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Posts Tagged ‘distressed property developers’
In 2006, the property market in Florida all but collapsed. Investors who were expected to continue their property buying binge left the market en masse. A depressed economy and rising unemployment also ensured that local first time buyer demand took a nose dive.
When this demand dried up, the builders who couldn´t service their loans to the banks had their assets seized. The banks packaged these up and mostly sold them to pension funds, hedge funds, big corporations and high net worth individuals. The banks that couldn´t sell quickly enough became insolvent and were put out of business by big insurance companies and the FDIC. Big insurance companies who insured too many banks with a high property exposure also went bust. From 2006-2008 it was bloody mayhem.
Things have been somewhat calmer since then. With prices discounted by 60-70%, demand picked up rapidly and the existing housing stock fell dramatically. New foreclosed properties were still coming into the market in significant numbers in 2009 and 2010, but they were very quickly absorbed by the market. The two graphs below for the Orlando housing market illustrate this quite clearly.
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What about 2011? There will not be another round of Florida based banks and builders going bust in record numbers - it has already happened. Demand and supply are closer to equilibrium again. A recovering economy is also helping to steady the domestic market and should result in fewer foreclosures from homeowners struggling to service their mortgages.
In other words, the supply of the type of product Torcana sources is not currently in abundance. Finding high quality, pre tenanted, developer owned and highly discounted stock in nice neighbourhoods is very hard work. Siesta Lago is one of these deals. It took a lot of effort to find, but they´re selling fast (3-4 units per day) and mostly to regular investors who agree with our analysis of the market. If you click on the link above and complete a short enquiry form, a full information pack will automatically be sent to you within 10 minutes.
There is one intriguing trend in Florida (and elsewhere) that is worth close consideration and is causing lenders to pull their hair out. I´m referring to strategic defaults. I think they are going to be a big influence on the market this year and will soon enter the political mainstream.
Regards
Colin
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As a property agent with a reasonably high profile, we receive a lot of requests from developers to promote their products. An increasing number of these have been Spanish developers offering 100% mortgages (including closing costs) for buyers and high commissions (6-10%) for the agents. They´re usually big developments (500 units+) with facilities such as swimming pools, golf courses, sports centres, shopping malls etc.
I´ve always had suspicions about these developments and so I visited one this week (23 Nov 2010) to satisfy my curiosity. I won´t give away too much information about the resort we viewed, but there are lots of them in the Costa del Sol and it´s highly unlikely we will ever promote one.
The development we viewed had more than 1000 units all told, and although construction has completed, most have never been occupied. The developer told me they were 80% sold, but he actually meant that they´ve taken 20% deposits for 80% of the properties pre construction and most of these buyers have no intention of completing, certainly not at 2007 prices.
As sales fell off a cliff in late 2008 and people delayed closing, the developers cashflow dried up and funds have clearly not been available to maintain the resort over the past 18 months. Mould was visible on every property we viewed with cracks on the interior and exterior walls, walkways and ceilings. No heating or lighting fixtures had ever been installed.
The golf course was overgrown, the sports centre was never started, the shelves on the supermarket were bare, and the entire roof of the indoor swimming pool will need to be replaced due to the inadequate air conditioners that were installed.
The developer clearly owes the bank a fortune and the bank is desperate to divide this debt between 100s of buyers rather than one developer (who is probably insolvent).
Hence the 100% mortgages.
The pitch is that the bank provides 80% on their “valuation”, the developer “pays” your 20% deposit plus your closing costs and then you get your free property with exclusive access to their rental pool.
Give me a break.
So you get a 2 bed property for €250,000 without having to spend a penny. You just need to service a €200,000 mortgage over 20 years at a variable interest rate with a net rental income that probably wouldn´t amount to more than €4,000 per year. Setting aside the substantial problems with the existing and non existing facilities, no other bank would give you a valuation of more than €175,000 and they wouldn´t lend you more than 70% of it.
