With all of the talk going on in the distressed real estate space, investors should also consider the Distressed Lender. Major media reports surrounding the health of major banks fails to consider the smaller players in the market. Many local banks and credit unions experienced significant distress due to the sour real estate market over the past six months to a year. Investors looking to pick up quality properties quickly should consider starting with these entities.
Characteristics of a Distressed Lender
Investor should start with their local community banks. Even if they seem healthy, like most banking institutions, they need to continually raise capital. In these tumultuous markets, the best way for banks to raise capital is to sell assets. These assets range from selling notes and mortgages to selling property they have repossessed through foreclosure.
The appeal of small banks goes beyond their distressed nature. Investors can navigate small banks much easier than large ones. Typically the person in charge of assets will work at the local headquarters or the biggest branch. Additionally, they will be very familiar with the distress loans and property they hold on their books.
Securing Distress Property
Unlike previous real estate market downturns, banks will not simply be giving away properties. The savviest investors will work with the bank to bid a fair price. Many times banks will have a certain hurdle price they must meet for an asset. This could be attributed to the general direction of the bank or it could be based on the amount the asset has been written down to. Selling an asset below the write down value creates a loss on the banks books, which most distressed banks simply cannot afford.
Speak with the lender to obtain a list of their distressed assets. Visit the properties and try to get a good understanding of the market value of the property. Bid conservatively, but expect some resistance. Small banks place a premium on relationships and trust. Once an investor proves to be credible and gets a good understanding of the process, the bank will be much more likely to do business with them.
Investors that perfect this method of working with small banks can reap huge rewards. Be patient, persistent and don’t forget every asset is different. While the bank might not be able to sell one property below market, they might be able to sell a different one. Small investors should start making inquiries with their local banks today.
Michael Cook - Michael Cook is currently a Real Estate Investment Banker for Wachovia. He and his partnerstarted their own real estate investment ...
