Bank Owned Multifamily: FAQ
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These questions were emailed to me today after a recent inquirer reviewed the list of bank owned multifamilies:
In the listings, there’s a list price. Is this how much the bank wants or is that the original list price prior to the bank owning the property?
The list price is the ‘ask price’ what we’re finding is that when you find a property you like and you make an offer that makes sense, you stick with it, and sometimes over time and sometimes sooner, the bank can be worn down significantly. These properties HAVE to sell.
Also, are the lenders willing to be the lenders to the future buyer or is their preference to sell out right?
Sometimes they would want to be the lender, in other cases the lender is out of business. It’s not the same as the bank “holding paper” it is a new loan origination.
Are any of these properties rented now or are they all empty?
Bank owned properties are almost always empty. As a matter of course the lender or more likely ’special servicer’ vacates the property before bringing it to market. The good news for would-be landlords (bad news for tenants) is that there are an increasing number of tenants being removed from their properties, increasing demand in the market, and increasing rents. You can search this blog for media references to this phenomenon.
Do you have a question about bank owned properties and foreclosures? Ask it below.
Mortgage Heat Maps
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I don’t know how useful this thing is going to be but here it is. Homethinking.com went and compiled mortgage data for the entire US from the FDIC website and then they try to make sense of it with various charts and graphs and heat maps and whatnot. I suppose it shows us to some degree what kind of shape our counties or states are in when it comes to the mortgage crisis. The only thing is its not real current. In fact data is more than a year old. Could be useful for predicting future default. Here’s one of their embeddable graphs.
Bad Loans Piling Up at Local Banks
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Last week I reported that Massachusetts’ banks are realizing growing default balances in their loan portfolios. This week the BBJ is reporting the same.
On Friday I was contacted by a guy in the industry whom I met at a number of the larger auctions we’ve held over the last year or so. He is in the process of buying a construction/development note that’s in default with a local bank. The note is on a failed project with some mostly built units plus more dirt and permits. He’s buying the note for less than 60 cents on the dollar (of face value).
Its probably wise for lenders to take the hit up front to the extent that they’re able today. Banks aren’t contractors and they aren’t developers and when they act as such things rarely go well. Sometimes the right thing to do is to take your knocks and keep on moving - aka “the first loss is the best loss”.
I suspect as more lenders start to realize the depth of the problem we’re in we’ll see more deals like this. Thus far however, I’ve been hearing mixed reviews on the bigger deals. Some of the guys I know are saying the lenders are still holding out for 85-90 cents on the dollar, and in the flailing residential market that just doesn’t cut it.
Smaller multifamilies, as I’ve mentioned here many times, are selling for cheap. We put one under agreement last week at 50% of the last sales price.
When I hear about a bigger deal like the one I mentioned above it gives me some comfort that things are moving, which is really what we want, movement. Deal flow is key to the market getting back on its feet and its the only way we’re going to get over this huge hump we seem to be stuck on. Lenders have to get their inventory out the door and lend again, thats how it works.
Lenders lend.
Commercial Lenders Report More Default
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Most of the first quarter thrift reports are in from Massachusetts’ commercial lenders. In my last Non-Accrual and REO report for these lenders I reported that across the board lenders were reporting more non-accrual and OREO. You can check that post if you need a definition for non-accrual, OREO is the property that a lender now owns as a result of foreclosure.
About 85% of commercial lenders in Massachusetts are reporting first quarter results right now so I’m not prepared to give total balances for the state. Of those now reporting bank owned property balances are up by 5.4% which isn’t too bad. Right behind this however is an increase in non-accrual by more than 56%. Non accural is the last stop before REO unless either:
- The note is sold to a third party
- The balance is paid or settled with the bank
- The property is sold at the foreclosure sale
Short of any of these resolutions the balance ends up in REO. Commercial lenders in Massachusetts have nearly $200,000,000 in non accrual at the moment and this is with a couple of key players reporting.
In my previous report most of the REO and non-accrual was clearly construction related. In this report there is a significant amount of commercial/industrial.
Today’s CoStar Watchlist from Mark Heschmeyer shows a collection of New Enlgand Multifamily properties. This is the first time I’ve seen this since I began reading Mark’s report.
This year is going to provide big opportunities for those ready to capitalize. If you have some money or you can put some money together, now is the time. Be prepared.
