Category Archives: Deals

Gardena Industrial Summer Preview 2018

The Gardena market continues to rage. Could be the best industrial market in the United States. Certainly prices are amongst the highest.  After doubling in five years, year-to-year increases are still rising but more moderately. Space shortages are severe and causing tenants to panic who do not have a long term home. Space Scarcity will keep values high. Land rents are soaring dues to restrictions on trucking in many municipalities. Lots of space is trading in the off-market, quite a bit on our Industry Lands platform

While Gardena has been our business home for 35 years (and no one has better relationships), we have a strong national presence and are more effective than larger companies. We are not locked into one organization like the national brokers but can pick the best SIORS in any market we choose. I’ll be in Warsaw, Poland this summer to Co-Chair our European Program and make more international connections.

Besides our 35-year industrial brokerage career in Gardena, we have two new initiatives. We are applying tech to get more space on the market. Sharing, A.I., analytics, and automation are new ways to make more space available by improving older, infill industrial buildings. We are looking for investors and investments to purchase more property. More information can be found at IndustryLands.com.

636 E. Rosecrans, Gardena, CA, 90247 (Unic L.A County) – 17,327 SF on 2.8 Acres – For Lease

636 E. Rosecrans, Gardena, CA (unic, L.A County)
17,327 CTU Building on 2.8 Acres (122,262 SF) +/-
All Concrete Yard
5,000 SF 2-Story Offices
Many improvements including:
Wash Rack and Clarifier (1500 Gallon Capacity)
In Ground Diesel – (2 @ 5,000 Gallon)
(2) 5-Ton  Overhead Exterior Crane Way; (1) 2-Ton Interior
Weld Shop; Lockers;
Excellent Condition
For Lease at $45,000 per Month ($.368 NNN psf/mo)
Property Taxes for 636 E Rosecrans Only – $30,000 Annual +/-

Avalon_and_Rosecrans_2-sided

Zoning: CSD West Rancho Dominguez

For further information please contact:
Jim Klein, SIOR
310-493-0053
jimklein@kleincom.com

 

Real Estate Deals in the GIS and Data Universe

 

Good technology can improve real estate deal making. This article describes my experience with Geographical Information Systems (GIS) and how it has become a fundamental tool for my business.  At its simplest, GIS programs are a visual adjunct to database and contact management programs.  However, if used to its fullest, GIS can crystalize multiple property relationships to monetize real estate information by traditional forms of deal making, solve complicated problems and create new business models.

So far, in the traditional real estate industry, retailers have taken the most advantage of GIS programs by making strategic location decisions.  On the other end of the spectrum, new place-based businesses, like Yelp and Four Square use location data to build profitable, mobile enterprises. To put mapping in their proper technological perspective, consider the furor when iPhone tried to replace Google Maps with its own inferior Apple Maps.  Mapping has not only become ubiquitous in everyday life, it should be an essential part of every real estate business.

 Creating robust GIS applications has never been easier. There are inexpensive open source programs, a quantity of excellent data, and many ways to host and share applications. It’s easy  to connect to other good mapping programs through  Application Programming Interfaces (API) and Web Map Services (WMS) that when used together create powerful mapping programs.  Is this perhaps a little too technical?  There are now graduate level GIS programs being offered in 160 universities teaching great consultants to adopt mapping technology to your everyday business life. GIS is used in all sorts of industry and government departments to make critical business and marketing decisions.  Hedge funds and financial institutions are using GIS and data warehouses as a backbone to trade mortgage backed securities and real property assets, hopefully more prudently than they did in the past.

GIS combines spatial data or geographical information with non-spatial data, for example, market information (comps, tenants, owners, etc.). Many of us simply keep market data in our heads or in very basic databases. Few of us use complex algorithms to tackle complicated market problems.  Programming languages are not part of our vocabulary.  But as you are reading this article, there are computer scientists that are using the entire universe of property and geographical data “to crunch the numbers” and create very lucrative real estate businesses. 

The most obvious examples of companies using universal property data are information providers that many of us rely for our daily work. For instance, Co-Star, NAR, Niteowl, and Exceligent all have products that combine data servers and mapping capability. There are other firms like REIS or Real Capital Analytics that collect property data for extensive statistical, reporting and analysis purposes. The question is how many of us use very commonplace data analysis and mapping tools in our daily business?

