Wednesday, June 29, 2011
Dear Reader,
If you have been to an auction where a handful of motivated buyers chase a single item (whether a beachfront home or a precious work of art) you will have seen first- hand how this works: A small number of buyers driving the price higher and higher.
The exact opposite happens when many sellers chase a single buyer. Prices go down. This is what happens in a distressed real estate market. That’s why we can at times (like today) buy for cents on the dollar in certain markets.
The economy, real estate market and banking systems of the U.S. and some countries in Europe are weak (at very best). In some locations there are many times more sellers than buyers. We can watch while prices are pushed to the bottom. We’ll wait at the bottom and buy quality properties…for a song.
Today’s distressed opportunities are divided into three categories:
-Individuals in distress
Many folks in the U.S. are under financial pressure. They need to pay their electricity bills and put gas in their car and food on the table. Something’s gotta give. And it might just be their dream home on a white-sand beach in the Caribbean or overlooking a dramatic Pacific coastline that they bought in better times.
When they go to sell they may find that they are competing with other folks in the same boat as themselves, for a small pool of buyers. And the buyers know that they hold all the cards so they wait until the price becomes a “no brainer”.
-Developers in distress
Developers built expecting that they would have no problem selling their units. The economic slowdown combined with oversupply of properties led to a breakdown in some markets. Sales dried up. High-quality, completed units are left unsold. To sell, the developer will have to offer deep discounts.
-Banks holding distressed real estate
Some developers failed and their bankers took over their projects and unsold (but completed) homes and condos. Now it’s the bank’s problem. They want to recoup as much as they can from the failed project and move on.
Irrespective of the type of distress play you are making, you need to follow our golden rules for buying distressed property.
#1. Buy quality (location, construction, amenities and fit-out). In the boom years, junk was built that should have never been built. Avoid these junk deals, irrespective of how attractive the sticker price looks.
#2. Don’t take on any construction risk…buy completed units. You don’t want to rely on a developer’s promise that he will complete the units. He may fail and never deliver.
#3. Don’t take on any project risk…make sure if you buy in a condominium project that it is functioning. You don’t want to be one of only 10 owners in a 100-unit condominium. If the community fails, no matter how nice your unit is, it could well be worthless.
Roatan and Ireland are two places where there are distressed deals to be found today.
Roatan is located just off mainland Honduras, close to the world’s second-largest barrier reef. Roatan is everyone’s idyllic Caribbean-dream destination. There was major real estate and tourism development on Roatan in the 1990s and in the first half of the last decade. Cruise ships, resort developers, direct flights from the U.S…property buyers and retirees…started to come in droves.
With good reason. I can hardly imagine a nicer place to be—and it’s mostly English-speaking.
When I was there five years ago, the real estate market was screaming “bubble!” New projects were poorly thought out, overpriced and underfinanced. Since then we’ve seen the U.S. property market collapse. We’ve also seen a global financial crisis.
Today, you can find opportunity on Roatan, but you need to be smart…and to be in the right place at the right time.
Returning to Roatan recently for example, I caught word that the owner of a resale lot previously listed at $160,000 was reducing his asking price to $50,000. He needs the cash. I visited the lot. It’s stunning…with views to the reef and breaking surf. Neighboring lots are in the $150,000 to $180,000 range. To get access to deals like this, you need to be on the ground and in regular contact with connected locals and realtors. When deals like this are offered they are snapped up in hours.
In Ireland, today’s opportunity is at distressed fire sale auctions.
The last auction took place in April. You could have picked up a three-bedroom semi- detached (known as a suburban row house in the US) home in the midland town of Mullingar for 30,000 euro. Or a city center condo in scenic and culture-filled Galway city for 70,000 euro. Right in the heart of Dublin’s Temple Bar, a studio apartment overlooking chic Essex Street, with a maximum reserve of 80,000 euro sold for 128,000. Units sold at a discount of 80% or more compared to their peak valuation.
The next fire sale auction in Ireland takes place on July 7th. And the deals are going to be even better.
Ronan McMahon
P.S. Members of my Real Estate Trend Alert group will get a full report on the opportunities set to go under the hammer in Ireland. Tomorrow I jump on a plane to Ireland. I’ll check out some of the units at the auction in advance of the big day. I’ll even show you how you can bid from your armchair. If you’d like to join Real Estate Trend Alert, click here to find out more.
Posted Under:
profit play, distressed, ireland, honduras
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