Navigating the Distressed Market – for Buyers, Sellers

By Steve Jaffe, Executive Vice President & General Counsel, BH Properties: Some people ask if it is too late to become a distressed investor. In my view, the answer is categorically "no."

Some people ask if it is too late to become a distressed investor. In my view, the answer is categorically “no.” BH Properties has long been a player in the distressed real estate investment market. When the market took the downturn, we, as everybody else, anticipated a RTC-type transition of property. When that didn’t happen and it took longer and longer for properties to work through the system, the one thing that became very clear to us was that we were not going to see a waterfall of properties changing hands. However, there still are distressed opportunities. We have found that in order to be successful in the “distressed world”, you have to be very careful about the markets entered and the properties targeted. The challenge really lies in knowing the market that you are going into and understanding what your investment parameters are and sticking to them.

In addition, understanding the needs of your sellers and the timing that they require in order to close a transaction, makes you all the more likely to get the deal and successfully close it. BH Properties takes pride in our ability to address the seller’s needs, especially with timing. We have been known to close deals in 48 hours which definitely puts us ahead of a lot of other buyers. So, my advice is that you understand what your strong suit is – what unique strength you can pitch to a seller.

But most of all, you need to understand your market. You really need to be laser-focused on what it is you are looking to acquire. Historically, BH Properties has invested all over the country. Currently, we are much more focused in three key markets: Arizona, Nevada, and Southern California. While we will continue to look for opportunities in markets where we have a big footprint, such as Texas and Utah, we have spent a great deal of time in Nevada and Arizona to understand what is happening in those three specific markets. Knowing those markets as much, if not more than, the local brokers gives us our competitive advantage. Full knowledge and a targeted strategy, one, increases our credibility and two, enables us to have access to the most current information.

Again, you have to be very specific about in what you plan to invest. The more focused and knowledgeable you can be about the particular investment and the market, the more serious the sellers will take you. The last thing a seller wants is to have you back out of a deal or re-trade because you misunderstood in what it was you were investing. So there is still opportunity, but you have to work a little harder to get there.

One of the more dynamic aspects of real estate today is the note-buying segment. Over the last couple years, BH Properties has been very active in buying distressed notes. Frankly, what we have learned can help the banks and the selling institutions as much as it can help other buyers. The key component of what we learned about how to market to buyers such as us, is that the better informed the seller is about their product, and the better that information is disseminated, the more likely the buyer will meet pricing and timing. This may seems obvious, but my experience is that sometimes the obvious thing is not so obvious in practice. There have been times when we are underwriting a deal on an expedited basis, and I have been stunned at how quickly we understand the loan better than the seller or the seller’s broker. Granted this is often due to the fact that the seller is disposing of many notes while we are only focused on the one in the offering.

A final point for seller’s broker, it is important to fully understand the needs of your client. Representing the seller, you should know your client’s timing, how quickly they need to close, how realistic the deal is … etc. The broker should also fully understand the fundamental real estate asset that secures the note. As a buyer, I am more interested if the seller can provide all the pertinent information on the property. The more information you can share with me, your potential buyer, the better.