I’d like to say that I do.  Alas, I’m barely one step above using Google maps and Excel spreadsheets.  But in my own rudimentary attempts at mapmaking and watching the powerful effect it has had on customers relationships, I see how GIS and data management will play a larger role in our industry.

My personal experience has been to create an application, called MAPP, designed for the way I work. Because my biggest deals have been finding “off-market” development sites, I’ve created a very simple GIS program that is able to identify infill land and older teardown buildings.   In other words, I have designed a program to meet a set of customer objectives by identifying and segmenting various property data from the entire universe of possibilities.  It’s one area where GIS is uniquely capable.

One concrete example is multiple properties I sold for self- storage development over a several year period. The majority of sites were “off-market”.  My MAPP program allowed me to match all other existing self-storage properties owned by competitors on the same map so we could immediately create a trade area of the entire universe of self-storage buildings and instantly see “off-market” locations that had ideal spacing.  By querying the owner database I created a target list of likely properties that resulted in deals.

A more recent example is a customer who purchases underdeveloped land near light rail stations.  By writing a basic radius query that identifies all property within 500’ of a rail stop, I have identified and sold several sites.  My next goal, in keeping with economic recovery, is to put the application to use by identifying large buildings in and outside of my traditional market to see if MAPP can locate ideal purchase opportunities.

GIS has its own intrinsic logic that answers questions about location and property data. If you have the right data sets, you can write a query much like an algebraic equation. Here are a few queries I have used:  Compare warehouse locations based on how much fuel will be used for customer deliveries.  Return a list of every large warehouse on a BNSF line that is within 5 miles of the Port of Los Angeles. Search for corporate owned Brownfields in the final stage of a work plan. Name every non-institutional landlord who owns buildings larger than 200,000 with extra land.  All these queries can be answered manually, but by writing a little code for GIS logic, the answer is fast and thorough.

Technically, I started my odyssey with an open source program called Map Window. The program originally resided on my local computer. I hired a GIS expert I found on Craigslist and an offshore database programmer. Parcel and ownership data is available for purchase from most counties. Municipalities offer shape files that depict all forms of urban infrastructure including rail, utilities, zoning, and of course geographical features.  I have since migrated the system onto a web server so the application is cloud based. The data I collect runs on a MYSQL server that runs independently from the map program. Because I use open source software and hire programmers located mostly in southern Asia, costs to build and maintain the program are modest.

While the technology part is important, the ability to create a specific environment around map information and to provide a solution for the customer has been the greatest benefit.   It’s by problem solving and collaboration that creates strong relationships.  Perhaps it’s no surprise that most clients are not very interested in using or understanding the MAPP application, they just want to see the selected reports and deals that can be generated. And that’s fine by me.

Even though I’ve been developing my MAPP program for several years, I’m only just starting to learn. GIS programs can be used to collect, analyze, and deal with the world’s property data in sophisticated ways. As more people begin to realize how relatively easy it is to build, I expect GIS will also start playing an important role in your business.  Because GIS is part of a large user community, I look forward to helping others as they have done the same for me.

)This article was published in SIOR Professional Report – Spring 2013)

Questions About The End of California Redevelopment

We are starting an extremely interesting and confusing period as redevelopment agencies (RDAs) come to an end. Firstly, RDAs were a powerful force in every city’s arsenal. They employed large staffs and had enormous budgets. A lot of the built commercial world is attributable to redevelopment through direct land contribution, infrastructure, subsidies, guarantees, loans or other physical or financial contributions.  RDAs created a lot of very good development that would not have otherwise been built. High quality, low income housing units were developed.  Many private and capable developers profited.

Legislation (AB X1 26) that allowed for redevelopment’s dismantlement appeared as if it were a minor line item in the Governor’s budget.  Many redevelopment  professionals did not take the legislation seriously. Many staff members at the RDA’s had a sense of their own special value and mission. With the weapon of eminent domain at their disposal and a large war chest of tax increment funding, RDA’s had enormous power if they wanted someone’s property. Attorneys were always available to defend RDA actions. The only remedy for a disgruntled private party was to obtain a better valuation in front of a judge. This same sense of entitlement led the RDAs to court in order to challenge AB X1 26 instead of negotiating with the Governor for a share in the tax increment. But the RDAs lost and the Agencies are now gone.

