Can we act upon the headlines?

It’s 2011, and with the beginning of a new year comes new hope for a year better than the last one. If you believe the headline statistics touted by retailers and economists, we’re in store for a rebound. Here are some of the signs heralded as indications of an economy on the road to recovery:

• Retail sales for the 2010 holiday season were at an all-time high
• Auto and Banking industries are repaying bailout funds from 2008 to regain companies
• At the end of 2010 unemployment claims nationwide dropped, and in California stabilized
• Sales of existing homes increased in 2010
• In 2010, foreclosure activity saw a 14% decrease nationwide, according to data tracking from RealtyTrac

Unfortunately, relying on 2010 statistics as a basis for optimism could be misleading, especially when looking into the statistical support for some of them. If one just accepts the statistic that foreclosures sales have fallen dramatically it will not be a true picture. We need to examine the drivers behind decreased foreclosures. As a result of “Robogate”, which exposed the practices of lender middle managers signing affidavits allowing banks to repossess homes in default without fully reviewing the documents, major lenders and loan services halted foreclosure proceedings last fall to evaluate their document review process. It’s now 2011, and financial institutions are gearing up to resume foreclosure activities. What also looms on the horizon is another round of adjustable rate mortgage resets to higher rates in 2011 which could potentially contribute to higher foreclosure numbers if borrowers can’t make increased monthly payments. Or worse still, borrowers faced with higher mortgage payments could decide they owe more than the property is worth and simply walk away in mass numbers.

With all the talk of a rosier outlook for 2011, it’s clear that borrowers are still facing the issue of losing their home. However, loan modifications and short sales still exist as viable options for homeowners to keep their homes while the economy stabilizes. The simple fact remains that lenders don’t want the cost of REOs dragging down their balance sheets, and invite alternatives to keep borrowers out of delinquency. They will invite alternatives that enable their books to show a positive direction. Many insiders are concerned about the prospect of an additional price decline although most that I have spoken to do not feel we should expect another large decline.

The reality is that as long as lenders keep their very tight lending criteria we cannot expect that any increase in values is just around the corner. At some point the reality of profits will need to translate into looser lending.

All the talk of an economic turnaround could lull homeowners facing distressed situations into a false sense of security. But borrowers facing delinquency or foreclosure do have options at their disposal to keep them from becoming the next bad statistic. Short sales and loan modifications are alive and well in 2011, and can help people stay in their homes or at worst have a solid chance of a fresh start.

Is this the time to invest in houses?

I am regularly asked this question - . Should I take my very valuable saving and buy a house, rent it, and hold it for a good return?

The answer is simple; for sure, maybe, probably not, or no way!! I believe that covers it all.

Let us explore these answers and you can decide what to advise or perhaps what to do on your own.

The correct answer directly correlates to risk, expectations, need for money, alternative investments and available time. An investor who wants to buy will have to identify the right asset for a lease / hold strategy and hold it in an investment portfolio as a separate class in the basket. Let’s explore the data and forecasts to help make this decision.

Existing home sale statistics have been rising over the last year but most recently are showing some weaknesses. According to NAR (including SFR’s & Condos) in June sales fell over 5% from May, but are still almost 10% higher then in June 2009. The supply is much higher then we would like to see. But the overall pricing is stable due to such a severe drop. The prices were higher in 10 of 18 metro markets in 2010 versus 2009. Condo values were flat in most markets year to year. In a broad brush approach – northeast values decreased slightly around 1%, Midwest – down 1%, South – unchanged, West was up 1.5%. It does appear that conditions have become more balanced. It is likely that a balance can continue since the tax credit expired and jobs remain a problem. The job situation may be the most important factor in a specific area if we try and forecast future values. This of course is considered along with the release of new distressed inventory by lenders “holding back.” There is also all the recent press about a “double dip” recession projecting future value declines.

Home value volatility and associated risk remain very high. It seems that the stabilization phase with government policy intervention may have run its course now. There is a strong possibility that we could see further price declines as the economy remains weak.

Digging further into values, according to Core Logic’s year to year home price index for June the following is important: The top 5 states with highest appreciation were South Dakota +6.9%, Maine +6.4%, California +5.9%, Virginia +4.7%, Washington DC +4.3%, Top 5 depreciation; Idaho -9.1%, Alabama -3.8%, Oregon -3.5%, Washington -3.4%, New Mexico -3.2%.

