From SFGate:
Want a read on the housing market’s future? Ask a vulture investor.
So-called vultures – also known as distressed-asset investors – make money by buying distressed assets, such as soured mortgage loans, and predicting which way the wind will blow to decide when to liquidate.
That means Jon Daurio’s economic calculations provide as good a guide as any.
As CEO of Kondaur Capital Corp., which buys thousands of distressed mortgages at a discount and rehabilitates them for resale, Daurio tries to flip those mortgages as quickly as possible. He has no desire to buy and hold, because he thinks homes are worth less and less as time goes by.
“I think housing prices nationally will drop 10 to 20 percent over the next three years,” he said. “We aim to be in and out of the loan in six months.”
Since its 2007 founding, Kondaur has grown to have $1 billion in capital, nearly 500 asset managers and a portfolio of about 4,000 loans at any given time. Daurio said it is profitable, but declined to give specifics.
“We are the nation’s largest and most frequent buyer of nonperforming loans secured by one- to four-family residences,” he said.
The Orange County company exemplifies an emerging class of investors seeking to make a profit from the real estate meltdown, from mom-and-pop speculators snapping up individual foreclosed homes for cash, to mid-size syndicates buying dozens of foreclosed homes to rent out until the market turns, to giant concerns like Kondaur.
Kondaur’s business model provides a right-now snapshot of some pertinent real estate fundamentals.
What it buys
Daurio refers to Kondaur’s acquisition targets as “scratch-and-dent mortgages.” That means home loans that are delinquent, usually by six months or more.
It buys in bulk, often several hundred loans at a time. The sellers are banks, other distressed-asset investors and Wall Street firms that prefer to quickly unload the troubled loans rather than having to foreclose or modify them. “Banks are hideously understaffed” to manage the loans themselves, Daurio said.
In recent months, Daurio has seen an increase in the number of distressed loans for sale.
“Banks are profitable again, so they can afford to take the losses to get these scratch-and-dent losses off their books,” he said. “Banks now are being truthful about the value of these loans because they can afford to take the hits.”
About $10 billion worth of distressed mortgages hit the market in the first quarter, he said, more than he’d seen at any one time during the previous couple of years.
He pays about 70 percent of the value of the underlying home. For instance, he’d pay $210,000 to buy a $400,000 mortgage on a home now worth $300,000. Obviously, that means the seller is taking a huge loss. Figuring out the homes’ values involves a proprietary formula, and takes into account demographic and sociologic data, as well as price opinions from local real estate brokers.
About a quarter of the loans were previously modified by banks to make them more affordable, but the homeowners couldn’t make the revised payments and redefaulted.
The greatest share of its mortgages are in Florida and California, followed by the Rust Belt states of Michigan, Ohio, Illinois and Indiana.
How it ‘fixes’ them
About 80 percent of the time Kondaur takes back title to houses, usually by paying the delinquent homeowners to sign them over as a deed in lieu of foreclosure, but also by foreclosing itself if that is more expedient.
“If I’m right that prices will keep dropping, getting that property today (as opposed to down the road) is worth a great deal,” he said.
Its asset managers then find local contractors to rehab the houses and local real estate agents to sell them. It puts the houses in turn-key condition – ready to move in – and tries to have them sold within 30 days of hitting the market.
About 10 percent of the time, it will sell individual loans “as is.” The remaining 10 percent of the time it will modify payments to keep the current homeowner in place. He’s not enthusiastic about that approach.
“Our experience is that modified loans are worth considerably less than what would be left if the house were foreclosed,” he said.
He’s clear that he’s not running a charity. Told of a Clovis (Fresno County) couple whose home was foreclosed upon by Kondaur last month, he said: “They should have bought a house they could afford.”
Sounds like flipping taken to an industrial scale.
I don’t get why the banks don’t retain their own realty crew and list the properties themselves. How is that more trouble/more expensive than taking a 30% haircut off the already-depressed market value? What am I missing?
What you are missing is that the investor is not making 30% but rather closer to 10% net after overhead, cost of capital, etc. They are just specialists and move fast so they can turn their capital 4x/yr generating a 40%+ return on capital.
They can do this on scale as they are assembling loans from multiple lenders. A single bank will only have a finite number of homes in a given area and that will be spread out over time. Thus it is less efficient for the lender to do this for their own account.
Secondly, they would have to hire all these people into the firm, bloat its payroll, and probably make a net return of less than they would compared to selling off at a discount.
