July 15, 2010

Today we talked about a variety of topics that pertain to the money aspect of real estate. They were

1. Lending

2. Foreclosures

3. Workouts

The current economic position of commercial real estate is not good, not good at all. A study showed that 2/3 of commercial real estate that is financed is underwater. Underwater is the term used when the value of the property is worth less than the debt that was used to finance it. What some banks are doing right now to combat these lending issues is to push back the maturity date. Obviously there are two sides to whether this is good for the economy. The banks believe that by pushing back the maturity date and thus not foreclosing on the property, the person being leant the money will be able to pay back the amount sometime in the future. Also, the banks see no sense in foreclosing on the property when the market is already saturated with properties exactly as theirs. From a financial statement perspective, by pushing back the maturity date they can classify the loan as operating still. By doing this they will not have to send more cash to their reserve in case the loan defaults. As your reading this you are probably thinking the same thing as I am; that the banks are only delaying the inevitable where the property will be foreclosed and the bank will be in a worse position. This is a very probable conclusion. Looking at these set of facts it is as if none of these players have taken notice to what caused our recession, toxic assets. The term that is being placed on this is called "extending and pretending", which we can all see where the name gets itself. I am not of any expertise to say that what the banks are doing is wrong. For all I know the market could strengthen and the loans will be paid back. The thing is, is that this looks very similar and it is quite frightening to think that a relapse is around the corner.

Foreclosures was another topic we discussed and it too has a doom and gloom feel to it but there are upsides. In the Fort Worth/Dallas area in the month of June alone there were 256 foreclosures added to the list. This is not a good sign for those that in this industry if you are holding one of those properties but if your not this is the time to buy. When foreclosures become more frequent investors are on the lookout for those properties that are substantially below their cost or replacement cost. By being able to buy a piece of property at such a low price you are able to lower your own price to customers due to the lower amount of cost you have to cover. This is where things can become interesting, it is almost a game changer. By being able to reduce your price to customers you are causing other buildings around you to have follow suit are lose out on their market share. If the company can't lower its price due to their high cost to cover than their building might be foreclosed too. It is almost a natural cycle. Even though foreclosures equal bad news their are some upsides to them if you happen to be in a more sound financial position.

Workouts are pretty much when you refinance a loan. In our class discussion workouts usually come about when the lender does not want to take over the rights of the property even though the person who was lent the money cannot make their payments. Workouts are process where you are down on your luck for now but in the future will be able to repay the money back. Do not think that workouts come at a cheap price. Usually the lender will ask for a percentage of the money that you will receive when the property sells. On the other hand the lender is not out to get you, they have an understanding of the situation and are trying to make both sides work. Though they may not be trying to find the best possible way for the person who owes the money but rather try to "work out" something that is mutually beneficial.