There are some factors that show reason for optimism in value expectations. The inventory of new homes being built and released to sell is actually at a very low level. In addition, we have interest rates being offered by lenders that feel like the “limbo” – How low can they go? They are at historical lows and we find 30 year fixed rate loans at around 4.5% to be extremely attractive.

So now having digested the various statistics and investigations, we need to ask if the investor is right for this investment and what a buyer should expect both in return on investment, time commitment, and other issues.

As SFR defaults continue and the housing market seems to stabilize, will SFR lenders increase their strategy to “rent & hold” property rather then dump them or leave them vacant? For many lenders this strategy makes sense even if they are reluctant landlords. A concern for any investor is that these rental homes will become your competitor as well as the multi-family building in the immediate area. Both of these will hold rental values down until the homes are sold and apartments fill-up. This increase in rental unit availabilities can cause a downward spiral for investors holding homes for rent.

As managing director of the Peak Corporate Network, I was recently interviewed by 2 reporters for a cover article in the L.A. Times, August 20th. I was able to provide details due to Peak’s expertise in the default area including our financing products for investors buying houses and our default services. The reporters were responding to reports that institutional investors / funds are jumping into the “trustee sales” investment world. We have seen this directly as we are regularly approached to finance or joint venture in such acquisitions. I believe that the demand to place money is very high now and the property returns on buying at the trustee sale support the “high yield” requirements for many fund managers. I bring this up because it may soon be the case that the way to get the higher “sales price” is at the trustee sales. The same factors that led to previous bubbles with too much money being placed in home loans can lead to too much money chasing the same deals at the footsteps of the courthouse. I can tell you that some of our property loans that have gone to sale have been sold to 3rd parties at prices considerably higher than our analysts advised we wound net at full payoff or as an REO after eviction, repairs and sale costs. This is an interesting phenomenon and will be worth watching. The inventory being acquired may ultimately disappoint the investor and lead to a wave of dumping these homes in 1-2 years.

The days of easy flipping single family homes may be coming to an end according to many savvy realtors and investors. I agree that the markets have in fact “cooled off” as so many remain unemployed and pessimistic. According to one research group, prices will go down even further over the next 18 months by as much as 5-10%. Anyone looking for a short term gain by selling a property is probably heading for trouble. Flipping is going on for sure, but fewer investors will be able to pull it off for a nice profit. Flipping a property requires “cash in hand” with an investment for repairs, holding and selling expenses. The idea of buying it and selling it “as-is” is becoming very difficult to accomplish.

The lenders policies are making it so difficult to close a loan. We regularly make loans for borrowers who simply could not obtain conventional financing in this market even though they are well qualified. Timing is usually the main issue.

Regardless of the roadblocks, investors are buying. The latest NAR figures show that 14% of all transactions in May were by investors. The majority of those being distressed properties that would still be empty if not for the investor.

Is the investment right for you or your client? Investor expectation is the key variable. Banks today are paying from ½ to 2 ½ % for their safer deposits. If we look at real expectations it does not take much of a return to match or beat the alternatives. If one is satisfied with little or no actual net cash flow and is willing to ride out this cycle, we can all agree that values will surely go up from their current levels. The problem of course is where we are in this cycle. I do believe the large downside risk has been stabilized and we are at most within 5-10% of the floor in most major national markets. There could be further declines but some risk is always to be expected and must be assumed. Most properties at these values and current rates cannot throw off cash flow in excess of 5% actual annual returns. In this calculation you have vacancy, cost of funds, repairs, maintenance, taxes, and insurance.

It is a reality that if you are a landlord “things” happen. The same borrowers who had sub-500 fico are now renters. They could not pay their mortgage so why would you expect a good payment record if they are your tenant? This means eviction cost and delays, vacancy, repairs and costs of re-renting. A break in occupancy, even for a short period, will eat up any expected cash flow and probably will result in a “cash call.”

This now brings us to the “time” concern. How available is the investor to handle such issues. Turning the house over to a management company is a solution but it does have a high price tag as well.

Now that we determined that expectations are good and the investor has the capacity to handle the rental I want to give a few tips to help maximize the potential return on investment.