But what is not gone are the hundreds of projects in various stages of completion and an enormous financial obligation to pay bondholders that financed these developments. The biggest question and greatest complication is that there are no detailed rules that can be used as guideposts. Only the barest instructions are available and they mostly consist of the institutional framework and not the details of dismantlement. In other words each RDA has flexibility to wind itself down as long as it meets state oversight.  Many cities have decided the risks of administering the end of their RDA is too great and have abdicated the responsibility to the state. Los Angeles is the largest example. Nelson Rising was selected yesterday to be part of the three person panel to unwind the Los Angeles RDA

I took a look what the RDAs own in Los Angeles County. I counted almost 2500 parcels of land. Some parcels comprise one project area but it is an enormous amount of property. Many of the sites are in very valuable commercial locations or are perfect for multi-family development.  By next week I should have it mapped out as a feature layer on my MAPP program.

Will the vacant properties be sold if there is no agency to manage them? Will the proceeds for the land sales be needed to offset bond obligations and administrative costs? What kind of conflicts of interest will be created by the selling agencies? Who will be hired to evaluate and dispose of the sites? What is the future of subsidized development? Will new city agencies be created or will exisiting ones take over the redevelopment mission in another form?

I have already heard from a few clients that they are eyeing certain properties. The same developers who already partnered with the RDAs and have proven capabilities are in the best position to purchase these properties. It is after all a very small world when it comes down to the final short list.

Order can be brought to the disposition process. The ideals that led to redevelopment can still be preserved as properties are sold. However the challenge is enormous because of the large number of sites, the value of the properties, and the clunkiness of any disposition apparatus on this scale. Unfortunately, many cities and government agencies that have operated by weak legal standards or lax oversight in the past may be tempted to dismantle their RDA’s in the same manner.

We are just at the beginning of the process but I expect it will heartbreaking to many and an opportunity for some. For readers that want a better understanding of the end of California Redevelopment, one of the best sources is The California Planning & Development Report. It makes their publication essential reading.

HOW ARE THINGS LOOKING?

 

Customers always ask me, "How do things look?" Here's one way to answer.  In this roughly one square mile grid of Broadway/Rosecrans, there are about 120 buildings of decent size. I count 25 that have availability. Perhaps not the entire buildings are on the market, but enough to depict this picture.  That's about 20% of the buildings with significant availability. I'm working on a lease in Chatsworth and there is even more yellow. This is  a pretty consistent picture throughout Los Angeles.  In contrast, there have been times when there is no yellow.

On a transaction level,  Landlords need to swallow a lot of pride to make deals. Rents are substantially below what anyone ever anticipated.  Tenants are negotiating hard.  On the sale side, and this is a surprise, some prices are much higher than one would expect based on rents.  The high ceiling, good-loading gem boxes are selling and mostly to Buyers who can take advantage of the cheap dollar. Older manufacturing buildings, like those found here, have not shared in the price recovery to nearly the same degree.

While activity is perking up slightly, it's spotty and unsteady.  In my case, I get a small run going and all of a sudden it's cold again. Likewise,  my broker friends may make a big deal, but then the spigot turns off.  Fund activity and build-to-suits are the source of considerable focus, but getting inside those deals are challenging.  Finally, there are some great land pieces all across Los Angeles, but it is still the most risky of all categories.

Overall, the picture is very uneven but as we move towards the rest of the year I expect to see less yellow on the map, and hopefully, more green in our pocket.




 


KLEIN NEWS FALL 2010

Activity Is Up, But Far From Celebratory

With the year of fear behind us and summer doldrums over, should we expect an increase of activity? Compared to the past two years of bad news, yes, activity is up. Many businesses that were paralyzed with fear are now investigating opportunities in the property market.  Private companies are looking for space just in time to replace the waning influence of government stimulus. For instance, businesses that can access low interest rates are in a particularly enviable position. The evidence is demonstrated by a few stellar deals that were purchased by a few brave souls who struck when no one else could.  Now that the great fear has receded, we are left with a bad market instead of a catastrophic one.  Buyers and Tenants are coming out of their shell to see if they can find bargains and re-launch business plans.

