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Investors defaulting to make money
Some NY investors go into foreclosure on purpose July 31, 2009 03:29PM By Alex Ulam
"For most homeowners, foreclosure is like a fatal illness that starts with losing control of their finances and ends with a sickening feeling when the bank finally seizes the property. Post-foreclosure, a homeowner's credit rating gets trashed and he can be in financial purgatory for years, making it nearly impossible to buy or rent property.
But while foreclosure typically spells disaster for homeowners, for some New York City investors, it may actually be a good business decision.
Indeed, foreclosure doesn't have to be a money-losing proposition, especially for the small-time investor who borrowed money to buy townhouses or condominiums, according to Augustine Diji, a Manhattan-based lawyer who helps investors drag out the foreclosure process for as long as possible.
A depreciating real estate market and adjustable-rate mortgage resets have changed the equation for many of Diji's clients, who include a tenured college professor as well as a restaurant owner. Instead of making mortgage payments, these investors are voluntarily choosing to go into default, sometimes before they are in dire straits financially, and pocketing all the rental income they can."
This is the next wave. The banks know they have this coming and are scrambling to extend out loans (not make new loans) on multifamily commercial properties to bring the maturity out till 2013. They did this first with construction and land loans in 2007 now they are paying that price. The same thing happened during the last crisis in the 90's and took thousands of banks down with it. Commercial property owners walk away. But they take the cashflow and fight the forclosure. As this takes more time then a residential foreclosure as commercial owners have a the means to hire good attorneys to play the stall game it will not happen overnight. I believe there will be a tremendous amount of commercial REO property in 18-24 months. First the owners come to grips with the fact that the property is worth less then the mortgage. Then they stop paying all expenses and grab as much cash as possible. The banks foreclose but they refuse to sell at the steps because recovery is around the corner and figure why take the discount now when we can hold the property and in 6- 8 months the property will be worth more. Eight months later the bank fails and the FDIC or Resoultion Trust company sells the asset cheap lowering values more. This is the Commercial Real Estate Deflation Cycle. We are in the 4th inning. You want to start buying during the 7th inning strech unless you are a great market timer then you wait till the closer comes out of the bullpen.
Investors defaulting to make money
Some NY investors go into foreclosure on purpose July 31, 2009 03:29PM By Alex Ulam
"For most homeowners, foreclosure is like a fatal illness that starts with losing control of their finances and ends with a sickening feeling when the bank finally seizes the property. Post-foreclosure, a homeowner's credit rating gets trashed and he can be in financial purgatory for years, making it nearly impossible to buy or rent property.
But while foreclosure typically spells disaster for homeowners, for some New York City investors, it may actually be a good business decision.
Indeed, foreclosure doesn't have to be a money-losing proposition, especially for the small-time investor who borrowed money to buy townhouses or condominiums, according to Augustine Diji, a Manhattan-based lawyer who helps investors drag out the foreclosure process for as long as possible.
A depreciating real estate market and adjustable-rate mortgage resets have changed the equation for many of Diji's clients, who include a tenured college professor as well as a restaurant owner. Instead of making mortgage payments, these investors are voluntarily choosing to go into default, sometimes before they are in dire straits financially, and pocketing all the rental income they can."
This is the next wave. The banks know they have this coming and are scrambling to extend out loans (not make new loans) on multifamily commercial properties to bring the maturity out till 2013. They did this first with construction and land loans in 2007 now they are paying that price. The same thing happened during the last crisis in the 90's and took thousands of banks down with it. Commercial property owners walk away. But they take the cashflow and fight the forclosure. As this takes more time then a residential foreclosure as commercial owners have a the means to hire good attorneys to play the stall game it will not happen overnight. I believe there will be a tremendous amount of commercial REO property in 18-24 months. First the owners come to grips with the fact that the property is worth less then the mortgage. Then they stop paying all expenses and grab as much cash as possible. The banks foreclose but they refuse to sell at the steps because recovery is around the corner and figure why take the discount now when we can hold the property and in 6- 8 months the property will be worth more. Eight months later the bank fails and the FDIC or Resoultion Trust company sells the asset cheap lowering values more. This is the Commercial Real Estate Deflation Cycle. We are in the 4th inning. You want to start buying during the 7th inning strech unless you are a great market timer then you wait till the closer comes out of the bullpen.
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