- Talk to top local rental agents about the area and rental conditions.
- Read newspaper ads – How much is being charged for rentals?
- Consider schools and amenities (Shopping / Transportation)
- If Condo – check out HOA restrictions
- Before you rent – maintain it, clean-it up and make it livable.

In conclusion, the concerns are similar if one hopes to flip it or rent and hold. Values are very attractive and if an investor has the wallet to “ride it out” there is a great opportunity to get a very good return at the end. Keep your expectations in line, be ready for surprises and make some money.


Gil Priel, Co-Founder
Peak Corporate Network



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Priel's Perspective - “The Light at the End of the Tunnel”

I want to start by saying it is clear to me that there are some buying opportunities in today’s uncertain market.

Many real estate investors, myself included, have been saying that commercial real estate is the next shoe to drop, our next crisis. However, the collapse is actually being held up by a “slow-motion” release of inventory. It is clear that values have declined significantly and many in the industry have serious problems holding on to their investments. The emerging reality is that the idea that an investor can sit idle waiting to buy “Class A” malls or apartments for 9 to 10 caps will not happen during this downturn.

The reasons for this are the “Slow-Motion” release of distressed assets by lenders, the willingness to work with borrowers without regulator pressure, and the fact that there is a huge amount of capital waiting to jump in on any opportunity put out to market.

Now that I made my point clear, I do need to make it equally clear that we are not in a “Boom” market or that I expect values to quickly recover to our 2006 peaks. The “Slow-Motion” idea also applies to any recovery. It will be drawn out as hard times will continue for the short to medium term – buyers beware!!

Many lenders are continuing to play the “extend and pretend” game with their loans and over time will need to take action by disposing of their bad debt and assets. This, in turn, means that these will sell at distressed values and further delay the rebound of investments.

The experts at Strategic Asset Solutions, one of the Peak Corporate Network affiliates, act on behalf of borrowers in debt restructuring on commercial properties. We have seen a significant shift in lender willingness to work with a borrower to reach a new realistic basis for their loans and creating a solid value for both lender and borrower/owner. This is accomplished with principal reductions, rate reduction (temporary and permanent), extended maturity date, funding reserve for property repairs, etc. The bottom line is giving the borrower a reason to stick with the program.

These types of negotiations will increase over the coming years as loans are nearing maturity. Deutsche Bank estimates that more than 65% of the loans that have been packaged in commercial mortgage backed securities (CMBS) will not qualify for refinancing when they become due. Some will be restructured while others will turn into distressed asset sales over time.

Another reason why the commercial real estate market will not collapse is that a bulk of mortgages are held by a single lender (not securitized) that is not under the strict scrutiny of Federal Bank Regulators. This gives that lender ample time to attempt to work out a problem loan in a smooth and orderly manner. The downside, again, is that it drags out any correction for years and of course is a delay for any real rebound is values. A 40% decline in values is not uncommon and it takes a robust rebound to bring it back.

In a recent real estate investor magazine survey, 65% of the responding investors indicated that they plan to boost their investment in real estate over the next 12 months. This is an increase of 30% from last year.

For anyone contemplating making an acquisition there of course remain many concerns that are very real, they include:

- Vacancies continue to increase
- Rental rates continue to fall
- 100’s of properties are in default in most markets
- Sales have plunged
- Appraisals and values are falling
- More equity required by lenders
- Still a disconnect between seller and buyers

These concerns will continue to dominate every due diligence model and challenge decision making by prospective investors over the next few years.

The analysis should be made under an extremely conservative perspective as is required in this very volatile market. This strategy is in the face of what we see as very stiff competition for a very limited supply of distressed properties.

At Peak, we continue to make bids for some of these assets and in many cases competing with as many as fifty “all-cash, quick –close” bidders. We recently purchased a non-performing note secured by two office buildings, in Southern California, with a firm belief that we would ultimately own the underlying assets. In a clear example of money being available, we were overbid at our foreclosure sale by aggressive buyers paying all-cash with little or no due diligence.

I do believe the next 12 months will provide a better flow of deals although many will likely be sold in an auction environment. This requires costly due diligence with a low likelihood of success making it more palatable to the large institutional players who will be the winning bidders with adequate staffing and resources.