Up to this point in the Great Recession, property had to be priced less than either side imagined. This logic will continue, but as business emerges from hibernation, the sentiment will change from price to quality and functionality. There is no doubt this will take time and one sign will be if demand strengthens through the Holiday Season. Another sign is when I get together with my broker friends and we have deals to discuss unlike in 2009. I’ll report back if these conversations continue. 

Using the abyss as a reference point does not make for a very balanced real estate market.  But now that companies can make business decisions without the fear of being wiped out, we are inching back to practical business outcomes. But don’t let me lead you too far astray. Painfully slow growth still means long vacancy times, very marginal business expansion, and continued disappointments.  The big unknown, and a common refrain from clients, is what type of additional government action could either derail or improve a creeping recovery. Midterm elections will be one sign, but plan old leasing activity will be the best indicator.

Trust and Contracts

One lesson from the Great Recession is the importance of trust and relationships. It became clear who would stand by you in troubled times. It could be Lender and Borrower, or Investor and Developer, but Landlord and Tenant is the most familiar. While all these relationships are contractual, weak business conditions made them personal.  Rent relief was one example that demonstrated mutual reliance. Landlords would forgo rent increases or lower contracted rents in exchange for term extensions. This provided lower tenant occupancy costs, but also gave landlords better leverage with their lenders. I was a party to a few negotiations when the tenant needed help because of financial difficulties. To their word, the tenants recovered and resumed paying like clockwork. Needless to say, tenants who are perennially late or careless never receive this benefit.

Strangely, many Landlords who could not provide this relief have been unfairly tarnished.  Even though these Landlords simply abided by the contact many tenants felt betrayed. Tenants don’t realize that property owners have investor and loan obligations that don’t allow forbearance. Still, on more than one occasion I’ve had tenants make leasing judgments based on the owner’s flexibility during the crisis. Expense pass-throughs, capital replacements, and wear and tear are also areas where tenants felt misled, but are also provisions that are not well understood, explained, or negotiated.

In fewer and fewer circumstances, there is a property owner who has the power to drive down, meet the tenant in person, listen to the grievance and make a handshake decision on the spot. Too often the norm is unreturned phone calls, letter writing sagas, and poor committee decision making. While the intention is good, many larger landlords are not structured to deal with tenant financial calamities. Principals who have established trust during the negotiation and occupancy stages are more apt to help each other. Relationships solely based on the contract will lack the personal flexibility in crisis and can damage both sides equally.


 

MAPP 1.0 PROJECT

We are just finishing our first version of the Map APP (“MAPP”). It's a mapping program designed to give a spatial view of Los Angeles County commercial real estate with a focus on industrial property and infill land. MAPP combines aerial photos, parcel maps, zoning, and our personal tenant and owner data. Google Maps is incorporated for its search function. Visually, it looks like the GIS programs that many larger cities have to catalog their land use. In addition, MAPP works on a County level basis and it can be paired with different databases that have special attributes. It works particularly well for those who hunt for commercial corners, developable land, or off market buildings, to name a few examples. Because MAPP includes tenant data, it’s helpful to identify prospects, by size, use, or location, for empty buildings.

Unlike the ZIMAS portal at LA City, or the corresponding GIS-NET program at LA County, MAPP has full ownership records, the ability to generate mailing and contact lists, and to identify properties with special characteristics, en masse. For instance, we can identify all development sites within 500’ of a metro stop, properties located in special economic assistance areas, or industrial properties served by rail lines. Available and potentially available properties can be viewed for an armchair tour. MAPP will write back to the database so as you traverse the County it will record properties that are visually identified.

We will be using MAPP 1.0 for customer assignments and showing the program on WebEx conferences by mid October. Because of vendor agreements, use of the program will be limited to clients and specific projects. MAPP will cover a lot of ground and provide fairly complete information quickly. The database is customizable to specific client needs and processes.  By incorporating programmers, mapping technology, and open source software we can begin to adapt to a post recession environment. One goal is to locate and evaluate opportunities in a mobile and connected world. The other goal is make customers better at what they do.


Recent Deals

3 Acre Land Sale in Huntington Park.

2 Acre Truck Yard Lease in Gardena.

50,000 Square Foot Lease in Carson.

7,500 Square Foot Lease in Gardena.



