In Foreclosure Times Distress May be Turned into Opportunity

Posted on February 9, 2009
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If one knows how to operate the keys then during these foreclosure times, distress could be turned into opportunity.

Harry Macklow took over Drake Hotel about three years previously and began to purchase many properties surrounding it. It was expected that he would develop the area into a jumbo office complex. But the market meltdown saw Macklow defaulting on his loans and the potential buyers are bidding at ridiculously low prices.

The catch is that the Drake property is not available for direct sale. What can be bought is $200 million loan on the land that covers a considerable portion between Park Avenue and Madison Avenue. The buyer will own the major portion of the debt. This means that if luck once again favours Macklow, he will have to pay this buyer first to clear the loan and take over the lost ownership. If Macklow fails then in the event of a foreclosure the owner of the note will be in the best position to become the owner.

Thus there is a shift in the commercial real estate market from buying and selling of property to the trading in debts. Robert Freedman of Williams Real Estate based in New York commented, “We are expecting a flurry of deals like the Drake Hotel site, where it is the loan that is for sale, not the actual real estate.” The company is now creating a special sector to handle these types of deals.

During the boom the developers had relied heavily on debts to finance their purchases. Now that the commercial market is in trouble many of these borrowers are defaulting. This is allowing for the banks and other private equity firms as well as hedge funds to own these huge commercial properties. But the lenders badly need the cash and are keen to offload these loans, Moreover they do not have the expertise or the resources to deal with commercial real estate. It has resulted in commercial brokers who hitherto dealt with sale and purchases of property marketing loans and mortgages now.

David Schechtman of Eastern Consolidate said, “I am inundated with calls from banks who want to sell their loans. In just the last few weeks, I have also collected a list of 30 clients – primarily high-net-worth individuals, long-established real estate families and small opportunity funds – who want to buy up these loans.”

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