Mark Heschmeyer’s Property Watch List - CoStar
| Property | Property Type | CMBS | Special Servicer | Notes |
| 65-71 High St., Southbridge, MA | Multifamily, 5 units | CBA 2005-1 | Midland Loan Services | The property is 100% vacant with all units inhabitable. Borrower started a rehab of the property and all, but one unit has been completely stripped down to the studs. The borrower ran out of funds to complete the rehab and appears to have abandoned the property. |
| 7-9 Mulberry St., Attleboro, MA | Multifamily | CBA 2005-1 | Midland Loan Services | The asset transferred to special servicing last month. MLS will schedule property inspection once borrower contact has been made and MLS can assess default status. |
| 33 Cottage St., Lynn, MA | Multifamily | CBA 2005-1 | Midland Loan Services | The loan was 60 to 89 days delinquent as of mid March. |
| 92 Girard St. & 127 Marion St., Springfield, MA | Multifamily | CBA 2005-1 | Midland Loan Services | The property has been boarded up to renovate, but borrower has ran out of funds with approximately 90% completion. Property inspection was scheduled to verify that all repairs have been made, but the property manager did not show up. Midland will request another inspection to verify what repairs remain and then make a determination regarding a deed in lieu per the borrower’s request. Property is listed at $160,000 with little interest to date. |
| 27-29 Pleasant St., Attleboro, MA | Mixed Use | CBA 2005-1 | Midland Loan Services | The file was transferred into special servicing last month. Midland was to schedule a property inspection. |
| 1224 Pleasant St., Fall River, MA | Mixed Use | CBA 2005-1 | Midland Loan Services | The loan was 60 to 89 days delinquent as of mid March. |
| 1524-1528 Pleasant St., Fall River, MA | Mixed Use | CBA 2005-1 | Midland Loan Services | The loan was 60 to 89 days delinquent as of mid March. |
| 73-75 Water St., Lawrence, MA | Mixed Use | CBA 2005-1 | Midland Loan Services | The loan was 30 to 59 days delinquent as of mid March. |
| 22 Cutts St., Biddeford, ME | Multifamily, 10 units | CBA 2004-1 | Midland Loan Services | The loan was 30 to 59 days delinquent as of mid March. |
| 413 Main St., Lewiston, ME | Mixed Use | CBA 2005-1 | Midland Loan Services | The loan was 60 to 89 days delinquent as of mid March. |
Apartment Rents Are on the Rise
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You heard it here first folks. Back on September 7th 2007 I reported that we’d be seeing rents on the rise
“There is a flight to rentals in a big way right now. You get foreclosed on, you go rent. You just got out of college and barely have a job, you rent. You had a few bumps in the road and a few late payments on your credit score - right now you are renting. Good for us!”
Just in the last week or so there are two new articles pointing to exactly this phenomenon. For the first one yours truly was contacted by Banker & Tradesman [4-21-08 Banker & Tradesman Article] for a quote.
The second article popped up today on Inman News and that article is echoing the same cause and effect that I point to in my interview.
If you have been sidelined by the high prices over the last few years that prevented rental property from making sense - now is the time to buy. Buying now while rents are rising will give you a big advantage as you’ll be able to maximize your rents and profit over the next several years.
Increasing rents increases the value of your property. Get out there and find something that has under market rents and pay accordingly. Improve the performance of the building over the next few years as rents rise and you’ll be glad you did. In an upcoming article I’m going to write about ‘forced appreciation’ to round out this position, for now you can Google it.
Massachusetts Residential Market Takes a Beating
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The Warren Group reported today that Massachusetts housing prices worsened and both sales and values declined substantially again in March (08).
single-family homes in Massachusetts fell more than 10 percent in March, the second-steepest price drop since The Warren Group began recording prices in 1987. The last time prices declined by more than 10 percent was in December 1990, the nadir of the early-1990s housing crisis…
median price of single-family homes fell 10.6 percent from $340,000 in March 2007 to $304,000 this past March. The median price during the first quarter fell 8 percent, from $337,000 to $310,000. Single-family home sales in March fell 31.6 percent, from 3,853 last year to 2,637 this year. Home sales in the first quarter declined 27 percent, from 9,434 to 6,891
“Nadir” sounds good and if history is an indicator then this could be it (the bottom) right? Sure it could be but I’d sure expect to see a housing nadir in December before I’d expect to see one stuck in the heart of the spring selling season. No I’m afraid it isn’t over, we’re still nadirless.
Just because we’re not at the bottom doesn’t mean there aren’t deals out there. We’ve seen some signs of life in the last few weeks and have put a number of properties under agreement. A lot of investors are starting to feel like they’re starting to gain a little footing.