As an explanation of the low flow of deals, it seems that the institutions that acquired banks assets during the crisis have had no real reason to sell and no pressure to do so. Now that it is clear that there is a lot of liquidity we feel that change is coming. Currently, Wells Fargo, LNR, and others, are taking billions in loans and assets to market. The capital is available and I would expect an even larger flow of capital looking for safety in the U.S. as economies like Greece and other European countries have their own crisis. Many believe the worst of our crisis is over and the U.S. is a safe haven once again.

In conclusion, the factors I have discussed make me believe that the light visible ahead in the tunnel is not an imminent train wreck, but rather it is the light of optimism.

Gil Priel

Founder and Managing Partner

Peak Corporate Network

"Sitting on the Fence"

Will commercial real estate values cause another wave of bank failures? Are we heading into a deepening recession or depression? Should I jump in and buy now?

I have been struggling to come up with definitive answers to these questions as the pace of change has created a very tumultuous environment.

I was convinced, as recently as two months ago, that there will be a major collapse of commercial property values. To date it seems that the drop is manageable as CAP rates have risen from sub 6 to over 8 on good quality properties.

We continue to assume falling rents and rising vacancies in our analysis models of commercial deals and loan requests. Perhaps the impact of the residential bloodbath was so severe that it caused a massive reaction by the FED and thus has made the commercial loan impact less of a concern at this time.

Investors and lenders have been forced to focus on their residential portfolios and this distraction has caused them to back off on enforcing their rights when commercial loans are defaulting. We need to comprehend that the volume of commercial loan debt is less than one-third of its residential counterpart. This may make it possible that the bad debt can be absorbed by our economy without the catastrophic impact many fear. This becomes even more likely if the economy actually is growing and the recession is declared at an end.

My belief is that there will be many more bank failures ahead, especially on the regional level. The most likely candidates are those lenders who have a portfolio of loans originated in 2003-2007. For those lenders, as with private individuals, the difference between a recession and a depression is whether it is you or your neighbor. In the private sector, if your neighbor loses a job, it is a recession; if you are losing your job, it’s a depression. For a public financial institution, depression starts when regulators come in and ask questions about the portfolio’s health and valuation- it is at this point that jobs are on the line.

I still sit on the fence thinking things may improve because I have seen, first hand, how many investors with capital are beginning to jump in on any real opportunity. One recent example was a bank sale of an apartment community being liquidated on an all cash basis for a $10mm opening bid. There was a 5 day window to bid- 35 bidders qualified with proof of funds during that short period. I am always working with our institutional partners and I have seen how little attention an “all-cash” and “quick closing” offer gets because many sellers are well aware that the money is readily available.

I recently read that at an Expo in Munich, Germany, there was overwhelming interest by European investors to jump in on the US Real Estate discounts. In the 2008 Expo there was very little attendance and no interest for those exhibiting. Our international relationships have also surfaced and are now requesting that we bring them deals to partner on. There is no question that the aggressive focus is on distressed assets only. However, earlier in the year this was not the case as people were looking for blood.

Now looking over to the other side of the fence, there are plenty of clear indicators and opinions that we are only in the 3rd inning of the value declines and that the worst is just around the corner.

The following are some of the key considerations:
- During the next 15 months approximately $2 trillion of commercial mortgages will be maturing
- Between April and August 09, the value of commercial loans placed in “special servicing” doubled to $50 Billion
- Office and retail vacancies are soaring
- Rents are declining in all sectors
- Flow of new credit remains very tight
- In recent years large project loans have been broken up into layers of securities and if they go bad they will have a very wide impact
- Many projects are standing in various stages of completion and will take months of recovery to justify their completion
- Mark to Market has not been enforced and many lenders are reluctant to reduce values

The market can be kept afloat by the willingness of lenders and the Fed to do modifications, etc. and “extend and pretend”. The idea behind this is to put it off for a later date and not bite the bullet today. Many will argue that things cannot actually improve unless the bad debt is dealt with now and taken out of the system. The prolonged down market is caused by the band-aid approach. The jury is out on this theory.

In summation, I do not feel like we need to jump into deals due to a fear that the “Ship of Opportunities” will sail away if we don’t. However, I must admit that the anchor may be close to being pulled up making us more aggressive in pursuit of investment opportunities in the very near future.

“Still on the fence- but looking for a soft spot to land”. Decisions, Decisions, Decisions.

