Assuming or taking over delinquent apartments - Posted by William

import · January 31, 2010, 8:50pm

Posted by ray@lcorn on March 19, 2010 at 12:21:30:

David,

Both of the deals I used as examples in this thread were the result of owners contacting us. I’ve done two more in which bankers contacted us directly.

Overall I’d characterize my efforts in searching for deals as a modified target marketing strategy. Not so much a rifle with a silver bullet, more of a silver shotgun. I want as many leads as possible from any source, but filtered as to property type, size and market.

I’ve made a concerted effort to initiate regular and constant personal contact with every banker I know. (My expense account for lunches has tripled over last year!) I like personal meetings because I’m more likely to get sidebar information (i.e. not in the file) than via letters, email or phone calls. I make sure they put us on their list for help with “problem credits” --that’s banker-speak for defaulted and delinquent loans and REOs–for deals that meet our current criteria.

The smaller community banks typically have one point person that handles the loans/properties, and they are usually pretty easy to find, especially if you already have a relationship with a loan officer.

I am also reaching out to the big banks, though I don’t usually deal with them on a regular basis. Response has varied, from a voice mail shuffle to getting a detailed list. Most of the bigs deal with problem credits and REOs at the regional level, so the first challenge is finding the right contact. For that I try to start with the highest ranking officer at the local level.

Understand that the banks are getting a lot of calls from vulture investors looking to take down entire pools of loans and properties at steep discounts or utilizing the PPIP program for restructuring. And frankly that’s what the bigs are most interested in. The smalls are more open-minded, but it takes some time to explain my approach and differentiate myself from the crowd. I’m working on a page now for our website that outlines the program.

Typically, once they understand that I am in search of deals where I can offer par on their loan balance–structured over time–they get curious and want to know more.

ray

import · January 31, 2010, 8:50pm

Assuming or taking over delinquent apartments - Posted by William

Posted by William on January 31, 2010 at 21:50:39:

Looking for some answers here:

Is it possible to assume a reo 45 unit apartment complex from the bank or delinquent apt. owner? If so how?

I am bringing 200k to the table as well to @ least show that I am serious & have some skin in the game. Management experience (RE Broker,& have several rentals).

The reason I am asking is because I believe it would be simpler to do it that way other than jumping through hoops to get financing & coming up with 35% down payment.

Thanks in advance for your advice,

William

import · February 4, 2010, 9:36am

Re: The perfect “White Knight” Scenario - Posted by ray@lcorn

Posted by ray@lcorn on February 04, 2010 at 10:36:14:

William,

I’ve been meaning to answer your post all week because it is a perfect example of the “White Knight” strategy I’ve been mentioning over the last six months and featured in my 2010 Commercial Forecast as one of the strategies I?m using to succeed in recessionary times.

You are right in your thoughts about the existing lender being the one to keep in the deal. And you are the perfect type of investor they need to solve their problem.

Remember, you are doing them the favor… you are the White Knight riding to their rescue to bail them out of a bad situation. You can provide the expertise and the resources to help the bank avoid taking a major hit to capital reserves, and turn a non-performing asset into a new loan relationship with a quality client. That puts you in the driver’s seat, but it takes some work to create a plan the bank can buy into.

First and foremost you?ve got to do your homework on the physical condition of the asset and the local market conditions. This information is needed to quantify the cost of improvements and to project the rental rates and time needed for lease-up after the improvements.

Then you?re ready to offer the bank your assistance in solving their problem. Note the tone? this is a buyer?s market, and no one in your position (e.g. an investor with experience and capital) has to beg for a deal. In short, be prepared to walk away.

The White Knight concept is a variation on the old “you name the price and I name the terms” game. If you understand how bank accounting works (discussed at length in the Forecast), in some cases it is possible to structure the deal for a true win-win outcome. Your deal sounds like it will fit the template for an alignment of interests.

The banks are interested in one thing… taking as small a loss as possible on the REO asset. What the bank needs is an investor with the experience and the resources to do the job.

