Oct. 14, 2009 - Distressed Portfolio Transactions? Be Patient…..
Another week went by, we prepared valuation models for three distressed single family portfolios we bid on and were rejected by the seller for being to low. In today’s market we need to submit ten proposals just to buy one. The Buy/Sell difference for distressed notes and REO’s are all over the place, compounded by poor information and overstated valuations of “portfolio value” by sellers who are often politically reluctant to sign their names on the loss to move the assets off the company’s books.
When an investment becomes distressed, the first option is to sell: But at what price? The value of the asset is what someone will pay after they understand the risks. There are serious detailed technical matters to address in today’s market the buyer must understand before moving to commitment.
As a buyer it is difficult to value property of any kind when prices are declining. An economist will tell you a real estate assets value is driven by supply and demand, interest rates, the economy, unemployment, immigration, etc. and even more economic fundamentals. That maybe true, but with falling or stagnant prices in most markets across industries and across the economic spectrum, the difficulty in valuation makes most assets today distressed.
Accordingly the seller may not want to face the fact that their assets could be worth far less than what was paid for them. Yet the question is will the asset be worth more in a few months from today? Most will agree not.
Our question we are confronted with is, how can you value an asset especially when we may hold the asset over a 12 month period? With the multi-levels of risk and uncertainty it is difficult to logically understand why so many distressed assets are being held off of the market. The incentive to sell is just not as strong as you would think given the facts.
As a buyer the key to success in today’s market is patience as we continue doing our due diligence and prepare our next letter of intent. Until the market resolves the current Buy/Sell difference deal flow and the REO's entering the market will remain a trickle.
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