Gil Priel
Managing Director
Peak Corporate Network

Avoiding a Commercial Real Estate Crash (May 09)

Just focusing on cleaning up "sub-prime" residential garbage will not bring us back to the days of the real estate boom. The collapse of residential home values is only part of the story. The bigger, and more pressing, financial emergency is on the commercial side of the real estate market.

For some time, the U.S. commercial real estate disaster has been developing like a catastrophic hurricane, swirling in warm waters, gathering intensity, getting ready to hit hard.

Ignoring the reality of a commercial real estate collapse is following the same steps that allowed the free fall in home values. A failure to act in a cohesive effort to pre-empt the impact of a collapse of investment property values will only result in an economic fate similar, or worse, than what we’ve seen in the residential market.

This is a critical time for commercial lenders. Helping honest, qualified borrowers keep their investments is particularly vital to the survival of commercial lending – but perhaps more importantly – has ramifications that will positively affect the economy as a whole.

Back in 1991, during the last real estate down cycle, my own company negotiated a reduced payoff on our office building. The lender received full current value for their loan and we were able to structure a sound deal allowing us to keep the building and ultimately sell it for a substantial profit in a better market. It was this good faith spirit of negotiation that made the deal work out then and can serve as a model for us now, as we brace ourselves for the perfect storm.

Lenders, investors, developers, and many others, will all need to work together to build an infrastructure strong enough to avoid a total collapse of the market.
Initially, the mezzanine lenders will be most affected. They’ve made huge capital investments behind securitized senior loans that took the safer portion (lower LTV). These lenders are not small Mom & Pop lenders; they are huge institutions like GE and Transwestern Insurance.

Recent transactions, like the sale of the Hancock Tower (a premier office skyscraper in Boston) is a perfect example of risky lending practices. The property was sold for $661 million, representing approximately 1/2 of the purchase price less than three years ago. It was clearly acquired during the peak period of value but it is still a trophy property. A 50% drop in values is not at all rare if the property is among the “crème of the crop” in the city. Analysts, lenders and appraisal experts all agreed it was safe to jump in at that price. As part of the original financing package, a half billion dollars were lost by the mezzanine lender, in addition to several hundred million in buyer’s equity.

This is not the only example of the brewing storm and our new reality. There are glaring examples in Las Vegas, Los Angeles, Miami, New York, Phoenix, and most cities nationwide. According to CoStar, there are almost 20,000 distressed office properties in the 50 largest U.S. business markets.

The same factors that led to high valuations in the home market were prevalent in commercial lending. Plenty of appraisers gave willing lenders what they needed to support "out of whack" values. Wall Street money needed to be funded and since values were never going to decline, the call was "bring me your loan and we'll show you the money."


I observed this first hand over the last few years in my capacity as Managing Director of a private investment fund. I was angry to be termed the "value butcher.” I tried to be conservative on valuation, rejecting many loan requests that were gladly gobbled up by other lenders who were not lending their money and receiving huge bonuses based on the volume of funding.

Things have got to change; both in the way we originate new loans and how we handle existing loans that are already facing peril.

In Washington, Treasury Secretary, Timothy Geitner, has presented new rules and proposals that are still being defined and digested (along with all other new Obama Administration policies), based on the hope that the economy will turn around and real estate values will recover before loans are due.

The key is to bring all the powers that be together and infuse liquidity into the market based on real value. Solutions need to be implemented that help borrowers and lenders work out a current loan without forcing it into a default status or creating another future toxic asset.

The good news is that there are solutions. I know through my own company’s network of services, we’ve been heavily involved in providing other specific solutions including: Short-sale (allowing a sale for less than the debt), Short-refi (same but with refinancing), Note sales, Discounted payoffs, modifications including reducing loan balance, rate and or terms, Equity Participation with lender and payment plans.

We saw the need several years ago to help homeowners negotiate a solution with their lender to keep the borrower in their home or allow them to sell it to a new buyer at a fair price. These requests were met with deaf ears and only in the last year, or so, has there been a willingness on the part of lenders to work with the borrower.

In today’s economy, all the rules must change and solutions must be implemented quickly in order to keep the level of defaults and foreclosures at a minimum and sustainable level. A flood of failed loans and projects need to be prevented from hitting the market and causing a catastrophic jolt to a reeling economy. These measures in conjunction with the governmental efforts have a solid chance of making the recession shorter and build a solid foundation for a safe and speedy recovery.

