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Posts Tagged ‘distressed property’
Put simply, we will source, inspect, purchase, manage and resell highly discounted properties on your behalf using a host of different suppliers, including distressed developers, REOs, Foreclosures, Short Sales , FDIC and other contacts on the ground.
Over the past year, as panic has receded and prices have started to bottom out, the supply of developer owned distressed real estate has tightened considerably. One of the few ways of ensuring a continuous pipeline of product for our investor database is to link up with and leverage the buying power of high net worth individuals and corporations.
The properties purchased will have lower purchase prices, higher net yields and faster exit strategies than those available on the open market. This is not a fund - you would be the direct owner of each individual unit. Additionally, we have access to the lawyers and advisors needed to create and maintain tax efficient holding structures.
To qualify for the program, a minimum of $200,000 must be invested and a proof of funds will be required before full information is provided.
If you would like to learn more just send an email to investments@torcana.com with “Torcana Private Portfolio” in the subject line.
Please include a contact telephone number and a rough indication of what you may wish to invest.
Regards
Colin
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There is quite a lot you can predict about how a market will move, especially if prices are bottoming out.
A high net rental yield, free of gimmicks, is one of the simplest and easiest ways to establish if a property is over or underpriced.
During equilibrium, you can expect a 3-5% yield, depending on the area. During a bubble, yields are very low (1-3%) mostly because speculation causes prices rise faster than rents. When a market bottoms out and rent rates increase before house prices do, you can get 7% and above.
A you can see from the summary underneath, we still have 5 units in Siesta Lago (Orlando) on sale below construction cost and yielding over 8% net of all overheads. This availability is as of 10th March 2011.
The ratio of renters to house prices is another indicator of a balanced market. Over the long term the average should be 100 and if a market is oversupplied, the ratio will be very high.
For example, the two biggest property bubbles, in Spain & Ireland, had ratios of 160-180 in 2006-2007, which was ludicrously high. Of the four best known property crashes (US, Spain, Ireland and Britain) only the USA is back to its long term average of 100.
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Before the recession, only pension funds and other institutional investors tended to purchase large amounts (i.e. billions of dollars) of property without financing. Now, probably for the first time ever, regular people with $50,000+ in savings are doing it too.
The great benefit of buying a cash positive property with your own money is that you will be insulated against rising mortgage interest rates as well as inflation.
I have written many blogs, newsletters and press releases illustrating how local markets like Orlando have bottomed out. The availability of high rental returns (8%) and high quality properties below construction cost represents a unique opportunity to hedge against inflation and protect you and your family’s wealth.
Our role is to find the properties that match these criteria. If you´d like to learn more, please browse through our website, send us an email or give us a call.
Regards
Colin
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Controlling inflation is going to be a nightmare for governments and central banks over the next 5 years, especially if it happens when interest rates are still low.
Inflation can be a bit like a drunken visitor - once you let them into your house it´s very hard to get rid of them. If you´ll forgive the extension of a crude pun, the drunks will be banging on a lot of doors soon.
China, India and Brazil are already battling with inflation as is Britain. The jury is still out on the USA in the short term, but I think higher inflation is inevitable. You´ll find all manner of predictions (from wildly optimistic to doomsday) on the internet regarding the course of US inflation once the Fed Reserve starts to unwind it´s gargantuan quantitative easing program.
Inflation: Winners and losers On the one hand, high inflation can cause a lot of damage to people holding (non commodity) stocks, government bonds, variable rate mortgages, bank deposits and unprotected pensions. A huge amount of people fall into his category.
On the other hand, you don´t need to be Paul Volcker (famous US central banker who tamed inflation in the 80s) to know that the higher the rate of inflation, the more expensive everything will become. That includes property prices and rental rates.
To clarify - if inflation is high, the value of your property will increase and the rent tenants pay to their landlords will increase. Looking at figures for the last 40 years (i.e. not just the recent boom), property prices have consistently outpaced the rate of inflation. |
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(Note: NCREIF is an index of properties owned by pension funds & NAREIT is an index of publicly traded real estate investment trusts)
Regards
Colin |
“The price of copper has increased by 50% in the last 9 months“ probably isn´t something you´re likely to hear in your local pub on a Friday night.