What Are the Best Neighborhoods for Multifamily Investment
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Location, location, location right? Or is it income, income, income? Some would say you don’t have one without the other but then the competition pushes down the return. So where to invest? There are a number of good choices in and around Boston but what I’d like to do is get location down to a science (as if that were possible).
The fact is different towns make sense to people for different reasons. Some people are after income pure and simple. Others make strict value and plays and don’t want any hassle. At the end of the day though the market determines the relative values from one area to another.
In order to dive deeper into what the market thinks we’ve put together a rating system for Boston and surrounding neighborhoods. If you are an investor in or around Boston or want to be an investor in and around Boston we want to know how you rate the various neighborhoods.
If you complete the brief, one page rating survey you’ll get a free copy the results plus immediate access to the Massachusetts Multifamily Report, currently tracking
- Monthly multifamily average sales prices with year over year comparisons
- Commercial multifamily sales volume
- Commercial Multifamily Quarterly Price Trending
Click here to complete the Boston Area Multifamily Investment Market Survey and we’ll provide you with all of the above.
Making Sense of Multifamily Investing
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A lot of the more seasoned multifamily investors that I know or work with have some quick “rule of thumb” evaluation of their own that they use to very quickly decide whether or not a property is worth really taking a look at. The simplest is per unit cost; some I know use cost per bed on smaller buildings. Having these rules at your disposal and understanding how they relate to a potential multifamily purchase will:
- Save you a lot of time
- Make you look smarter and more seasoned than you really are!
I’m going to do some math and I’m only looking at commercial size multifamilies (5+ Units) for the purposes of this post. I’m also assuming a down payment, low-money, no money down stuff doesn’t fly and isn’t available right now so you’ll have to look elsewhere for that math.
Cost Per Unit
This is as easy as it gets. You simply divide the purchase price by the total number of units. But then what do you do with the resulting number? I made a survey of on-market multis in our service area that I’m going to release later in the week but for now I’m going to pull just a few figures out of it and use these as examples.
Parts of Boston are showing average ask prices of:
Cost per bed of $59,474
Per unit average of $123,040
Rentometer shows us that $1250 is the average rent for a 2 bed in the neighborhood. Figure on expenses eating up 45-55% of gross right off the bat (could be more). So that leaves (taking 45%) $687.50 net per month.
Figure on borrowing at a 7% interest rate to be safe (yes you can get lower rates but don’t go around doing the math with lower rates in mind). Figure on putting 25% down.
To achieve a debt coverage ratio of 1.25 your monthly nut can’t be more than $550. That means you have to pay no more than $110,000 per unit as baseline for any properties in this area. You probably only want to pay $100,000.
So if you see a 10 unit building “CASH COW” listed at $1,500,000 you now know right off the bat that if this is standard 2-bed stock this property is overpriced by $400,000… right out of the gate. Conversely you’ll be able to spot a deal from a mile away.
Obviously different areas demand higher or lower rents so if you’re not in or near Boston you have to get a feel for what your market will bear.
Another Bank Owned Property Auction Comes to Town
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Hudson and Marshall is a well known REO ballroom sale type of auction company. They are advertising an REO property auction in the Boston area but they’re not yet posting any property details. Hudson and Marshall is a well known firm with some rather large bank clients. As I find out more info I’ll post it here. The auction is scheduled for May 17th.
Boston Apartment Building Sales Slow
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You don’t have to be an economist or a statistician to see that there are a lot of apartment buildings on the market right now. Pick up tomorrow’s Globe and look in the income property section and there are more buildings listed there than I have seen in 6 years, at the same and sales are slowing. When I’m talking about apartment buildings I’m talking about 9+ unit multifamilies.
The first quarter of 2007 saw 20 9+ unit apartment buildings trade at an average of $2,523,045. The first quarter of 2008 only saw 5 properties sell at an average of $1,657,031. The total dollar volume of deals Q1 2007 was $50,460,911 while it was only $8,285,154.
There are a lot of experts predicting that we won’t see any significant slip in commercial prices this year but with a wave of property coming to market and not a lot moving it seems unlikely to me that prices won’t give. They’ll have to or else would-be sellers will have to withdraw from the market if buyers and sellers aren’t aligned on value.
It’s not that there aren’t any buyers out there I’m working with a number of investors myself who are shopping in this market right now and I know other brokers who are as well. For the most part though they’re sick of looking at 6 and 7 caps on old properties with deferred maintenance and the promise of a “great condo conversion”. At the same time sellers are looking at the price they could have had just 12 or 18 months ago and its hard for them to reconcile in their own heads that those prices are gone and not coming back for a while.
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