Gil Priel, Co-Founder
Peak Financial Partners

The Fight of the Century: Round 1 (Oct 2008)

Turmoil on Wall Street- a direct hit to the head of credit markets, Lehman declares bankruptcy- another blow, Merril Lynch sold, AIG being supported by the US Government, Taxpayers pick up the tab on a $700B rescue plan- blow after blow, how much longer can our fighter keep standing???

Top financial leaders, including Greenspan, have called this crisis “a once in a century event.” This has not been limited to our shores, as the Global markets have also absorbed serious punishment. Most countries are struggling to “liquify” their credit markets as lenders are holding on to every cent they have available.

The immediate impact to lenders has been that even traditional delinquencies for “lower risk” borrowers are on a steep increase. This is the case as so many fall behind on their mortgage obligations. For the higher-risk borrowers, the story gets worse. There is no capital available to keep them in their homes and avoid foreclosure. The FHA alternative has strict guidelines that are prohibitive to most borrowers. The problems will continue to increase as property values are driven down by the inability to obtain any financing alternatives. This, in my opinion, is the reason that we are likely to be in a declining lending environment for several years to come. Only the reduction of inventory, the stabilization of values and credit being released will eventually lead us out of the crisis. 2010 is my estimation for reaching a stabilization point.

Stabilization will be greatly affected by the regulations being proposed by government, thus making it tougher on lenders. The stricter guidelines will only exasperate the decline in property values and increase foreclosures. The borrowers who truly need the most help are locked out.

I would like to share something with you that is really at the root of the problems we are all facing today. We recently received a submission for a short-term loan on an investor owned home. The loan request was in line with our guidelines and at a very low LTV. We received a complete credit package including an appraisal just completed by a licensed appraiser.

We were prepared to fund the loan and, as a standard precaution, we sent our analyst to perform a property inspection. The appraisal was a complete fraud, showing multiple shots of the interior and exterior of the property and provided documentation of the home being in average condition. The house was a disaster beyond description. The reason I bring this up is that it is exactly the problem that led to the inflated real estate values we witnessed over the last few years. Many appraisers were asking- “What value do you need?” This complete breakdown has to stop and there must be strict legal action implemented. We are pursuing every avenue against the appraiser and broker.

As lenders, we have very little confidence in what we receive. This makes us pull back from lending, increases our costs and ultimately hurts the borrowers who need our funds. I hope everyone does their part to stop the widespread fraud in the current lending environment. Without gaining the confidence of lenders, credit availability will continue to be scarce. If I sound angry it is because I am. I only hope that you all get angry as well and help put a stop to such activities.

All the unprecedented actions taken by the government are geared to one thing: find the bottom and begin to re-build confidence. Our fighter needs to get off the mat.

The mindset of people needs to change before that can happen. Cheap, easy money was available to everyone to spend on luxuries, college, home improvements and vacations. Institutions also used the cheap money to expand their operations and banks were happy to lend as the capital kept flowing in. This is no longer the case and this reality needs to filter through and establish new spending habits. If there is nobody left to finance the previous lifestyles it will probably be “Big Brother- the Government” that will need to keep pumping money in to avoid a complete collapse. All the success that was built on cheap money will lead to further declines in other industries and this will unfortunately be Round 2 of our fight.

I believe the next 6-12 months will be the key in trying to predict what the future will be. The questions to be answered are: If some of the bad debt is pulled out of the banks and other institutions will they suddenly be willing to loosen the grip on credit flow? If housing stabilizes, will lenders jump back in and lend on higher LTV’s? One thing is certain, if that fails to happen we are looking forward to a prolonged recessionary period.

That is the most difficult projection to make. At Peak Capital Group, we have been actively pursuing some of the distressed assets held by Banks. We are buyers of REO’s as well as Non-performing notes, both commercial and residential. Our analysis remains very conservative with an eye toward further declines. We are also lending to opportunistic borrowers who need quick access to cash or property owners trying to salvage their deals. We are clearly one of those lenders that remain very well capitalized but holding back to a degree, primarily due to a market confidence lapse. Although we have reduced our loan production, we are still active and will remain so in our market.

I do look forward to being the creative solution for borrowers as well as sellers of properties and debt instruments. I also look forward to our fighter getting up and landing a strategic blow to the negativity that currently prevails.

Gil Priel

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