New Listing at 14710 Maple Avenue – 50,000 SF of Ideal Manufacturing with Large Yard

2 Units Remaining – Best Small Distribution, Gardena – 7350 SF and 8650 SF

5 Acres for Sale on Los Angeles Avenue, Simi Valley, CA – 100% Location.

1.6 Acres Available for Free at Wilmington, NC Airport.

 

Thanks for Subscribing,

Jim Klein, SIOR

310-451-8121

jimklein@kleincom.com

INTRODUCING MAPP 1.0

 

 
Over the summer we created a commercial real estate mapping application that combines the important commercial real estate information  for Los Angeles County in one place. It is designed to help buyers, tenants, developers, and investors get a spatial view of the real estate commitment they are about to make. We call this map application MAPP 1.0.

MAPP 1.0 combines source data from the following areas:

  • Parcel Data including all relevant Assesor information and shape files.
  • Aerial Photography superimposed over the parcel data.
  • A proprietary database containing all Tenant, Owner, and Available Property information.
  • Zoning from the largest municipalities in the County (more is being added weekly).
  • Special  districtsthat allow for high density development.
  • Custom fields describing the investment quality of the buildings, the potential for infill development, and field notes.

While additional source data is being added for more functionality, MAPP 1.0 can quickly identify the primary attributes of every property in Los Angeles County. The initial focus is being placed in our specialty areas of larger industrial buildings and infill development. Our 30 years of brokerage experience has demonstrated that sometimes the perfect property is listed on the open market, however more times than not, it takes searching the off-market to locate the more perfect opportunities. For instance, MAPP 1.0 can locate all development sites within 500’ of a Metro Rail stop and determine the likelihood of a purchase. We can identify every rail-served parcel in the County for those businesses that require rail service. MAPP 1.0 can find older teardown properties that are ready for redevelopment.  For marketing property, if you have a 100,000 square foot building, we can locate every tenant in a smaller building and quickly generate a list of prospective tenants.

While we are immediately working on upgrading MAPP 1.0, we have developed a unique and powerful real estate app. We would like to demonstrate MAPP 1.0 and put it, and us, to work for your next commercial real estate decision.

 

Tenants Are the New Opportunity Buyers

Tenant decision making has radically changed since the Great Recession. The combination of low interest rates and falling prices mean that mortgage payments are the same as or less than rent.  This has been a fairly rare occurrence over my 30-year career. Tenants with established histories are finding some great bargains. Even companies that may have difficulty obtaining loans and lack large down payments can team with sophisticated investors to solve many financing hurdles.
Searching for deals was once the domain of shrewd real estate operators, but uncertainty, credit and legacy problems have sidelined many of the aggressive buyers. Because of vacancy risk, the value of a tenant is the critical difference in closing deals. With the threat of slowing growth, a year vacancy can destroy a proforma. In other words tenants have become the only viable buyer for many properties.
Before the recession, industrial real estate was marketed on an efficiency ranking.  Physical attributes such as maximizing throughput with loading doors, yard depths, ceiling heights, and access was the primary criteria for many tenants.  Many developers and users strove to create the the best designed warehouses for maximum velocity. The supreme example is a cross-dock building with large side yards for container storage. Metrics included number of loading doors per square foot and cubic storage capacity. While tenants will always want functional properties, many will sacrifice the most efficient features for more affordable occupancy costs. This is a significant change wrought by the Great Recession. A lower rent for a less efficient building is an outspoken preference.


The desire to reduce costs coupled with an eye on profiting from property has changed the dialogue with tenants. Not only is there a wide selection of choices, but many tenants are starting to probe more deeply. They want to know when the property was acquired and what are the characteristics of the property owner. If the building was purchased in the boom, then price flexibility will be limited until the bank takes over. Moms and Pops tend to be better Sellers than institutions, although not necessarily true in every instance. Certain areas also tend to be better long term investments. Cities with a history of good governance and pockets of institutional ownership are a couple examples of preference.


Over the years, some very smart buyers have followed a different acquisition strategy that bears some reflection. By luck or by skill they have located their businesses in locations that receive preferential zoning entitlements. These properties could be in high density commercial corridors, near transit hubs, or for other reason are more valuable than the existing improvements merit. In a growing city like Los Angeles well located properties go through periods of excessive valuations. While we may be some time from development activity, if a user can satisfactorily occupy an older, well-located property, upside will drop in his lap.


