From detox to retox.
March 22, 2009 3:53 PM Subscribe
Will the upcoming federal auction of toxic assets include any buying opportunities for income-oriented real estate investors?
In the next few weeks or months, the federal government will start auctioning toxic assets--with attractive purchasing incentives, thanks to the stimulus plan.
Now, it's likely that most of the real estate auctioned will be foreclosed houses and a smattering of McMansions in the middle of nowhere. In other words, places of no interest to somebody who wants to buy a fourplex or apartment house with rental income.
However, you'd expect that a few attractive income-generating assets might be up for grabs. What I'd like to know is, how many can we expect?
Recognizing that any auctioned asset should be vetted with a qualified financial advisor, and be bid on and acquired only after thorough study and due diligence, how might somebody go about getting information on the auction and the assets? Will all assets be in the million dollar range, or will a few six figure properties be available? Will it be possible to dig up good income-generating properties with current rent-paying tenants?
I realize that much of what I'm asking is speculative at this point, but I'd enjoy hearing your speculations.
In the next few weeks or months, the federal government will start auctioning toxic assets--with attractive purchasing incentives, thanks to the stimulus plan.
Now, it's likely that most of the real estate auctioned will be foreclosed houses and a smattering of McMansions in the middle of nowhere. In other words, places of no interest to somebody who wants to buy a fourplex or apartment house with rental income.
However, you'd expect that a few attractive income-generating assets might be up for grabs. What I'd like to know is, how many can we expect?
Recognizing that any auctioned asset should be vetted with a qualified financial advisor, and be bid on and acquired only after thorough study and due diligence, how might somebody go about getting information on the auction and the assets? Will all assets be in the million dollar range, or will a few six figure properties be available? Will it be possible to dig up good income-generating properties with current rent-paying tenants?
I realize that much of what I'm asking is speculative at this point, but I'd enjoy hearing your speculations.
You should look over the TALF terms and conditions. This program is separate from and different than the public-private toxic assets program being discussed, but it may give you some insights into how the government has been structuring these things. Specifically, note that the minimum TALF loan is $10 million--clearly outside the range of retail investors. Individuals aren't mentioned as eligible TALF borrowers, but you could easily form a new corporate entity that qualifies. The difficulty would be finding a primary dealer willing to sign a customer agreement with you (unless you're a big deal investor already), which is a requirement for participation.
But as it pertains to the toxic asset auction plan specifically, the early word seems to be that the Treasury will hire 4-5 investment managers to handle the private money (at least for one of the three "approaches"). This may preclude you from direct investment, but perhaps it opens up the possibility of investing passively through one of the selected managers. I know, for example, that Barclays is creating "TALF participation securities" that allow smaller investors to buy into a pool of TALF-funded assets indirectly.
Anyway, I guess we'll find out more around 9:30am.
Now, it's likely that most of the real estate auctioned will be foreclosed houses and a smattering of McMansions in the middle of nowhere.
Actually, I think it will be entirely mortgage-backed securities (commercial and residential), CDOs, CDS, leveraged corporate loans from LBOs (or CLOs thereof) and maybe some whole loan mortgage pools. I doubt it will include any hard real estate.
The structures sold by FDIC will reportedly be non recourse; again, not a show stopper but any reasonable business plan would need to account for this outcome and plan accordingly.
Why would non-recourse be a potential show stopper? It's a massive show starter!
posted by mullacc at 8:16 PM on March 22, 2009
But as it pertains to the toxic asset auction plan specifically, the early word seems to be that the Treasury will hire 4-5 investment managers to handle the private money (at least for one of the three "approaches"). This may preclude you from direct investment, but perhaps it opens up the possibility of investing passively through one of the selected managers. I know, for example, that Barclays is creating "TALF participation securities" that allow smaller investors to buy into a pool of TALF-funded assets indirectly.
Anyway, I guess we'll find out more around 9:30am.
Now, it's likely that most of the real estate auctioned will be foreclosed houses and a smattering of McMansions in the middle of nowhere.
Actually, I think it will be entirely mortgage-backed securities (commercial and residential), CDOs, CDS, leveraged corporate loans from LBOs (or CLOs thereof) and maybe some whole loan mortgage pools. I doubt it will include any hard real estate.
The structures sold by FDIC will reportedly be non recourse; again, not a show stopper but any reasonable business plan would need to account for this outcome and plan accordingly.
Why would non-recourse be a potential show stopper? It's a massive show starter!
posted by mullacc at 8:16 PM on March 22, 2009
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- First of all, information is key to any investment. This is true not only of the US equity or listed options markets but especially so regarding property or (in this case) structured products. What structures will you be purchasing and at what price? How many eyeballs have looked over these structures (containing mortgages) before you get a chance? Why did they pass on the opp?
- Next, you'll need to form an investment partnership, and get it recognised by FDIC. To do that you'll need capital, money that will be matched by the government, but even so you'll need some cash. While reportedly 85% of the money will be government matched, most of the structures traded will require significant sums (i.e., we're talking about perhaps hundreds of mortgages per tranche) to acquire.
- Third, the government seems to have a bias towards profiting from this exercise (no surprise given the present political climate); will their profit wipe out yours? Once again, information will be key to acquiring properties that will outperform and generate significant profit. What if only enough profit is generated to cover the government share of the proceeds and you net /net? What is your business plan if a loss results? What is the opportunity cost of this investment, and what extraordinary return would compensate you for this loss?
- The structures sold by FDIC will reportedly be non recourse; again, not a show stopper but any reasonable business plan would need to account for this outcome and plan accordingly.
- Seems like low ball estimates for many of these structures are starting from a base of roughly twenty cents on the dollar; a bidding war, starting even from such low levels, still will require superior information about fair value. You certainly don't want to pay too much but how much is too much? Local market knowledge is key, as there is no right or wrong answer here, just your cost of capital, opportunity cost and model parameters to consider.
- The banks will be selling properties they themselves have identified; once again we see a disparity of information. How will you price your offers keeping in mind the banks will retain the best structures for themselves?
Just a few issues to think about. There might be some opps for retail money, especially so if folks have strong local market knowledge, can pool funds and have a sufficiently long term outlook. Even if one has the cash and time frame, without local market knowledge it is difficult for me to see this as little more than gambling; after all, the banks are selling these structures for a reason.A few speculative concerns from my viewpoint, and I'm sure this list would markedly lengthen, especially so as one starts to model the details in earnest and construct a robust business plan.
Still, great idea! Best of luck and hope you make some money.
posted by Mutant at 4:54 PM on March 22, 2009