Clients ask me about Spain all the time and I´ve no doubt Torcana would have quite a few takers for Spanish property like this with 100% mortgages, great facilities and easy access to the beaches and airports. We´d mostly sell them to people who would buy sight unseen. We might sell 50 of these over two months if we put our minds to it, and we´d make a tidy commission on them all.
The only problem is that our reputation would be destroyed within a year, because these are terrible investments.
That doesn´t sound like a sustainable business plan to me and so it looks like we´ll be sticking to places like Florida until other markets become sufficiently attractive (not to mention safe) to investors.
I´m curious about two things.
Firstly, why are Spanish banks allowed to blatantly inflate the valuations of properties on their books and then offer mortgages on them? Secondly, what sort of property agent would actually encourage their clients to invest in them?
The result of all this is that lots of naive buyers are going to get (forgive me) screwed, but they won´t purchase anything close to the amounts of properties needed to reduce the current oversupply and return some semblance of market normality to the area.
Regards
Colin
Harsh as it may sound, there are several ways those who are still liquid can profitably take advantage of a global downturn which is still causing much suffering to others 3 years after the credit crunch began.
One of these ways, which Torcana identified more than two years ago, is to purchase highly discounted and undervalued properties from distressed sellers. To maximise the return and minimise the risk of these types of properties, they must be purchased
- in wealthy, democratic economies
- with a history of renewal and recovery from recessions
- in fundamentally sound cities and neighbourhoods
- where locals rent long term
- where locals have and are currently purchasing these properties
Apart from that, the properties must be fully completed, cashflow positive and in well located and well run buildings or communities.
I´m sure there are plenty of other types of properties that can make you a healthy profit, but these are the ones we´ve identified with the best risk/reward ratio. It´s difficult to see how these kinds of properties will give any serious problems over the next 5 years and the potential benefits are huge.
So our criteria is very strict, but we´ve found plenty of properties that tick all these boxes and the latest is Arbor Lakes in Orlando. Here you can buy for 30 cents on the dollar in a beautiful and pre tenanted condo with 7-9% net rental yields.
If you haven´t received an information pack, please send an email to investments@torcana.com and request one.
Kind Regards
Colin Murphy
We’re now in the final quarter of 2009, traditionally one of the busiest times of the year for businesses. This year is radically different to most of course, because we’re still trying to get out of a severe recession. Others might call it a slowdown, but I’m not particularly fond of that description - recessions tend to shake things up rather than slow them down.
A recession will expose weak business models, destroy bloated companies and create unemployment – this has been well documented. For stronger and healthier individuals and organizations, a recession will reveal hidden strengths, create new opportunities and release pent up energy. Companies can hire top class people on the cheap. Talented executives in large corporations will find their bosses’ much more willing to listen to ideas for developing new businesses and revenue streams.
Most importantly, at least from my narrow point of view, a recession means that distressed assets can be bought for absolute song.
Kind Regards
Colin Murphy
Director
Torcana.com
The bad news is that opportunities for easily purchasing a property at the very bottom of the US market are gone. This isn’t necessarily making front page news in The Times but statisticians and reporters tend to print yesterdays news.
There are two fundamental market forces at play. There is the “real market” which comprises 90% of existing US residential property. This stock may have lost significant value in the last few years but it is neither distressed nor foreclosed and the vast majority of it is not for sale.
The other, temporary market is the “distressed market” which completely undermines all efforts of the real market to sell surplus stock. This is because the “distressed market” as you will guess, is comprised of foreclosed and distressed property from banks and developers.
This market is the only show in town as far as bargain hunters are concerned, and it is our knowledge of the main players in this market and the process by which we help clients purchase, tenant, maintain and resell these assets that makes Torcana.com stand out from the crowd.
Kind Regards
David Shaw
Sales & US Sourcing Manager
Torcana.com
I recently read a great quote from Noel Whittaker (Australian financial columnist). It struck me as particularly relevant for those who are unsure of where or how to make their next important financial move.
