Multifamily Fire Sales?!?

Question

Where are all of the deals everyone said were coming in multifamily?

Over the past six months, numerous people talked and fantasized about all of the discounted deals that they planned to scoop up in multifamily. It was also the reason why many people decided to sit on the sidelines - uncertainty of where the market was headed coupled with the hope that when the bottom presented itself they could maximize their purchasing power.

So where are these deals? Are they still coming? And if so, when?

While I do not believe we have seen the last of the foreclosures, as I recently heard that 60% of multifamily bridge loans nationwide are not paying their mortgage, I am skeptical on whether or not we will see a massive fire sale of multifamily properties. Why? I thought you would never ask.

There is a famous saying by George Santayana, "Those who cannot remember the past are condemned to repeat it" that applies nicely to the situation we find ourselves in today. In 2008, during the housing crisis, banks started foreclosing on houses across the country. While most people thought banks prioritized foreclosing on houses that had not made their mortgage payments in months, banks actually prioritized homes that had a lot of equity. Banks also recognized that in just two years most properties rebounded in value. It is that rationale that has guided my thoughts on what I think is and will continue to happen with multifamily.

Specifically, I think for most distressed properties, the banks are actually going to hold the property. Most people would say to me now, "Banks are not in the business of owning real estate." And I would say, "On most investments they are the largest investor." The difference is they are not the operator. So what do they do about operations? Banks are currently reaching out to good PM companies and Owner/Operators to see whether or not they are interested in taking over the property. In other words, the property will never hit the market during this down cycle, but instead hold steady until the market rebounds.

For any property that a bank wants off their books, most are being sold in a short-sale capacity. What about the properties that are headed to auction? These properties represent the smallest amount of distressed assets.

So if you are waiting for a massive wave of distressed properties to hit the market, you might be waiting for a while...

What are you seeing in your market?

George Voutsinos · Answer

I believe it comes down to relationships and your network. The small time investor or public probably won't see half of these apartments hit the market, sales will be completed behind closed doors. Same idea as when an apartment owner goes to a broker to sell their building. That broker has a preferred list of clients they will send that building to FIRST before listing it on loopnet. Network is your net worth.

Michael K Gallagher · Answer

@Ashley Wilson your opinion is about the only opinion on the subject I need to hear! This is a great perspective thank you for sharing, I do know there was quite a few Tik tokers and youtubers yelling about the impending doom, havn't heard from them in a while though it seems.

Bill B. · Answer

IMHO: anyone hoping for a price correction better hope… There aren’t 1,000’s of other people waiting for the crash to either beat them to the deal or bid the price up Current owners don’t hear that rates will drop this year, maybe in a few months. And god forbid rates start to drop, then prices will start to rise again. This could end up being another shade of the great SFR crash of 2015, 2017, 2019, 2021, and 2023.

William Hochstedler · Answer

Walker & Dunlop has a podcast that just did a pretty good job on trying to explain this. There seem to be a lot of sunk costs that developers aren't yet ready to write down.

Nathan Harden · Answer

Hello from the other side of the country!Over here we are seeing minimal inventory as a whole. SF and MF. Personally, I think we are seeing quite a few MF properties hit the market in my area because Washington is becoming harder and harder to be a landlord. They are pushing rent control, some of the laws that the cities and state are pushing through are down right Anti Landlord.This is turn is creating a lot of people that are just hungry to get in to the game, they see these properties hit the market but have no idea about the laws that they will come across. In terms of REOs, I can't speak from first hand experience of the 2008 disaster but I will say this from personal experience with dealing with REOs right now. Banks are listing some (not all) close to market value and not budging on price for the first 30 days. Then they lower it a little (still not enough meet on the bone for an investor) But in my opinion, I think they are trying to get home buyers to bite on the properties before they decide to sell at investor purchase prices. So they are playing it slow and in no rush to give away deals without it first sitting on the market for a SOLID few months. Lets be honest though. REOs (atleast in my area) do not hang around long enough for a smaller time investor that's using Hard Money, paying points, carrying costs, etc. to make their numbers work for them to make a solid profit. Cash is King and always will be.

Sam Yin · Answer

I'm sorry Bill... I'm going to have to agree with most of what you just wrote. I have a strong feeling that the prices will keep creeping up, and even more so when the rates drop.As for inventory, there seems to be a steady supply of inventory in CA. I constantly get called with opportunities, many of which are pretty good, they are just not listed on the open market. Prime evidence is the constant number of closings off the market. Makes you wonder just how many players there are in a given area. I snatched up as many as I could before depleting my capital. I guess I could take some of these off-market offerings into a partnership... but its just not my style at the moment and I do not have the network to pitch it too. I feel I would have to really operate it for my equity share. Then it will defeat the purpose of passivity, which was the whole point for me to begin with.That being said, there is just too much to pass up for too long. I think I explore equity extraction to have some liquid ready to go.

Robert Rixer · Answer

Good perspective, thanks for sharing. In many markets, there hasn't been a single deep discount sale of a multifamily property. This is allowing existing buildings in trouble to argue the value in their building is still there. A deeply discounted comp would hurt these buildings' and their ability to refi and could cause a trickle down effect to the rest of the market. It's happening in office right now but in multifamily, there just haven't been any truly deep discounted transactions anywhere. All it takes is 1 or 2 dominos to fall in a specific market that could trigger action but agreed the banks could be propping this up from happening.

Benjamin Aaker · Answer

Hopefully we have some bankers who are willing to weigh in on this. I agree with you, Ashley, that I believed MF sale prices would be lower than they are today. This hasn't stopped me from looking, but has stopped me from buying. There often is a big gap in what I'm willing to pay due to the mortgage I need and what the seller's misty-eyed retrospective value is. If it's true that 60% of bridge loans aren't paying their mortgage, that ties up huge $$ for banks with little return (except that which they would get by owning the asset themselves). I'm not a banker, but this would seem to me to threaten the solvency of some banks, who would be more than happy to foreclose and sell for a good price. Obviously, that hasn't happened big-time yet. Which is why I'm hoping we have a few lenders willing to give their insight.