You would if you were stuck with a nerd like me, but as far as investments are concerned, people are much more likely to be talking about the price the house around the corner was sold for and the estimated loss/profit that the seller made.
Property is unique in many respects, and the fact that people gossip about it more than any other investment is just one of them. It is also unusual in that prices are set by local transactions - one absurd bid on a house can push up the value of every other property on the same street.
Culture also has a major influence (Germans like renting, Americans like owning), as do property taxes (very high in Spain, reasonably low in Britain). The lax property laws and politics of Ireland´s outgoing government made a hefty contribution to the recent boom (and was a major reason the incumbent Fianna Fail party were hammered in recent elections).
Less obvious factors like demography (a steadily increasing population has always underpinned US housing investment from institutional buyers) and geography (limited space in Hong Kong, lots of space in Phoenix) can also have dramatic impacts over time.
You can push, but you can´t direct it (Bono)
Efforts to control the property market can often have unintended side effects. Spanish first time buyers have always had to deal with very strict mortgage lending laws, and yet the same banks that were required to ask for 25% deposits were given free rein to finance rampant speculation on behalf of developers. On the other hand, German banks who couldn´t lend to local developers invested in subprime mortgage bonds in America instead.
Go figure.
Regards
Colin
During the boom times, I used to attend 15-20 property exhibitions per year. I can´t remember anybody at these shows advocating a buy and hold strategy. It was all about buying offplan and then selling for a big profit shortly after completion. Many a taxi driver, publican and dinner party host could be heard advocating a “buy now before prices go even higher” approach.
In hindsight, that turned out to be a pretty risky way to try and make some money. It was also miles away from the traditional methods advocated by old hands.
Somewhat ironically, it is easier to make money purchasing real estate now even though many might instinctually prefer to wait until the opportunity has passed.
While I´m convinced that making a profit by buying real estate is both easier and safer than it was 5 years ago, it doesn´t happen quickly and it certainly doesn´t involve borrowing lots of money.
There´s no great secret here, the strategy couldn´t be simpler. Here goes: buy a highly discounted property with cash (no interest rate risk), in an established location, earn a nice income, treat your tenants well, and hold onto it for as long as you can. Consider selling only when the statistics and your gut tell you the market is showing signs of another property bubble.
I´ll be the first to admit that this isn´t a particularly exciting plan, but you know what? It works. Very well. Just look at the table below. All I´ve done is illustrate the net income that can be earned from any half decent three bed condo in Florida.
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Purchase Price 2011 |
$100,000 |
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Annual Net income (increases by 3% per year) |
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Year 1 |
$8,000 |
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Years 2-5 |
$34,473 |
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Years 6-10 |
$49,237 |
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Years 11-15 |
$57,080 |
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Total net income |
$148,790 |
Apart from earning 150% of your purchase price, you still own a property outright with no mortgage that you bought for 35 cents on the dollar.
Before any of you young guns reading this dismiss such as strategy as unsuitable, consider what the great American economist Paul Samuelson said, “investing should be more like watching paint dry or watching grass grow. If you want excitement, take $8,000 and go to Las Vegas“.
Let the numbers tell you when to buy and let the numbers tell you when to sell. I know a large bulk of our readers do this instinctually. A high rental yield with no gimmicks is one of the surest signs that a property is well priced.
The opposite is also true - a low rental yield probably means it´s overpriced. If it´s a combination of low rental yields and high capital appreciation - watch out, because you´re probably in the middle of a property bubble.
How do we know when the supply / demand balance is in our favour?
Taking Orlando as an example (because that´s where my company is most active), I think it is reasonable to assume that a good time to buy is when a supply glut has moved towards balance and the local house prices don´t reflect that yet.
Guess what? It´s happening now. According official figures from the Orlando Regional Realtors Association, the supply of available properties is now at a 5 year low. Unlike 2007, 2008 and 2009, average sales prices actually went up in 2010 across Orlando. I wrote a blog about this recently.