Lastly, getting 2,000 loans sold in 30 days at a discount is better than taking a year plus to individually sell 2,000 homes (npv of the loan value) in a market where everyone is concerned about the continued fading of values over the next year or two.
Banks figure is best to take the cash now and don’t get caught holding the bag when the gov stops the cheeze machine.
Go, baby, go! These guys are doing everyone a service by getting the delinquencies moving. More power to them!
70 cents on the dollar–where do I sign-up? This sounds much better than buying foreclosures (or shall I rephrase TRYING to buy foreclosures). We gave up on the courthouse here in SD last year and have spent the 1st half of the year unsuccessful in Phoenix–many are paying 90 cents on the dollar at times there!
LB – 70 cents on the dollar…just put together a few hundred million $$$ to buy a pool of size and you can get that pricing too.
Their line about prices going down in 2 to 3 years set off my BS alert. That sounds like a rationale meant for investors… a made up reason why it may be a good idea to flip houses during a flatlined recession IMO.
Agree with tj, this is great news!
Feel like getting in? Here’s a link:
http://www.fdic.gov/buying/index.html
Eli – I agree that you are somewhat correct on the BS alert. The guy is selling lower home values to the bank to try grinding his purchase price of the loans down…that’s what he is supposed to do. Bank wouldn’t take his offer if there was a better offer outstanding.
Here is a perfect example of the application of present value:
“If I’m right that prices will keep dropping, getting that property today (as opposed to down the road) is worth a great deal,” he said.
For whatever reason, many home owners have a difficult time computing present value in a down market. I too often hear “just wait” as if time is of no consequence, or the seller has a low discount rate, but at the same time I note the frustration when the home does not sell right away.
ewhac-
“I don’t get why the banks don’t retain their own realty crew and list the properties themselves. How is that more trouble/more expensive than taking a 30% haircut off the already-depressed market value? What am I missing?”
Uh, banks generally don’t have the staff to pull this off. This is a similar case to what happened to a friend of mine who personally underwrote mortgages. Rather than discussing CAPM and diversification, just like we might as well ignore the bad loans the banks made–it’s all sunk, let’s just take his past actions and move forward.
So what do you do when you have a bunch of properties on which the “owners” are not paying the loan payments?
His first preference is for the payments to be caught up.
His second preference would be to recover the principal balance right away.
Beyond that, what would you rather have:
1. 70% of the loan today.
2. Pay the owner to move right away and rehab the property yourself.
3. Wait the foreclosure period out (which includes the redemption period of 1 year after auction in his state).
4. ???
He’s retired and wanted the monthly income, but now his monthly income has been cut way back, and his ability to recover principal is reduced, and he’s not interested in rehabbing housing. It should be noted that he has no background or history in rehabbing, selling, or buying housing.
Yes, this was done for the extra return on investment.
The basic idea was if the loans were not paid, then he’d foreclose and recover all his principal, legal fees, and so on.
He’s stuck. What do you recommend is his best course of action? Is 70% today of today’s market value better than what he could do on his own?
70 cents on the dollar seems like a steal, especially considering that’s 70 cents of the current market value of the house, not 70 cents of the book value of the loan, which could be as much two or three times (in some cases even more) the current value of the house.
It seems like it would be a better deal for the banks to simply hire more people to process foreclosures in-house rather then selling them en masses to a company like Kondaur to do the exact same thing.
Geotpf and LB,
70% of current is not too bad to sell for a bank. We might argue +-5%, but there is a huge risk that the “buyer” of the mortgage cannot settle title. You have got to remember, when people stop paying the bank, they also stop paying California, the HOA, and any other lienholders. To clear title, those have to be resolved.
Then, they still have to foreclose, rehab, and sell the property, paying commissions, etc. Considering that even minor rehab and commissions come to 10% or more, another few percent to settle title, and establish the foreclosure, and you’ve got probably 20% of the “current value”, many of which have plummetted. Keep in mind you have to employ people to do this, and you may value your own time at zero, but employees won’t.
I’d say that clearfund is right about on the mark that you can get 10%. I’d be surprised if they can turn their money in 90 days; I’d say even if foreclosure is well underway, it’s gonna take 180 days from purchase to settlement. 20%+ p.a. in a high risk environment isn’t that great. I can get you corporate bonds that are in the 12-13% range without all that risk and hard work. I’d rather have the junk bonds than the risk of another house price decline and selling a house in a low volume environment with a poor economic climate. They get rewarded for their risk, as it should be. They can also get screwed as a few bad apples could ruin their entire batch.
Chuck Ponzi
I am glad to hear that everyone feels 70% is a ‘steal’.
