If you are interested in acquiring small-scale distressed properties, Lee Kiser, principal of Kiser Group, has this to say: “Welcome to the club. Everyone wants these types of assets nowadays.”
Kiser Group is a boutique investment sales brokerage that engages in the disposition of multifamily, mixed-use, land and other types of investment assets. Specifically, the company is focused on the Chicagoland middle market.
Investors interested in buying properties at a discount in the Chicago market may still be in luck. “There is still a lot of distressed properties, though not nearly the volume we have seen in the past,” says Kiser. According to Kiser, about 35 percent of the Kiser Group’s investment sales transactions today can be labeled as distressed assets—compared to as much as 80 percent and 70 percent in 2010 and 2011 respectively. Just last year, 45 percent of the volume was composed of distressed assets, he said.
Most of the distressed assets Kiser sees are bank-owned. One reason for the falling inventory of distressed assets is that the majority of such assets have moved off the balance sheet of banks, says Kiser. Similarly, in the past 12 months, not as many CMBS distressed deals have crossed his desk, says Kiser. However, an increase in CMBS loan maturities may boost the volume of distressed conduit loans again, he surmises, and the company is talking to special servicers currently about future deals. As Kiser Groups’s mid-market focus is on transactions averaging about $5 million, the company does not see so many conduit-originated properties, which tend to be larger in size.
Purchasers of REO properties foreclosed by banks should not expect conventional seller accountability on the part of the banks, advises Kiser. “My advice to purchasers is not to expect the bank to act as seller,” he says. Do not expect bank sellers to provide, for example, representations or warranties as to the condition of the boilers or code violations. The banks have no history of ownership and knowledge of the buildings, and most of the properties are sold as is, notes Kiser.
And in the case of note sales, investors are stepping into the shoes of lenders and need to make sure they obtain advice on the rights of lenders, says Kiser. As such, they need to hire local professionals—not real estate attorneys, but lenders’ attorneys—attorneys who work with and are defenders of lenders, says Kiser.
As buyer of the note, make sure all your rights of lenders are preserved, says Kiser. “You may think you are buying real estate, but you are not. It is a completely different type of transaction.” For example, there is potential for the property owner filing for bankruptcy in the near term. “This is a whole new level [of investment]. Completely different skillsets are required, and my advice is not to confuse the two types of purchases.”
If they can successfully navigate the intricacies of buying lender-owned assets, investors may be able to yield the benefits of an investment type that remains in high demand.