It´s a perfect storm (but the forecast says it´ll brighten up soon)
I´ve never seen conditions more perfect for buying real estate in the US. In the areas we sell - prices are reduced by 65-70% compared to what they were 4 years ago - way below construction cost. Supply was extremely high, but it is reducing fast.
Recent figures from the Census Bureau and The Economist (see graph opposite) confirm that homeownership rates have decreased from 70% in 2004 to 66.5% today - that means more renters. In fact, there are more renters now there has been for almost 6 years. When the number of renters is increasing faster than the supply of properties, rents should increase.
According to a Marcus & Millichap report (they´re one of the largest brokerages in the USA), exactly that has happened. The shift from homeownership to leasing should boost the local market’s average apartment asking rent to $864 by year’s end, a 2.2 percent increase. In the best middle class neighbourhoods it will increase by considerably more.
What are you thoughts on the Buy and Hold strategy?
Regards
Colin
Answer: Florida isn´t a giant property bubble like Dubai.
A property boom didn´t just appear in the Sunshine State out of the blue. The real estate market was tipping along quite nicely based on firm fundamentals between 1990 - 2002 prior to the unprecedented buying binge that occurred worldwide from 2003-2006.
A high quality of life, lots of space, great schools, universities and employment opportunities, a diverse and high tech economy encompassing large multinationals and government agencies of every description, a world class financial and tourism sector - all these played a part in attracting wave after wave of honest-to-goodness professional workers relocating permanently.
Guess what? They´re still here. If you know where these people live, work, play and go to university you are well on your way to making a wise investment decision. These are the locations where our target market of middle class professionals rent and buy their first homes. Siesta Lago is one of them. The people renting and buying here will provide a safe and stable exit strategy.
If you like the idea of purchasing a property that used to cost $200,000 but now sells for $70,000 and rents out at an 8% net yield - you really should start looking now. If you click on this Siesta Lago link and complete a short enquiry form, all information will be sent to you automatically.
In conclusion, prices aren´t falling anymore in the areas we source property - it is the supply that is falling. The window of opportunity to purchase a) in the best areas and b) at the bottom of the market will probably close sooner than a lot of industry commentators think.
Speaking of which, we´d love to hear YOUR views on the market via our blog comment and feedback forms.
Until next time
Colin
A strategic default is when a person decides to stop repaying their mortgage even when they can afford to continue doing so. Why would somebody do that? You´ll lose your home and your good credit history will be badly damaged.
If you dig a little deeper, the logic becomes apparent.
Let me illustrate by way of an example. Mr Smith bought a 3 bed condo in a nice residential area of Orlando in 2006 for $260,000 and he took out a $230,000 mortgage which is costing $1500 per month to service. He has a nice job and has no problem paying $1500 per month.
However, he knows that half a dozen identical 3 bed condos in his community, which weren´t sold in 2006 have recently been purchased by cash buyers for $99,900 each and they´re renting out for $1000 per month. When you take the interest into account, his mortgage is probably 4 times the size of the current market rates for that property. So he decides to stop paying his mortgage and instead saves $1500 per month.
It takes the bank 9 months to get round to kicking him out, during which time he lives rent free. After he gets kicked out, he simply rents one of the identical condos around the corner and pays $1000 per month to his landlord. He won´t get a mortgage or a car loan for 3-7 years, but he doesn´t particularly care as he´s done nothing illegal, he´s free of that huge 20 year debt and he doesn´t mind renting for a while.
The moral hazard that traditionally prevented people from doing this is disappearing fast. Ten years ago, a person who got kicked out of his house for not paying a mortgage would feel huge shame and embarrassment. His friends and family would pity him and quietly shake their heads at how bad things had turned out in his life. Not anymore. In 2011 an increasing amount of these neighbours will be wondering how they can do it too.
In the USA, in Ireland, in the UK and lots of other countries, it is becoming socially acceptable to stop paying your mortgage. People will understand and won´t think much worse of you. In the US, they might even admire the way you got yourself out of a huge debt. There are now lots of websites offering casual and professional advice to people that want to default on their loans and declare bankruptcy.