You?re interested in one thing: acquiring an asset with potential upside with as little cash out of pocket as possible. What you need to accomplish your goal is the time to turn it around, and on terms that do not over-leverage the existing cash flow.

See the meeting ground here?

In a nutshell, the “you name the price” portion of the strategy is to offer to purchase the property at the par value of the debt, meaning the existing balance on the loan. They?ll get all their money, but not right away.

In return, you get to ?name the terms?, e.g. interest rate, payment terms (amortization vs. interest-only), add-on credit lines for improvements, exit strategies, etc. You get the asset, but don?t have to use cash out-of-pocket to carry it during the turnaround.

I’ve done three of these deals in the last year, and have two more in the works. Don?t be shy in demanding whatever terms it takes to reduce your downside risk, but don?t get too greedy on the upside. If the bank is going to play they have to sell it to their board, so leave some meat on the bone.

ray

p.s. as a shameless plug, for more details on this and other strategies I’m using this year get the 2010 Commercial Real Estate Forecast. The direct link is http://www.creonline.com/Ray-Alcorn/report-order-now.html

import · February 2, 2010, 12:12pm

Re: Assuming or taking over delinquent apartments - Posted by james (CA)

Posted by james (CA) on February 02, 2010 at 13:12:33:

What do you think is a good deal besides low cost of acquisition: cash flow, upside? You can assume from owner subject-to but from bank might need to check with them

import · February 7, 2010, 2:10pm

Re: The perfect “White Knight” Scenario - Posted by William

Posted by William on February 07, 2010 at 15:10:18:

Thanks for your response (creonline) Ray. Thanks for confirming my intuition I new it was possible I just didn’t know if anyone had ever explored that strategy. Ray my next question to you would be where can I get more detailed information about the “White Knight” strategy. I purchased your 2010 Commercial Real Estate Forecast. I recently finished reading through your report. Your report touched on the strategy but didn’t really go into detail. I would really like to learn more about this strategy. Your assistance would be greatly appreciated. I am in the Houston, Tx market were there numerous opportunities to capitalize on. I have a potential deal that fell into my lap that aligns with this strategy. I just need a little bit more guidance/ education to be able to successfully put the deal together. Your assistance would be greatly appreciated.

Thanks,

William

import · February 4, 2010, 11:47pm

Re: The perfect “White Knight” Scenario - Posted by james (CA)

Posted by james (CA) on February 05, 2010 at 24:47:52:

Hi Ray,

How much down payment required in your deals, or no down and just assuming the loan and your term?

What kind of skin do we need to put in so the bank doesn’t think you are greedy?

Great info. Thx

import · April 2, 2010, 8:12am

Ray’s approach worked for us - Posted by CarolFL/UT

Posted by CarolFL/UT on April 02, 2010 at 08:12:49:

SEveral years ago, just about the time the Deal Maker’s Guide to Commercial RE came out, we were involved in a similar situation. Ray’s Guide and guidance brought us though to a most successful solution - I still remember the day the bank finally called and ‘asked’ us to assume the loan! Can’t recommend the Guide highly enough. Thank you, Ray.
Sigh.
Carol

import · February 8, 2010, 5:35pm

Re: The perfect “White Knight” Scenario - Posted by ray@lcorn

Posted by ray@lcorn on February 08, 2010 at 18:35:38:

William,

I use the term “white knight strategy” as the description of a situation, specifically the case where lenders are sitting on REO or pre-foreclosure properties in hopes of catching an upturn to avoid major losses. As I discussed in the Forecast, the relaxed FDIC regs have created a holding tank of bad loans and properties with the wrong owner. This has vreated a situation where commercial real estate lenders are much less likely to do short sales. They’ve got the opportunity to sit on it, and they’ll do that for as long as possible to avoid charging their reserves which reduce capital.

So I looked for a way to get control of the property on their dime. Being a white knight means having the resources and ability to solve the problem. In short, I’m offering to partner with the lender to make them whole, over time, and in return I get the upside.