In the first part of this year, there have been some very good purchases.  I have seen prices as low as $45.00 for older properties that need work, but mid $50’s to mid $60’s for rather decent buildings. One of the largest, but older industrial buildings in the County sold quietly this year in the mid-$40’s. This is not to say deals are easy to find, but with declining economic news, we are closer to the beginning than the end of the deal wave.

The Port Strategy Fallacy. It’s the Deal That Counts.

 

Both brokers and investors tout the strengths of investing in markets with a vibrant harbor and airport. This has been a pronounced strategy from at least 1997 when container imports began increasing beyond incremental growth. Many institutional investors have dubbed this the Gateway Strategy. But grand proclamations like these normally lead to increased competition amongst buyers and lower returns. If history is any lesson, the money was made by the first round Buyers who purchased these distribution buildings at distress. It was the following group who used port dynamics to justify their high purchases and are now sitting with vacant and poorly leased properties at rents vastly below proforma. In retrospect, it was the deal strategy that made investors money. Being located by the port was secondary. 

The Port Strategy became a marketing ploy that led to an enormous exaggeration of demand. It becomes evident as one moves further away from the Harbor, through the Inland Empire, to Las Vegas, and as far away as Phoenix. This is the route of the west coast warehouse boom, and unbelievably, developers actually marketed warehouses in Arizona as Los Angeles Port locations. It may well be that just as we saw de-industrialization occur in the 1980's, we will soon see de-warehousing along interstate routes of 10 and 15.
 
Ports do bring activity to areas that receive incoming merchandise especially in contrast to declining Midwest industry. But as consumer spending slows, the need for warehousing  diminishes. An expanding population will lead to moderate growth, but no longer to the levels predicted from the container volume boom. We've already experienced the impact from surging from Chinese production. Buying again into the port fallacy will need to wait for better evidence.
 
To make matters more challenging around the Los Angeles Harbor, many investors need to compete with an extremely large property owner who received vast tracts of industrial land for free when in service to the King of Spain at the founding of California. Normally, when there is an abundance of activity, there is enough absorption for everyone, but in a down market, the "low basis" landlord fills up first. Factors to today's leasing market has a very historical precedent. 

Likewise, students of current history will look to this period as the day of the individual deal. Finding property in these deep recessionary conditions takes place one property and one user at a time. Investors will count heavily on brokers because of the hard work and relative scarcity of opportunities. Many searchers are armed with sophisticated database and web tools to weed through broad swaths of the greater Los Angeles market. This year there have been a couple creative deals where large investors have purchased hulking, junky buildings at land value. They are able to enjoy a fair current return with bottom-of-market rents, while land banking for future development.  Another example is a breakup of a large manufacturing plant that had its component parts sold off in pieces at a profit. Mostly however, until lender forbearance wanes and bankruptcies wind their way through court, most investors will need to dig harder or look for another profession.

In the "B" market where I find myself most of the time, $.35 NNN rents conservatively equates to an investment purchase price in the high $40's and so far those types of deals are not available. If someone has a higher value estimation, we may be able to do some business together. Conversely, Users can find some opportunities in the low $60 level. I've  seen a few building examples where the mortgage payment is not much higher than rent. Plus a business can establish a permanent home with all the ancillary benefits of creating a Place. There are some excellent properties on the market that Buyers would have fought over in better times. Needless to say, the lease deals are great.

If you like the hunt and are not burdened with excessive debt this is an excellent time to look for property deals. But be careful of any stories that go with the offering. We are in a period of extreme fundamental analysis in a market that can easily decline further.

Foreclosure Land

It’s late in the Summer and temperatures are hitting 100 degrees. A few people are setting up large beach umbrellas in a tall tree planter. Others are unfolding beach chairs. Someone is dragging  a large cooler full of beverages and food for the day. It’s not an unemployed broker’s beach paradise, but the west steps of the County Courthouse in Norwalk – the largest property auction of our lifetime. On an average day $30 Million of Trust Deeds are sold.  The daily street auction is unsanctioned by the government and there is no institutional oversight. Day after day, it is the lender’s clearinghouse of foreclosed mortgages  where  clever real estate buyers  stuff their portfolios full of cheap property. It’s a feeding frenzy of real estate bargains that may never be repeated.