What are the consequences of these defaulters?
As you might expect, lenders in the USA hate the fact that a person can choose to walk away from their mortgage. There is no law against doing it. These lenders are lobbying HARD to get the rules changed so that people don´t have an incentive to walk away. For example, they´d like it if a strategic defaulter couldn´t get another loan for 20-30 years instead of 3-7 years. That would prevent a lot of them from doing it.
It´s not easy to prove strategic default though - you´d need to show beyond a reasonable doubt that the person wasn´t suffering financial hardship when they stopped paying their mortgage. Imagine a bank trying to do that to 5000 customers. Better still, imagine a state court system trying to handle 10 banks doing it to 50,000 customers.
Additionally, nobody knows what percentage of people are defaulting because they´re broke versus people defaulting because they don´t feel like repaying a debt bigger than the value of their home. Come to think of it, there isn´t even an official definition for a strategic defaulter.
One thing is for certain though. With the previous chaos in the market abating and the supply of distressed stock dwindling (see graphs above), they represent one of the few ways which will continue to generate discounted houses that investors can pounce on. The flip side is that if it becomes too big a problem, I think loop holes will be closed and people will no longer be incentivised to do it.
Don´t expect the authorities to announce a date for closing these loopholes either - they´ll just do it and tell you afterwards. Otherwise, people would simply rush to default before a deadline.
So, I think I can safely predict that when banks finally restructure their property portfolios and the levels of foreclosures slow to a manageable trickle, they´ll start lending to normal people again. That´s when property prices in the popular areas will start increasing and that could conceivably happen this year.
Regards
Colin
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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Florida has been very good to Torcana his year with many successful launches under our belts (with Mosaic, Arbor Lakes & Sabal Point being the standouts).
More will follow in early January as we continue to source high end condos with bulk discounts in affluent middle class areas that are pre tenanted by local professionals. Net yields will generally be 8% and prices 70% below peak rates.
Early in the new year we will bring other US products to the market including a variety of bespoke services for investors seeking to purchase multiple units (please get in touch if you´d like to know more).
Lies, damn lies and statistics (Disraeli)
I´ve had US housing numbers coming out my ears this year and I´m going try and ignore them for the next two weeks. For those who don´t want to watch Harry Potter or Willy Wonka on television, there´s no shortage of housing statistics on the USA market available online.
I´ll just give you two graphs in this newsletter though, one which shows the inventory in Orlando over the last 3 years and other which shows new contracts issued in Orlando during the same period.
Off the top of my head, I can think of half a dozen Housing Ministers in the EU and elsewhere that would sell their grannies for stats like these.
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Warm Regards Colin |
Let´s get the bad news out of the way first. The views I expressed on Ireland and Spain in the Xmas newsletter in December 2009 have not changed one iota. Both are high risk - low return investment destinations and I can´t see that changing in the near term (it will eventually). I also wrote a detailed overview of the Spanish market last month which you can view here.
Brazil will get a lot of attention next year from property investors. Most of the overseas interest will be in the (relatively) high end coastal properties and holiday resorts dotted along the north eastern coast. I´ve absolutely no interest in that though.
However, the second round of a huge social mortgage program (MCMV2 if you want to google it) is quite interesting. Millions of middle income Brazilians are purchasing homes for the first time with government backed mortgages, and there are a several ways international investors can get involved. It wouldn´t be for the faint hearted and it´s still early days as far as my research is concerned. I might have something in 3-4 months though.
Renewable Energy investments will continue to increase in importance in 2011. I´ve been on a steep learning curve with them this year as they are deceptively complex products that come in a very wide variety of structures. I think solar is best suited to regular €50,000 - €150,000 investors and we´re looking forward to promoting these in the new year.
Wind, hyrdro and biomass are more suitable for high net worth individuals. The low entry level (€20,000) forestry products such as teak, bamboo and agarwood strike me as a fad. I´ve looked into about half a dozen of them, some promoted by companies I respect, and I just don´t like the concept. My gut tells me to stay away.
Warm Regards
Colin
