Eastern Union In Today’s Real Estate Market, Featured In Real Estate Weekly

eastern ucThe following is an article from the Real Estate Weekly magazine, by Eastern Union Commercial’s owner Ira Zlotowitz: As the global meltdown in real estate continues to drag on into the new year, many owners have been seeking out new opportunities within the real estate sector. With sales just about nonexistent, as prices have not yet fallen within proportion, the question of how to make money in this market becomes more and more crucial. I’ve had the privilege to see that many opportunities still do exist in today’s market. Although obviously not applicable to all, some opportunities are unique to the current environment.

Banks are finding themselves bogged down, having to workout existing loans that have gone into default. The borrower may be struggling, or the bank, needing capital, can no longer keep the loan on their books. As the overload of workouts continues, banks are finding that their resources are being occupied on defaulting loans rather than on originating new profitable loans.

In order to concentrate their efforts on new origination, many banks are willing to sell off their notes at a discount on the face loan amount, the size of which depends on individual circumstances. Investors are taking a closer look at purchasing these notes, which they see as a replacement for the non-existent state of acquisitions for actual real property.

The note buyer contends with two possible outcomes when buying a non performing note. The note buyer is first prepared to finish the foreclosure process and thereby, in effect, “buy” the property at a discount.
In some instances, the current owner understands that he’s losing the property and is willing to “take a few dollars to walk away.” In this scenario, the note buyer avoids the costly and lengthy foreclosure process, thereby making the note purchase even more profitable.

Secondly, if the borrower avoids the foreclosure process by paying off the new note holder, the note buyer makes a significant profit, the difference between the face amount of the note and the price that he paid for it. On performing notes, the note buyer receives principal and interest payments throughout the life of the loan.

A less frequent scenario, but one that is open to real estate investing, is when the bank allows the borrower to buy back his own note. As mentioned above, banks want to rid themselves of some of these loans, and they may therefore offer the current borrower a discounted price if he or she pays them off.

Many of these deals, however, require all cash, and the current owner may not have this capital. To not lose the opportunity to buy their note at a discount, the current owner can partner up with another real estate owner who is liquid, who’ll provide the cash in return for equity on the deal.

As more note transactions take place, there is a growing need for non conventional financing. Most conventional lenders will not finance a note sale prior to the note buyer owning the deed, yet most note buyers need to close on a loan beforehand.

This leads to another opportunity for real estate investors, the hard money arena. For hard money lenders, the deal is low risk, as the note is usually bought at a discount and by a much stronger buyer putting in fresh equity. With their risk position greatly diminished and the opportunity to make between 12-14% interest plus points, many real estate owners have found it profitable to lend on note purchases.

In the hard money arena, owners remain in their real estate expertise, and they have the opportunity to either make a double digit return on their money or potentially foreclose on and own the property at the amount of their original loan. With the current freeze on acquisitions, many real estate owners have become hard money lenders.

As a leading commercial real estate mortgage firm, Eastern Union has been the facilitator for many of these transactions. In recent months, many banks have provided us with notes to sell or have asked us to approach current borrowers to assist them in reaching an early payoff at a discounted price. Moreover, in addition to conventional debt financing, Eastern provides hard money financing for notes and other non conventional situations.

In conclusion, 2010 will still likely be a rough year for the commercial real estate market, as values have not yet stabilized, and the new underwriting environment does not provide enough proceeds to cover the large existing debt of the many deals coming up for refinance.

In addition, we’ll only see a trickle of new real property sales until the banks clean up their notes. From a financing perspective, we are optimistic, as we see more and more lenders coming back into the market, thereby opening up the opportunity for more transactions to close, as certain niche players are more aggressive.

Our office sees over 125 new refinance submissions a month and has been tying up deals with over two dozen different lending sources in the last few months alone.

This makes Eastern Union well positioned to service all of your real estate financing and restructuring needs in the coming year.

Ira Zlotowitz is the president of Eastern Union Commercial.

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