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Opportunistic buyers look for ways to scoop up delinquent loans and properties for deep discounts
March 2009: South Florida Business Journal
by Brian Bandell
The Villas at Lauderhill was about as beaten down as a development could get.Hurricane Wilma had battered the 405-unit apartment complex in 2005. The slumping real estate market negated the plans for a condo conversion there. In April 2008, the city told residents the damage was so bad they had to evacuate.
Intervest National Bank won a $20.9 million foreclosure judgment against Villas at Lauderhill in July. Soon after, West Palm Beach-based Priderock Capital Partners bought the assignment of bid from the bank for a fraction of the judgment amount and then took title to the property.
With help from a $21 million mortgage from BB&T Real Estate Funding, the new owners are rehabilitating the apartment complex, which has been renamed the Glenn at Lauderhill.
It should take a year to 14 months to completely rehab the property, said David Khoury, a managing principal of Priderock. They should begin leasing part of the property in June.
With so many South Florida developments in foreclosure, opportunistic buyers are looking for ways to scoop up delinquent loans and properties from banks at deep discounts. Even though the real estate market is struggling, a project can still generate income if it’s bought for enough of a discount.
Condo Vultures Realty CEO Peter Zalewski said six of every 10 investors who contact him are looking to buy the distressed mortgage note first. Many of them are looking to pay 50 cents to 60 cents on the dollar, based on loan balance, he said.
“There’s a position of power in possession of that loan,” Zalewski said. “You bought it at such a big discount from the construction loan that you can sit for a few years and wait for the foreclosure to go through.”
Priderock had spent a considerable amount of time negotiating with Intervest to buy the note on the Villas at Lauderhill and getting an estimate on the rehabilitation cost, but it decided to wait until the bank won the foreclosure judgment to reduce the risk of a legal delay, Khoury said.
George Banks, another principal at Priderock, said his company pulled back on new construction two years ago. Now, it has pooled investor funds and is going after distressed properties. However, Banks cautions that deals like these are very complicated and require a great amount of due diligence on both the physical property and its legal status.
Carey Stiss, a partner in Miami-based Bilzin Sumberg Baena Price & Axelrod who helped Priderock close the deal, said a legal review is a must when buying distressed loans and projects. A lawyer should review zoning, permitting, the foreclosure lawsuit and whether the developer’s contracts, including presales, might apply to the foreclosing entity.
“What we are seeing right now is a lot of investors looking for promissory notes to acquire, but they are afraid to touch the real estate,” he said.
Properties with immediately or near-term cash flow are the easiest to work a deal for, Stiss said. It’s much harder to evaluate the costs and return on investment for an uncompleted project, but the bank should accept a lower bid, he said.