“Life is full of uncertainties. Future investment earnings and interest and inflation rates are not known to anybody. However, I can guarantee you one thing.. those who put an investment program in place will have a lot more money when they come to retire than those who never get around to it”
Apart from working, investing is the only method of generating long term financial independence. From a personal point of view, I’ve made more money from my investments than I have from the various salaries and dividends I’ve drawn over the past 15 years.
There was a lot of irrational behavior on display in Florida during the boom years. This irrationality forced prices too high and placed unwarranted trust in developers promising they would build luxury resorts that potential renters would flock to.
That property boom has bust, and the prices for certain properties in wealthy locations are completely irrational in the other direction – i.e. they being sold at too large a discount. While the instinct to wait for the macro economy to recover and “normality” to return before investing is understandable, it could turn out to be a counterproductive strategy if your aim is to create wealth for the future.
There are still quite a few areas within Florida where high rental yields are available and the potential for capital appreciation is huge.
For example, I’m going to be a sizable chunk of this week speaking to clients about the twenty odd units we’ve available Flora Ridge. These three bed properties are tenanted, generate 9% net yields and used to cost more than $350,000 per unit. They are now available for between $114,500 and $115,500. I’m pretty confident these can be sold with a minimum of fuss in 3-4 years time for at least double that. In the meantime you’ll be taking home more than $10,000 per year net of all costs.
You’ll be hard pushed to find something better than that.
Kind Regards
Colin Murphy
Torcana.com
- We either locate buildings with tenants in place (most of Florida product) or we collaborate with local management companies to source new ones quickly (most of UK product).
- We advise on purchase strategies and negotiate bulk discounts on behalf of high net worth investors
- We liaise with accountancy experts to ensure returns are filed properly and with title and insurance companies to ensure contracts are processed quickly and efficiently
- We help you obtain financing (where applicable), open bank accounts and obtain tax numbers.
In short, we are a very research and service orientated company.
For more information, please see www.torcana.com.
Kind Regards
Colin Murphy
Director
Torcana Ltd
A new trend seems to be emerging in certain property circles. Several times in the past six months I have seen evidence of hardened investors who have always pursued an offplan investment strategy considering a radical change.
The profitable strategy of the past decade is fairly simple on paper – find a reputable builder, reserve an apartment in a great location which will be built in 2-4 years time, negotiate preferable payment terms and wait for capital appreciate during the construction stage. Definitely not as easy as it sounds, but hundreds of thousands of people have been doing it successfully.
Times are changing though, and these same hardened buyers are now pursuing a new strategy with equal vigor – instead of offplan apartments or condo hotels in emerging markets, they are snapping up completely finished properties in developed markets at discounted prices.
Why? The credit crunch. Developers are struggling to sell excess stock, which means they are under pressure from the banks that financed them. This forces them to drop prices dramatically to stimulate supply and boy are they doing it. I’ve seen prime urban properties in very wealthy cities selling cheaper than an offplan resort in an area with a fraction of the income per capita.
The property section in Torcana.com has plenty of examples for any who have time to look through them.
Kind Regards
Colin Murphy
Torcana Ltd
Quite a few people have asked me about Spain recently and whether or not it would be wiser to wait a little longer until prices drop further.
The truth is that the Spanish market has not bottomed out yet, and there are many banks and developers who will shortly be joining the ranks of those who are already very distressed. This increase in supply should cause a drop in median house prices.
However, this doesn’t make it any easier to predict how far the markets might fall or when the “best” time to buy might be. At the moment we have highly distressed stock (in great condition) that is reduced 30-50% from peak levels, and I can’t see average foreclosed properties falling much further to be honest, even though the average regular property price still has a long way to drop.
If you want an extreme example of how much property developers are suffering down there, look no further than a small Belgian developer in Marbella who kidnapped a local bank manager at gunpoint in an attempt to secure a 50,000 euro loan a few weeks ago. Thankfully he was arrested and nobody was harmed after the bank manager used coded language in a phone call to his branch who then alerted the police.
I kid you not folks, it was reported in El Pais.
Feel free to view our Spanish property listings.
Kind Regards
Colin Murphy
Director
