Near-term opportunities lie in acquiring distressed debt because it will be some time before the opportunities to acquire discounted properties will materialize.
Savvy buyers are “focused very hard on the FDIC pipeline” of distressed loans.
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The focus on the FDIC is related to the two primary components of the distressed loan market. One of these is healthy banks that are trying to sell their bad assets; the other is distressed loans that the FDIC has acquired from failed banks.
The FDIC is a more motivated seller than the healthy banks right now, so we see more opportunities there. In the case of the distressed debt being marketed by healthy banks, the spread between bid and ask prices is so wide that few such deals are closing.
In cases where it buys properties, savvy buyers will target the main property types that real estate investors have traditionally focused on: industrial, low-rise office and medical office. In the case of distressed debt, buyers will have to be more flexible, because loan pools often include a variety of property types as the underlying collateral. In cases like those, the buyer might keep the loans on the office and industrial properties but sell off those that are secured by other property types.
Savvy buyers will try to work with borrowers to resolve the loans it buys. The solution might be for the borrower to pay off the loan at a discount, or for the buyer to modify the loan and remain a lender and possibly sell the loan later. In the event that the buyer can’t resolve a loan and takes title to a property via foreclosure, the buyer’s background provides the expertise to see a project through to completion.