 

Even though the sale takes place under tattered canvas and bidders are mostly clothed in shorts and sandals, it doesn’t mean the bidders are naive. Just the opposite. Many are armed with bluetooth headsets, tough book computers, and researched spreadsheets. The bidders are linked to their investors who have accumulated large pools of money to purchase property at 50% discounts. The sheer number of properties being sold, distant locations to underwrite, and fast pace requires competence and organization. While several websites like Foreclosure Radar and REtran  monitor the data, it’s the buyer’s experience in building, marketing, and financing that is essential.

 

Sales are closed in real time without due diligence. Many investors monitor simultaneous auctions in Van Nuys, Pomona and other county locations where vast foreclosures occur. Some buyers simply come to the sale with a list of properties and their top price. Others are evaluating on the fly while their associates are scouting the sites to make sure the properties aren’t damaged. While on-site bidding increases by hundred dollar increments, the investors use the precious few minutes to make final decisions.

 

For years, late night pitchmen showcased the money making potential of foreclosures. Most viewers felt misled because there were no distressed properties. Finally, the foreclosure charlatans have been vindicated. It’s true. There’s a lot money to be made buying foreclosures. Latest statistics show 10% of L.A. County homeowners have received delinquency notices. Still with hundreds of properties being sold on a weekly basis only a very few buyers can participate. It’s all cash at the sale and you need to show your funds before the bidding starts. On sale days, millions of dollars in Cashiers Checks are stuffed into worn envelopes, but they reside in only a few hands.

 

There is no competition from institutional investors. Decisions are instantaneous and although total sales volume is high, each property is too small for large organizations to analyze.  As it stands now, the best buyers are smart entrepreneurs, many from distinct ethnic backgrounds. Armenians buying Glendale, the Chinese in the San Gabriel Valley, and Persians covering Beverly Hills. A few years of this business and fortunes are made.

 

Meanwhile, plenty of mistakes occur. Many properties are purchased too early in the cycle only to see values fall farther. But with 50% margins, these buyers can drastically undercut the average homeowner. They are not trying to resell at the market price, but only at a profit. It partly explains the downward cycle. In many markets, pricing is being set at the foreclosure level.  While a few buyers will rent the properties and enjoy the cash flow. The majority will flip so they can redeploy the cash into new bargains. Occasionally, commercial properties are purchased, but most of the behind the scenes activity occurs  a few blocks away in the County Recorders Building.

 

Normally, the Recorders Office wouldn’t cause much excitement. It houses marriage certificates, fictitious business names, and voter information. Occasionally there’s an Erin Brockovich wannabe (dressed as such) investigating a major cover-up and announces the expose on her cell phone. But in Foreclosure Land, the Recorder is the source of all the loan and contact information for the lender, junior note holders, plaintiffs, and property owners. Often immediately before the foreclosure, there’s a lot of scrambling with note sales, substitute trustees, bankruptcies and lawsuits. And after the sale, the Trustee Deed is recorded by the new owner. In the past, Title Companies would simply email the documents, but with California’s ill conceived Senate Bill 133, it  has restricted Title services and many active buyers find it more comprehensive to go to the Recorder in person.  Even with Erin’s investigatory skills the trail has many dead ends because of litigation, environmental, and excess debt.

 

Once the property becomes bank owned, it’s generally not an immediate bargain. The bank will first try to get a price that covers the loan. Normally the price is too high and the overwhelming bet is against the banks ability to reach par. Chock full of non-performing assets, the banks become a large repository of problem properties. They are hamstrung by capital ratios because too many write downs lead to closure. At the same time holding problem real estate ties up capital and will also bring ruin. The government delays the day of reckoning by suspending mark to market accounting. TARP infusions have also provided limited stability. With additional time, there is the hope that the market improves and new capital can be raised. But as prices continue to decline, the waiting game is fraught with risk because less money will be ultimately realized. A few clever buyers are able offer the bank something of value in terms of a profitable banking relationship to help offset the loss. But it appears the end game for many banks will be failure. Once a new financial institution is found to purchase the failed bank’s assets, the new bank will  will receive a substantial discount generously aided by a loss sharing agreement from the federal government. This means the taxpayer will absorb the majority of the losses and the new property buyers will be able to finally purchase at realistic prices.  It may take a while longer, but here in foreclosure land, commercial buyers will eventually see bargains just like the bidders on the steps of the  Norwalk Courthouse.