The Mattress or the Bank? (May 08)

I have been thinking about all of the IndyMac customers running to the bank, standing in line for hours, worried about their life savings.

This has played out over the airwaves and media so many times. It is a sad scene that may be repeated many times in the coming months.

While the FDIC does its thing (insuring most customers), there was still a real loss of over ½ billion dollars for some people that are now devastated.

These unfortunate consumers’ answer to my question would have certainly been; YES! It is time to keep the money under the mattress.

The other answers of course include being aware that there is a limit on FDIC guarantees and to stay below it in each institution. However, I do believe that these turbulent times require consumers to look again at their long term objectives and the value that real estate holds for their plans.

Having been through at least three significant cycles, I am always amazed how values seem to come back or exceed the last high. Real estate does not suddenly vanish. There are few cases of cities disappearing and land becoming worthless. These down cycles present the opportunity we all ask for when prices are skyrocketing. I can’t tell you how often I’ve heard, “The next time it goes down I will jump in full blast.” Then it goes down and our fears and dire predictions take over leaving us on the sideline. This psychology can make or break investors.

There are areas that residential values have fallen up to 75% in less than 18 months!!! I am not talking about the rust belt in Ohio either. I am talking about the Southern California suburbs. Nobody needs to wait for what is believed to be the lowest possible price. My advice has been that if a property is available at a steep discount from the high water mark and is the type of property you would be happy owning for the long term, it may be time to step up. It is clear that there is action on the listings in the depressed areas like Stockton, Riverside, etc. Our valuation department has seen a dramatic change in responses from agents in the field. They are seeing offers and some even indicate they are seeing multiple offers. I am not saying that this is the bottom of the market and it can’t go lower. However, the sword has fallen a long way and catching it now may make good economic sense in the long run.

I am not as confident in matters relating to commercial property values. I do believe there is a significant downside risk remaining in that market. Things have not adjusted to meet return expectations and lender credit tightening. It is the time to take extra precautions and be sure that you are buying at a discount to today’s value. With a strong cash position it is possible to take advantage of collapsing leverage deals and make a prudent purchase that will stand up in the long term.

Our fund continues to be active in commercial bridge loans and residential loans. We look for safe underwriting and liquidity. We are also making an effort to be a source of financing for loans being called by lenders who cannot wait it out or have urgent cash requirements. Recently, we have concluded several construction completion loans, letting the borrower go forward with projects that would have been grounded.

I can summarize by telling you that real estate investments remain a very attractive place to put your money and you will sleep better knowing your money is safer and because your mattress will not be lumpy.

My best wishes,

Gil Priel