential world and will find out more about that in the next articles inspired by this special seminar.

Roberto Mazzoni

In a previous article I have already reported that Llenrock Group counts on international real estate funds to come to the rescue and this might very well be the case (see “International Investors Coming to Rescue the US”). But what does this mean to you? If so many banks collapse all at the same time, many businesses will also go due to the lack of financing to support them and the market will spiral further.

Small community banks are at risk due to the coming commercial foreclosure wave.

And the main problem won’t be with the big office buildings, but rather with the small office and apartment buildings or the small strip malls. So we need to facilitate a solution by directing any small commercial property owner that is facing foreclosure, and they are going to be many, to the right sources to solve their situations in an orderly and timely fashion.

This might include loan modification, short sale or partnering with a domestic or an international real estate investor who can help them get refinanced and survive, in exchange of equity. You can direct people to this blog that will keep them informed of the options they have and the way to use them. And you will have made a big service to yourself and to your community.

Roberto Mazzoni

P.S. The commercial real estate foreclosure wave is something we can deal with. Refer anybody you know might be in trouble or interested in becoming a solution provider to the MEETUP we are holding in Tampa on June 9.

What is the basic formula of success in commercial real estate investing when you are looking to attract local or international real estate investors? The properties you are looking to acquire should have multiple rental income streams but should not have a business connected with them. It is that simple.

Commercial buildings are more attractive when they don't require managing a business.

Let’s make an example: an office building that rents space to individual companies offers a pure rental return potential, you can rent the premises, you can rent the use of some common spaces (like conference rooms), you can rent equipment. You can offer an excellent level of service to your tenants by improving the premises and keeping the basic systems always operational (air conditioning, heat, and so on) but you don’t need to deal with a centralized reception or the office support staff that some companies provide as part of the rental service.

The management of the staff connected with the additional services prevents any standardization of the management activity. If you are acquiring, managing and turning around more than one property you need to standardize the type of services you provide so to make them less expensive and more effective.

But why rent and not just a straight flip? You lose most of the gain potential or you leave it to the next investor. Let’s take an example from a different market. Wayne Huizenga is the only man to have built three Fortune 500 companies practically from scratch: Waste Management, Blockbuster Entertainment e AutoNation. He began as the owner of a small garbage collecting firm and he built it to the national level by acquiring 133 other similar small companies, he then took over Blockbuster and AutoNation and expanded them big time and sold all of them for billions in profit.

The basic formula of his success was to find service based industries where he could create a recurring income and provide a higher level of services in areas where the existing industries were not meeting customer needs. So if you acquire a distressed commercial property you can remedy the management mistakes of the previous owner while you create cash flow for yourself and your investors and then you turn the project around in 18 months time and sell or refinance for a major profit.

Another example of good and bad: a standard apartment building that has just tenants in them is a simple enough operation to standardize and keep efficient for an investor. An hotel, even if partially converted into an apartment building, is a totally different scenario. If you acquire an hotel you now have to manage the hotel business in addition to the real estate and it can get quite complex. The potential of profit can be much higher, but also the risk increases in proportion. You will be absorbed by the project fully for a couple of years and you won’t be able to do much more.

So recurring income and standardization of services and “brand” are the way to go in the current commercial real estate scenario, whether you are an investor or you are looking for deals to bring to an investor.

Roberto Mazzoni

P.S. If you want to get street-smart information on how to find and evaluate commercial deals join my MEETUP and come to our meeting on June 9th.

Foreclosures are the main focus for real estate investment activities both in residential and commercial. They allow to garner significant benefits from acquiring a distressed property at a very discounted price and turning it over so that it regains most of its current value and yielding a substantial return in the process.

Commercial foreclosures bear an important difference from residential in that they offer two main ways of changing the value: fix what is broken (just as in residential) or change the property use (which is usually not an option in residential. This doubles the exit strategies and the earning potential.

As far as fix what is broken is concerned, you can rehab the property, bringing value to the actual structure, or you can improve its management and its marketing presence. When “flipping” a house, you can only work on the house itself, with some cosmetic or maybe even some serious rehab work (like replacing the A/C or redoing the the roof and so on).

On a commercial property you can fix the property inside but usually you get the best return by “massaging” it from a management perspective: improving the service to your tenants (office or apartments), increasing rent, reducing maintenance costs, improving the marketing efforts and thereby reducing vacancies.

You have therefore much more latitude of action so to bring about a substantial change in value but you also need to have the experience to produce such a result. It is all very fine to “flip” commercial properties just on a wholesaling basis: you find a deal and negotiate it down to a certain price and then sell it immediately to somebody else for an higher price, but still you must know what your final buyer would need in order to provide her a good deal that will also make you money.

And you must be able to understand the need of the seller and become a problem solver for her as well. Look first of all for problem properties: those that need repair or those which are vacant, as they will be acquired at much lower price than pristine properties going in foreclosure.

Remember, you always have two exit strategies possible: bringing the property back to a workable condition or changing its use altogether. Even if you might not be an expert in this field, your final investor will know what to do if you bring her a good deal. And a good deal is measured not only by the price but also by the terms for that price. There is a saying: “You can always get your price if I can get my terms”.

Commercial foreclosure is a “problem solving business” and you’ll be working with sellers that are sophisticated enough to understand the value of a solution when they see one. So look for properties that are in bad shape and start working for them. One word of caution: avoiding hotels in Florida, the market is just plummeting and it often takes a super-hero for turning them around. Small office and apartment buildings, small strip malls should be your main focus.

Roberto Mazzoni

P.S. If you want to know more on how to look for deals that can make a big payday, join our Meetup group.