I have a few hundred REO homes in CA/AZ/NV that we’re taking title to shortly.
I’d be happy to sell them in bulk to anyone here for 70% of current value ‘as is’ (all cash, quick close, plus commission) so long as you have Jim represent you!!!!
Clearfund,
It’s clear that you approach RE as an investor but I think there are a fair number of people that would love to get a crack at a fixer upper for 70% of current value
This just highlights that there are two RE markets, one for you and Kondaur (wtf) where you have cash, buy from a bank/trustee and get some margin to work with and one for me where I see crooked deals, competitive / full price assetsin the face of 15-20% unemployment.
Isn’t the saying ‘you make the money on the buy’?
Geotpf- “especially considering that’s 70 cents of the current market value of the house, not 70 cents of the book value of the loan”
Well, as JTR has previously pointed out, “current market value” is a somewhat specious thing. It has to be 70% of the market value given some set of assumptions.
As clearfund points out, the NPV of 70% of today’s [market] value is better than the NPV of the future market value. Clearfund clearly has made some assumptions about market conditions and discount rates.
It might be interesting to discuss what market conditions and discount rates this might hold true, but in a down market it’s much easier to justify. If the market outlook was for rapid price appreciation, then selling today at 70% would produce a negative NPV.
Finally loan value is of no consequence to any buyer (excluding, of course, some minor examples where a property can go from short-sale status to not short for a few bucks, for example–it might be worth it to a buyer to pay a small extra amount just to get the deal done, if the buyer values the underlying property high enough. If not, then the deal might be killed, since the buyer is not willing to deal with a short sale or pay more).
Anonymous- “I see crooked deals, competitive / full price assetsin the face of 15-20% unemployment.”
What you see is the true professionals and the clueless working in the same market. As always, fraud and other illegal activity gets it’s own category. Unfortunately for us lay persons, it takes an attorney to determine if an illegal action was made.
It has been my experience that you need a few million dollars to properly buy houses at the steps also (especially with the CA system) and the BEST deals that I see are maybe 80 cents on the dollar. The distressed loan market at 70 cents on the dollar makes better sense to me!
Real estate is no different than any other business.
If you walk into 7/11 and pay $1.50 for a bottle of water you are paying full retail whereas 7/11 pays a lot less since they buy in bulk. No one complains or cries injustice.
I find it odd that people would expect to simply buy real estate at the wholesale point when they are only buying 1 or 2 assets.
The water distributer/wholesaler isn’t going to sell you 1 bottle of water at $.50 just beause you wish it to be. They only sell to large buyers at the low price. Thus you pay $1.5 at 7/11 since they risked their capital buying 1,000’s of bottles in advance just hoping you get thirsty one day and choose to stop in.
Real estate is no different. The world is no different.
The overhead of selling is a problem in areas where prices have gone down so far. Take Vegas, one of my favorite examples, where prices have gone down ~70%. Today instead of earning a given percent of $400k, the agent earns a given percent of ~$120k. It’s probably more work today, with the short sales and such, and yet the agent earns 70% less per sale.
Clearfund,
The 7-11 distribution / retail adds a lot of value for the end buyer (location, refrigeration)
If I know I want an asset (house/condo) which has gone into foreclosure, how you do / a broker add any value to me the end buyer by getting in the middle and want a cut of the deal?
Maybe you help the bank by removing the need to market but 30% is a lot of dough. I am surprised that banks are not selling more directly to consumers.
Anonymous-
Ok, let’s expand the discussion to the full 4P,C of marking:
Position (location)
Promotion
Price
Product
&
Customer
So, you might be right that 7-11 is about position, but there’s also promotion.
If we take a given house, the position and product are usually fixed. Thus we need to think in terms of promotion and price to find the customer to maximize the net.
There has been some discussion as to whether or not REALTORs actually add value to the sales process. Let me be clear: A good REALTOR earns every penny of the sales commission.
Of course adjusting price, instead of promotion, can be effective too.
JP2,
‘A good REALTOR earns every penny of the sales commission.’
Explain this if I know I want to bid on a certain set of houses (identified) with the intent of getting on? Assume I am pre-qualified
on = one. for the previous comment
Anonymous – Its kind of weak to have a debate using Anonymous as your handle…identify yourself so we know who we are sparring with.
Can a discussion wait until after the game?
You must be fans of the old green guys.
Simply put, listing agents are selected and paid by sellers.
Going further, however, if you choose to use the services of a buyer’s agent, then you want to increase your chances of an offer being accepted, all other things being equal.
