Apartment Market Downturn Will Last Another 3-4 Years
- Sep 01, 2010
Greg Rutten is the senior vice president of QualityFirst Commercial’s Distressed Assets Team. Rutten has focused exclusively on Distressed Real Estate Markets in San Diego County and throughout the United States since 2003. Because of his specialization and expertise, lenders, investors and other commercial real estate professionals have sought out his assistance in either disposing or acquiring notes and REO.
Rutten has over 25 years in the commercial real estate industry.
He talks to MHN about the trend of distressed deals and how QualityFirst Commercial helps developers through the process of foreclosure.
MHN: What does QualityFirst Commercial do?
Rutten: QualityFirst Commercial was formed early this year. It is a traditional commercial real estate company but specializes in distressed real estate. We consult a lot of the banks in what their next steps should be. We do not deal with single-family projects.
MHN: Have distressed deals and REO sales become a trend?
Rutten: Let’s face it. 118 banks have been taken over by FDIC just this year, so we are having a problem and it’s not going away this year. In addition, we will have over 200 more banks fail by end of this year and this trend will continue into 2011 and 2012. We are in a downturn in the real estate market for at least another six years (in my mind.) Don’t believe the New York Times and LA Times. We are in this for the long haul. We are just starting the commercial end of it. There is a lot of private equity, pension funds etc that are buying from the lenders and then going through the foreclosure process.
MHN: Will the apartment market be in a downturn for another six years too?
Rutten: The apartment market will come back quicker because people have to live somewhere. But I still think it will be somewhere in the range of three to four years.
MHN: What should a developer be looking at while purchasing REO?
Rutten: Do your homework. Get with a title company and understand how many loans might be on the property and in which position (1st, 2nd 3rd and so on). Depending on the position, this can affect the value and the buyers financial responsibility. You can buy the note and go through the foreclosure process or you can buy when the bank takes it back. The safest and cleanest way is when the bank takes it back. The reason is that there are a lot of unforeseen issues—developers and owners do bad things when they are going back to the bank—water and fire becomes issues; developers don’t pay their taxes etc.
Also, understand the rental market, the crime rate etc. A lot of times, the properties are going back to the bank because they are in bad areas.
Know your focus. If your focus is on C type properties, focus on that.
Know your market.
Due diligence periods are short so have your due diligence team ready to go. Banks will give you a lot of due diligence but it’s upto you to go through it.
Visit the property.
MHN: Do buyers of distressed properties make profit?
Rutten: If you are looking to buy from a bank and immediately sell it, you are not going to make a quick profit. Most investors are pretty much long-term holders and their exit strategy is five to seven years. Their strategy is to stabilize the property, clean it up and increase rents. Sometime in the future they would look at selling it and if there is a condo map, look at keeping those titles or if the demand for condos is bad in that area, then getting rid of that.