Markets go up, and markets go down.
People love buying when the price of anything is going up. Whether it’s concert tickets on StubHub, or shares of Apple stock, people think they are missing the boat.
So they bid up.
This is the textbook example of herd mentality investing. It’s how investors get fleeced. “Everyone else is doing it, so it must be a smart thing to do!” they all say to themselves.
Let’s face it: every single human has the greed glands, and those hormones are activated by rising prices and the fear or missing out.
It’s why real estate investors speculators in 2005-2008 bought homes in Las Vegas and Phoenix, sight unseen. Prices were going up. And they were going to miss out.
Then, in the vicious cycle of life of an unsophisticated investors, the warm market winds at their backs inevitably turn much colder when it hits their faces. This is how the the sheep get slaughtered, and when the vultures come out to eat their carcasses.
Much like animal ethology, distressed sellers usually engage in weird and desperate behaviors in order to save their reputation, perceived status or what assets they have left as they approach the these stages of the market cycle.
In this post, we’ll about what happens from the time the market turns downward, up until the seller’s death, and post mortem.
Unsophisticated commercial investors will always buy on emotion. Numbers and fundamentals come second for these folks.
So when markets turn, or the bank calls a loan due, this is the exact time when those novice investors get a crash course in real estate math and markets, among several other things.
Yes, sellers will get appraisals done and use that as a certificate to justify their asking price. “I have an appraisal,” is not a proxy for the market and its forces.
And just like Mother Nature, Mr. Market is always in control. Of course, anyone who thinks appraisals are objective needs to think about who pays the appraiser for the appraisal…
Let me let you in on a little secret: Do you know how can prices go down if everyone is paying cash? Simple. Real estate is always priced at the margin, it only takes one transaction at a lesser price to wipe out prices.
Just because you invested in it doesn’t guarantee final demand. Just ask anyone who tried to sell their over-leveraged home in 2010.
But this is why we love commercial real estate, right? It’s inefficient. Someone will win when someone loses.
Your job is to make sure you’re smart enough to not be the former…
I’ve seen disillusioned sellers try to scheme some profit so they don’t lose their shirts, and every time they try that, they get into trouble.
The most common approach usually follows the scheme of what I outlined in the Five Minute Fundamentals video below:
What Do You Do?
If you’re a buyer, there are a couple of things you can do.
1. Perhaps the most pragmatic way to deal with this if you really like the asset is to put your pens down and wait.
Time is your friend. The only person feeling the pressure is your seller.
Yes, he or she will tell you they have multiple offers coming in – of course all of which are at, or over their asking price. That’s all they can and will do.
Pay them no mind.
Remember, you’re a grownup and you’ve been conditioned to look at the numbers dispassionately, right?
2. You could buy the note from the lender.
If they ever have been in behind before, they will fall into arrears again. Just as the sun will rise in the east, these borrowers can’t remain solvent indefinitely.
This will take a longer period of time, depending on who the lender is, and how long it takes to get the special servicer on the line.
Buying the note is not without risk.
You’ll want to use this handy blueprint below as a checklist prior to engaging in any dialogue.
Combine 1 & 2 above and you could turn this into a multi-front plan of attack like your own Battle of the Bulge!
(NOTE: Don’t forget to download your free resource for raising millions in capital for all your real estate deals with a “Wall Street” grade, done for you investor Pitchbook. Grab it here.)
If I get enough comments indicating interest below, I’ll elaborate on how this strategy is executed, perhaps in a future blog post.
However, here’s how we’ve approached this before in the past:
Have Your Funds Lined Up
Be ready to proof up. No dickering around. If you don’t, reach out to your investors.
When I was starting out, I would send a copy of one my private investor’s bank account with the liquid funds immediately available. Of course I explained the deal, drafting an Excel model showing the numbers.
Not necessarily a full pitch deck, but a model. These were experienced investors and wanted to see… you guessed it… only the numbers.
Use a New Special Purpose Entity
So you’re buyer doesn’t find out you’re attacking him on all fronts.
Prepare a Full Package to the Servicer/Lender
Have an attorney draft the Purchase and Sales Agreement for the note; “As-Is, Where-Is”, and provide CMAs of recent trades to support your bid.
Follow up, Follow Up & Follow Up Some More
I’ve actually have “dropped in” on lenders in Irvine.
From New York…
Out of sight is out of mind. Follow up with them.
If you’ve done residential short sales, this is the same thing, however, the stakes are higher if you have the ability to make a big profit and an willing investor betting on you to hammer the trade closed.
Prepare to File The NOD Immediately After You Close
Cleansing the asset through foreclosure could take anywhere from 6 months to 2 years, depending on how cooperative the borrower is.
Remember, you’re not buying the building, but the underlying note and mortgage, which is an enforceable lien. You’re enforcing your right to remedy the default by foreclosing on the property.
Nothing, of course, is a substitute for your gut feeling. Internalize it. Use people who are more experienced than you are as a sounding board.
And always assume when someone wants to do something a little too creative how that puts you at risk.
Sellers will come and go, and (most) will lie to your face along the way. Your investors, if you treat them like gold, will always stand by your side.
Remember that and you’ll have a successful dealmaking career.
Now get to work!
(NOTE: Before you go, don’t forget to download your free resource for raising millions in capital for all your real estate deals with a “Wall Street” grade, done-for-you investor Pitchbook. Grab it here.)