I am actually starting with the supply, someone who wants to sell. This person has options: FSBO or listing with an agent, for example.
FSBO is easy, if the price is low enough.
Local Boy made the comment that prices at the Maricopa trustee sale (Phoenix) were at times 90% of TODAY’S home value.
It sounds high, but from what I’ve seen, true.
We stopped buying at auction this year because prices got too high.
In fact, I was just at the auction last week and there were 6, yes 6 bidders for a multi-family building. It even was a jump-bid (bank raised the opening bid above the posted bid) too. Ultimately it went for 6 figures over what most of us expected.
Crazy!
By the way, I filmed the auction again and this time I was wearing my Bubble Info shirt. When the video gets edited, I’ll post a link.
I think we’ve hit a near term peak in pricing and transaction activity in Phoenix. There were far more “companies” offering “bidding services” than before. I think I counted over 6 different professional buyers at the auction and most with multiple bidders on their staff.
‘A good REALTOR earns every penny of the sales commission.’
Here’s how a buyer’s agent can help:
1. Demonstrate the value of each house to you.
2. Write a powerful offer.
3. Present a compelling case to seller/listing agent why offer should be accepted.
4. Add extra benefit/influence from having a stellar reputation in the realtor community, and solid sales history on record if the listing agent looks it up.
The big powerful agents can intimidate a weak listing agent, and convince them that they should take the deal.
David – I concur 100% with your Phx observations. Our last auction was Feb/March…it just felt a bit crazy for my comfort level (even though we were just lenders).
We expect to stay away until September and hope to catch a combination of increasing supply from the banks and decreasing buyers after they blow their $$$ over the summer and don’t make the profits they were expecting in quick, easy flips due to a market that is in a value fade.
No one ever lost a penny by taking a time out.
FSBO is easy, if the price is low enough.
Absolutely true, and everyone should try it once just so you can gain more appreciation on the difficulty of selling for retail pricing.
FSBOs aren’t that motivated. If they were dying to sell, they’d walk into the closest real estate office and list their house today.
Because FSBOs lack full motivation, their pricing isn’t that sharp, because they figure that they don’t have to sell, they aren’t going to give it away, etc.
They price their house based on active listings, and end up as part of the pack that isn’t selling.
FSBO = Disclosure lawsuit from a savvy buyer. Even though I am licensed, I always hire 3rd party brokers.
Because we’re in the business we’re not as dependent on the broker for market info. We mainly are hiring their legal team and insurance policy more than their insight.
A broker’s insurance policy is a good firewall against a potentially angry buyer down the road when they look to find someone to pin their bad purchase on.
clearfund- The savvy FSBO seller will have already hired an attorney. Have forms ready, proper disclosures, and so on.
Don’t get me wrong, it is my opinion that a professional and competent REALTOR earns every penny. I only present the other side for those who are wondering.
I always find it a little strange that those who probably are the most competent to handle a sale on their own are the least likely to try. Those who are the least competent are the most likely to try a FSBO.
The last person that I suggested try FSBO had a very special* property on a lake that was in relatively high demand at the time, and the sale went down without a hitch. How many people have I suggested FSBO? Exactly one. It took a very special property with the right price expectation, and several agents who priced it lower than it actually sold FSBO. It’s a rare case–this basically never happens.
*No property is special, generally speaking. This one, however, was among a fairly small group very nice properties on the lake. Interestingly enough, the owner, my friend, purchased the first lot sold on the lake in 1965. He had his choice, and hired an excellent architect and hired experienced craftsman. It’s an extraordinary place. The property sold a several years ago.
Let me be clear: Unless the conditions are perfect, hire a great agent. And always, always, always hire an attorney.
“The old green guys” Love it JtR, Go Lakers
Old Green Guys? We prefer to call it “experienced.”
Jim…Funny you should be a Laker’s fan. Let’s not forget which city dumped the Clippers in LA.
This seems like a great way to keep the market moving, and help offload the processing of all the shadow inventory. Who cares if the investment company gets to make some money on the side; they are taking the risk and performing a vital service which is being somewhat neglected by the big banks and impeded by the government (namely, getting the housing market back to normal, and concurrently making housing more affordable for people buying within their means).
The only issue I have with their business model is that the taxpayers are paying their commissions (through the banking bailouts and handouts which are enabling the banks to realize their atrocious enormous irresponsible gambling losses without going under). Given that it seems inevitable that taxpayers’ money is going to be flushed in record amounts with this current government, I can think of far worse things to print/waste money on than trying to restore some semblance of a free market to housing in the US.