Today Bloomberg announced that Morgan Stanley is doing just that for the second time in 2009. And the Wall Street Journal has had a series of articles on single family home owners and the epidemic of strategic defaults in home loans

More on Morgan Stanley …

Back in the boom days Morgan Stanley made a series of purchases of commercial property from folks like Sam Zell that turned heads because everyone in the industry knew they had over paid. Now the stuff is hitting the fan and Morgan Stanley is simply handing the properties back to the bank and walking away – even though the loans are still current!

• Last month they agreed to surrender 17 million square feet of office buildings to Barclays Capital after acquiring them for $6.5 billion in 2007 from Crescent Real Estate Equities.
• Now they are announcing plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.

From Bloomberg:  “San Francisco prime office rents fell 37 percent in the third quarter from a year earlier, the biggest decline since 2001, as companies cut jobs, Colliers International said. The vacancy rate rose to 14 percent, the highest since 2005. Almost 1.4 million square feet of space was returned to the market in the first nine months of the year. ”

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Let me show you a technique I call ”Move the Middle” that will naturally cause your negotiating counterpart to split the difference in your favor and move them in your direction …  toward the number you need.

It begins with a traditional “meet half-way” or “meet in the middle” basis for bargaining. I add a little twist I call “Move the Middle”, that benefits you in any negotiation. This is a simple negotiation technique that provides consistent profitable results for you in any transaction. It has enormous value and it is a tactic you can use again and again when bargaining.

Here’s the technique:

You just make note of the gap between THEIR opening number and  yours and make your response less than halfway. Basically you NEVER split the difference and always negotiate in smaller increments than your counterpart.

The following is a true example of a commercial property re-trade I negotiated:

The negotiation took place at the end of the Due Diligence period on a Commercial Property I eventually acquired. My calculations indicated I needed a $100,000 credit for repairs from the seller to make the numbers work. I began with a request for a $200,000 concession from the seller up front.

• The seller countered with $100,000.
• BINGO - notice he came up from zero to $100,000 in one step – he automatically split-the-difference… a response I expected when I made the request.
• An impulse response for me might have been to split-the-difference again and say $150,000. Instead I used Move the Middle and named a smaller amount than the expected $50,000 drop. I floated a request for $190,000 – and dropped by only $10,000.
• The Seller countered with $130K
• BINGO AGAIN - Notice again, he moved toward my offer by countering with $30,000 above his initial $100,000. I moved $10,000, he moved $30,000. I successfully applied the Move the Middle technique. I requested $180K next and the Middle moved my way again…

The Seller and I eventually settled on $145,000, a $45,000 increase above the $100,000 I actually needed, and the acquisition now worked on paper. After this technique got me what I wanted, I proceeded with the close of the transaction. The re-trade worked and the deal was $145,000 in our favor.

That is how you Move the Middle !

Look at the negotiation interval the other side is using and come back with a smaller one. The other side will come your direction as their natural tendency to “meet in the middle”.

Learn and profit from this bargaining tactic:

I really love this, once you get used to it, you just learn to rely on it. Try to Move the Middle in your next negotiation… especially if it seems like a just too simple tactic. The results will reward you again and again.

Here’s to your investing success.

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In Default:
An Owner is in Default when they fall behind on the Loan Payments. Non-payment violates the loan agreement and can result in the Lender taking the Property back if the Default is not “Cured”. Foreclosure is the name for the process of taking the Property back.

 

At this stage:
You can find out what local Owners are in Default and approach them directly.

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In Receivership:
The Court can appoint a “Receiver” to manage the Property while the Foreclosure process proceeds. The Receivers are Property and Asset Management Companies or even Attorneys you can connect with.

 

At this stage:
You can find out which Properties are in the hands of a Receiver and which Property Managers take on receivership work. Then you can approach the Owner, Receiver or Lender directly.

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Real Estate Owned (REO):
Real Estate Owned is a term for a Property that is now through the Foreclosure process and is actually owned by the Lender. All REO Properties need management to preserve the value of the Asset. In this case the Lender hires a Property and Asset Manager to do the job

At this stage:

You can find the Lenders holding REO. You can find the Property Managers who manage REO Property. You can approach either the Property Manager or Lender directly.

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Listed and/or Sold
At some point, the Lender will sell these Properties. However, the decision to sell can take a significant period of time for one simple reason. If the Property sells for less than the Loan Amount, the Lender will have to realize the Loss on their books. This decision to take the loss and move on is usually one made in the higher levels of the organization. While the “Sell” decision can be delayed … once it comes you can see a flood of Property on the market as the Lender attempts to clear their REO inventory quickly.

 

At this stage:
The Lenders will often have preferred buyers by this point. Many times these properties are sold without being listed … often in large portfolios.

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• Default
• Receivership
• REO

• Your Broker Network
• Your Mortgage Broker
• Your Property Manager
• Your Real Estate Investing Group
• Your Local Property Association Meeting – such as the local Multifamily Housing Association meeting

In every conversation, let the other person know you are in the market for distressed Commercial Property. Ask them who they know who is .. 

• In Default or in trouble
• In Receivership or managing Property in Receivership
• What Lenders have REO Property and who are the companies that are managing REO in this market

I have started 4 successful businesses with less than $2000 in each … my last business only cost $19,000 and most of that was programming costs. Build your business in this fashion and some people will call it “Bootstrapping”. I call it becoming a fearless entrepreneur.

Here’s an article about Bootstrapping from a very successful entrepreneur, Clate Mask from Infusionsoft. It contains his ten lessons learned that I TOTALLY agree with … a great read indeed for folks looking to become an entrepreneur without selling your soul to the Venture Sharks.

