A forest of foreclosures — the afterglow of a financial firestorm, overbuilding and plummeting home prices — roused a buzz within the investor community about bargains galore and bulk purchases.
Some sprawling subdivisions and towering condo buildings, spawned during the fever-pitch housing boom, years later contain more vacant units than occupied ones — some were never sold; others were sold and soon after ended up in foreclosure.
While the glut of vacant units has stirred interest from buyers and buyer groups seeking to seize upon dozens of bank-owned (REO) properties, bulk sales are still more the exception than the norm in most foreclosure-saddled markets, say experts.
"There’s been a tremendous amount of offers but only arm’s-length deals have occurred," said Peter Zalewski, a principal with Condo Vultures Really LLC, a firm that generates offers for bulk portfolios from various funds.
Paul Roper, co-founder of REOLynx, a company that seeks to bring parties interested in bulk REO liquidation sales together, said there have not been many large-pool deals, citing servicers that are hesitant to release units.
"We’re seeing a lot of lenders that are waiting around hoping that prices will go up so they can get better values," said Kurt Smith, president of BulkREO.com, a company that similarly works to facilitate bulk sales.
Smith and other experts cited a gap between buyers’ bids and the lenders’ asking prices as one of the key reasons bulk sales activity has been minimal.
"While many (investors) had planned on making bulk acquisitions (in 2008 and the early part of 2009), in most cases the lenders weren’t realistic about the bid/ask price," said Jack McCabe, a consultant with Florida-based McCabe Research and Consulting.
According to Chris Wiley, co-founder of REOLynx, the most aggressive bulk-package bidders he’s seen are typically local and regional investors whose bids have been 35 percent to 45 percent less than the average sales price or listing price of the development’s units.
Bids by speculators who operate nationally tend to be at least 45 percent to 55 percent less than the average sales price or listing price of the units.
Meanwhile, lenders tend to accept offers that are a maximum 15 percent to 20 percent below the listing price, he said.
But an important question is: Are the lenders and potential buyers using the latest data or stale data to arrive at a fair listing and offer price?
Zalewski said institutional lenders are looking for investors willing to spend at least $20 million and purchase at least 51 percent of a given project.
"You have to be tight with the lenders (in order to close a bulk sale)," McCabe suggested.
While the price gap between lenders and investors has occurred for at least 18 months, some sellers have recently become more realistic regarding bulk portfolio values, said Pamela McKissick, president of the auction company Williams & Williams. …CONTINUED
South Florida bulk sales
One location where lenders have become more realistic in terms of pricing for bulk sales is South Florida, where 14 bulk deals have closed since July 2008. Most of those sales have occurred in downtown Miami, with nine transactions occurring after May 2009, according to Condo Vultures data.
Additionally, at least two bulk deals are scheduled to close or are already complete but not yet recorded in government records.
"The bulk deals were slow until this year," McCabe said. "Some (investors) are going after REO assets and others are looking to perform underlying debt (a bulk note sale)."
Zalewski said some bulk REO sales have occurred, but the focus is currently on discounted note sales and bulk short sales where the lender, which is oftentimes out of state, has yet to take back title and doesn’t have the desire to go through the foreclosure process.
One example is a recent sale that involved a Miami development and management company that purchased the outstanding debt of a construction loan for the 28-story Onyx on the Bay condo tower in downtown Miami.
In purchasing the note secured by 40 unsold units, the buyer Hyperion Onyx Partners LLC steps in the place of the lender who initiated foreclose proceedings against the project in May 2009, according to a Sept. 16 Condo Vultures release.
Hyperion Onyx paid an undisclosed price — rumored at $155 per square foot — for the outstanding balance on the original $46.1 million construction loan — or an average of $303 per square foot — provided in October 2004.
With the Onyx sale, bulk buyers have acquired a total of 806 units in South Florida, mostly within downtown Miami, for nearly $199 million, or $210 per square foot, Condo Vultures reports.