What it takes to make the deal is the same thing I always do… EXTENSIVE due diligence. That includes market analysis, physical inspections, and evaluating the current rent roll (e.g. tenant’s business sector and outlook, market position, performance, etc.) and the expense profile. Due diligence shows the strengths, weaknesses, opportunities and threats (a SWOT analysis for you biz school grads) and literally writes the playbook. It may also tell me to not do the deal, often the most valuable intel to have.

Assuming there is potential for upside I formulate an investment plan to turn the property around. It might include anything from just performing deferred maintenance to a complete change of use. It includes a timeline for improvements and absorption, as well as financial performance, cash needs and carry costs, and most importantly, several exit strategies. I present this to the lender as an offer, not a request.

This also applies to amateur owners who are in trouble but not to the point of default, yet. When you find them, the first step is to tie the property up with an option or a contract with say $1000 earnest money to give you a chance to do the due diligence and evaluate the deal. If it has potential, then it is time to get the lender involved. You might have to make them aware they have a problem. Why go to the existing lender? First, because they are the ones with the money at risk. Second, they are likely to grab you like a life ring and offer more money to help you fix their problem.

And that’s the crux of the strategy… using the circumstances to leverage your knowledge with their capital to produce a solution that works for all parties.

For details on how to do all that… watch out, shameless promotion ahead… I wrote a book with step by step directions on how to perform every phase. It’s in the bookstore, at http://www.creonline.com/catalog/b-140.html

You see there is nothing really new… it still comes down to applying fundamental principles of sound real estate investment. This is just a different environment with a different set of players. If you have the knowledge of how to apply those principles you can approach owners and lenders who don’t have the knowledge, and offer to solve their problem. As Dan Kennedy is fond of saying, “In the land of the blind the one-eyed man is king”.

I’ve done three of these in the past year, worked on another one all last week, and spent two hours with a banker this afternoon evaluating his entire non-accrual list. I’ve also looked seriously at three other deals that I turned down.

Being a white knight is all about presenting your services to a new audience in a new way. The catch is that they need you more than you need them.

ray

import · February 9, 2010, 5:28am

Re: The perfect “White Knight” Scenario - Posted by ray@lcorn

Posted by ray@lcorn on February 09, 2010 at 06:28:33:

James,

There’s no formula or template because every deal is unique. The the market, the owner, the lender, the physical condition, zoning… and on and on… all combine to form the particular circumstances that must be dealt with, so there is no one size fits all… more like one size fits one.

The deals I’ve done have ranged from paying only $10T in closing costs on a $650T deal (call it Deal 1), to a $100T down on a $900,000 deal (Deal 2).

For Deal 1 we went in with essentially no money, and negotiated (actually demanded) a $50T credit line for tenant upfits. The loan terms are interest-only 4.5%, three-year reset, six-year call. We “granted” the lender right of first refusal on the permanent loan when the property reaches stabilized status. I got a little frisky with that one because the deal started with the owner who knew he was in over his head, but the bank was slow to come around in acknowledging reality. Patience isn’t one of my character traits, so the longer they dithered the harder I made the terms.

In Deal 2, the seller financed the entire balance at 4.5%, interest-only, with a three-year reset and five-year call. There was no underlying debt. We also got an agreement from the seller to release half the property (excess land) for a specified price, about half of market value, at our option.

I’ve closed another one which was somewhere between the two above. I’ve got others working that span the same range. The key is to evaluate the deal accurately, and form the investment plan around the circumstances. The down payment becomes a minor issue. More important is the ability to perform, and in many cases the capital is better used in improvements than down payment.

ray

import · March 16, 2010, 2:00am

Re: The perfect “White Knight” Scenario - Posted by David

Posted by David on March 16, 2010 at 02:00:10:

Question for Ray, I am a multi unit investor. I am curious about the above deals you obtained.
Do you get your deals from the banker directly or are the deals made by people making you aware of a loan that is delinquent some how? Am I going to meet deaf ears if I decide to call a larger banks like BOA or Wells Fargo to get a list of multi unit property that are non performing? Am I better contacting smaller banks. Just curious about your approach.
Thanks