Here’s the article

“Apartment Vacancy Rate Hits 22-Year High !” and I murmured to myself … here we go again.

It just reminded me why newspapermen are NOT Real Estate Investors … they are just out to sell papers and a sensational headline will always beat out a rational article.

But wait … there’s more …

If you read the last line of paragraph three you found that, “Of the 79 Markets tracked by REIS, 45 showed an increase in Vacancies.” That sounds really BAD now doesn’t it? We should panic … right? Hmmmm … Remember now, this is coming from a newspaper and there is most certainly more to this story. Hold on just a minute …

As an Investor, what I find MOST interesting in this article is this.

• In the face of the worst economic downturn since the great Depression.
• In the face of the worst residential housing market in anyone’s living memory
• In the face of hundreds of thousands of foreclosed / vacant / rental single family homes competing with apartments for renters
• In the face of ALL of this …

43% of the markets tracked by REIS showed STABLE OR DECREASING VACANCIES !!

That’s right 34 of those same 79 Markets preserved or decreased their vacancy rates. That statistic is truly amazing given the national economic circumstances. And that’s not all … In the next to the last paragraph we learn that suburban Maryland and Washington, D.C. even saw a 0.3% rent increase in the second quarter. WOW.

What is the Press Missing here?

The media propagates one of the big myths in Real Estate when they report on national statistics in this fashion.

Here is the myth … “There is a “National Real Estate Market”  That statement is simply not true … never has been and never will be.

Here is the truth…

You can aggregate statistics and report on the national data with big screaming headlines, but All Real Estate Is Local. There is no mythical “National Apartment Market” that moves in sync from coast to coast taking all Multifamily Projects up and down with its gyrations.

The Profit is in the details

The savvy investor is still doing the same things despite this article …

• Working to find a market in the right phase of the market cycle
• Then finding well priced properties where they can make a profit by improving the performance under their management.

And those local markets exist right now.

The timeless rules still apply … LOCAL market conditions will determine much of the profit in your Commercial Real Estate projects. One of the key skills for Commercial Property Investors is understanding Market Cycles and timing the markets to ride the LOCAL wave. If you are invested one of the 43% of Markets where vacancies are stable or falling … you and your investors are doing just fine. These headlines may cause your investors to give you a call with concerns … AND the cash flow from your property is probably stable.

Here is the biggest challenge for Project Sponsors in Multifamily as a result of this article … Your Investors and potential investors read this article too … darn.

Now you have to provide some education about the myth of the “National Apartment Market” to bring them on board.

It won’t be that difficult to do. Some local market research will quickly prove to them that you know more than the Wall Street Journal about your local market and why Apartments are still an excellent investment. The ability to find a profitable apartment project may actually be increasing in this economy because of distressed commercial property for sale in many solidly performing markets at once in a lifetime prices.

Here is my advice. Don’t believe ANY headline in ANY article claiming to report on ANY national trends in Real Estate in your chosen niche. All Real Estate is Local … from now until the end of time.

Your job is to find those local markets where you can make a buck. And there are a lot of them still out there despite the WSJ blaring, “Apartment Vacancy Rate Hits 22-Year High” last week. Then show your investors the difference between what you know about Real Estate as an Investor and what the Wall Street Journal says as a bastion of the media.

I am sure both of us would have written a different headline.

 ”We have kind of a Mexican standoff. Sellers aren’t over the shock of the market and are still asking too much, while buyers, who are greedy for rock-bottom prices, simply aren’t willing to step up and pay. (and) Without debt, there are no transactions to step forward.”

As long as this remains true … it will be hard to envision deal volumes picking up in the near future.

All the experts lamented the puny deal volumes this year and none of them seem to have a clear prediction of when deal flow will pick up however …

When asked, “How would you invest $3M in this Market?” Here is what they said …

Most responded that they would look for small, quality assets. May said that he would buy good core real estate on the west side…small retail that has long-term potential. “I am seeing a flight to quality,” he said.

Salis said that a lot of the volume that you are seeing right now is on the residential side, such as the 10- to 25-unit multifamily projects in infill locations such as Anaheim or Santa Ana, so that is a place he would look.

Roth would also look for quality. “The nice thing about quality properties is that there will always be tenants who want to park themselves there ”

Click here for the full article

“Experts: Cleansing Period Ahead, Bottom Near”

And if that is not the definition of a bidet … I am not sure what is!!

I will give you a link to what turns out to be a pretty important article in a second … here is the gist of what they have to say:

In the next 24 months, this convocation of experts expects a radical increase in deal volume as Lenders cleanse their books of bad Assets. The Bottom of this market seems to be very close and the cleansing is projected to begin very early in 2010.

Here’s the full article – and remember, when your bottom comes in sight … give it a quick cleanse.

Here’s an interactive map of bank failures by state

Here’s the entire list of failed banks

This month there were more than 360,000 properties with foreclosure filings — including default notices, scheduled auctions and bank repossessions — an increase of 7% from June 2009 and 32% from July 2008, according to RealtyTrac, an online marketer of foreclosed homes.

This is the Double Dip we have been anticipating … release the moratoria and open the floodgates.

AND don’t forget the “Double Double Dip” …

These are the houses that are empty and for sale that have been pulled off the market by the sellers when they didn’t sell 6-12 months ago. The Double Double Dip will occur when these “Shadow” homes come flooding back onto the market once sales finally do take a significant upturn.

This will almost certainly give a “W” shape to the eventual market recovery in single family homes in many areas. First the forclosures must be absorbed … then the shadow market of unlisted homes must be absorbed … and only then does true recovery occur.

Here is the full article on CNN/Money

One Bright Spot: the ETF “URE” is up to its highest level this year and may be a fun way to play these residential see saws as they ripple into sentiment about the commercial markets.