The first bulk deal in downtown Miami and the largest in terms of units purchased occurred in July 2008, when an opportunity fund purchased 146 units in the 50 Biscayne condo tower for $246 per square foot, or $36.4 million.
Another early bulk deal closed in December 2008, when a Singer Island, Fla.-based entity paid $200 per square foot for 60 units in the Marina Blue condo tower.
According to McCabe, Zalewski worked on this bulk deal. But Zalewski declined to comment about the deal, citing a nondisclosure agreement he signed.
Similarly, multiple messages left for attorneys who represented bulk buyers, and members of private equity groups who have made bulk purchases, were not returned.
"A lot of deals get done discretely. Sellers and buyers don’t want others to know what the pricing on those deals was," McCabe said.
Other notable bulk deals that have occurred in South Florida include Brickell Station Lofts LLC, which paid $126 per square foot for an entire 63-unit residential tower dubbed Brickell Station Villas in Miami, according to an Aug. 26, 2009, Condo Vultures report.
The tower was never able to open and the equity group paid $10.24 million — a 42 percent discount on the original loan amount. …CONTINUED
The second-largest bulk deal reported by the company occurred in February 2009, when a publicly traded Scandinavian investment firm, based in Norway, purchased 141 units in the Whitney condo development for $24 million, or $144 per square foot.
Several months ago a South Florida private-equity group dubbed Elcom Condominium LLC purchased 51 condo-hotel units at a discount of 94 percent off the average recorded sales price for a unit.
However, that price — $2.6 million, or $63 per square foot — was contingent upon Elcom also buying the ownership stake in the condo-hotel’s common areas and land, Condo Vultures reported.
Future bulk-deal locales: Las Vegas, San Diego?
While South Florida may be the only market where bulk sales are occurring on a regular basis, other markets appear prime for future bulk sales activity, say experts.
"In Las Vegas there are (many) empty condos on the strip, but the banks haven’t come to the realization that the properties aren’t going to sell for what they’re demanding," said Bill Rigdon, part owner of Condo Vultures, adding that lenders are sitting on some units.
Condo Vultures has tried to work with several banks and developers in Las Vegas and has come up with what Rigdon considers viable numbers that should allow sales to move forward. However, lenders and developers might receive calls from 30 or 40 other interested parties — which can lead them to reconsider.
"Their tune changes. They want to hold out and try to get more (money)," he said. "They’re taking huge losses right now."
Similar to Las Vegas, downtown San Diego has a glut of vacant units within high-rise condo projects.
"(T)he problem is you still have Realtors going around and getting $350 a square foot on some of the pricier product," Rigdon said, adding that if Realtors make a couple of sales within a development the lender might take that to mean sales activity isn’t so slow.
"You have properties about to get there with the bulk buyer, but the Realtor is telling the owner, ‘We can sell at a higher price,’ " he said.
Prior to going the bulk sales route, some downtown San Diego condo developments, such as Smart Corner, are turning to auctions.
The project’s developer, Lankford & Associates, recently announced it will auction 49 of the project’s remaining units on Oct. 11. Minimum bids will range from $129,000 for studios, $149,000 for one-bedroom units, and $219,000 for two-bedroom units. The previous listed prices were up to $342,900, $411,900 and $1.1 million.
The developer is utilizing at least one freeway billboard to advertise the auction.
With Las Vegas and San Diego appearing prime for future bulk sales activity, Miami and the South Florida region in the midst of a bulk sales market, and other cities such as Los Angeles and Phoenix likely locations for future bulk sales, McCabe forecasts that a significant redistribution of property and revaluation of that property will occur in the next two years.
"I wouldn’t be surprised if you see some (private equity) funds where they complete a bulk deal get credibility (with lenders) and other deals flow," Zalewski also predicts.
Erik Pisor is a freelance writer in Southern California.
What’s your opinion? Leave your comments below or send a letter to the editor.