“Many of the lenders have been extending loan periods to try to give developers and condo converters additional time to make sales, especially in markets such as Florida and Phoenix.” says Jack McCabe, CEO and managing partner of McCabe Research & Consulting in Deerfield Beach, Fla.
But if things continue to sour, condo developers may not be able to make any payments. Then, the banks will begin cutting off life support. “As soon as [developers] are out of money, they won’t have a say,” says Ken Stevens, co-founder and West Coast partner for Boston and San Francisco-based Accelerated Marketing Partners, a firm that specializes in the sale of real estate. “They’ll hand the keys back to the bank.”
But the banks can’t really hold onto the condos for long, either. For one thing, banks aren’t equipped to hold large real estate portfolios. “The banks are being inundated with real estate,” says Robert Roggeveen, president of Auction Services Group in Chicago. “When they take property on REO [real estate owned], they have to include it in loan loss reserves.”
Even if the banks want to hold onto foreclosed real estate, there’s speculation that federal regulators wouldn’t allow them to do so. That’s another incentive to auction off foreclosed real estate. “Their [lenders’] books keep getting bigger and bigger with REO properties and no accrual loans,” McCabe says. “Examiners will tell them they can’t do business until they move them off their book. That’s when we’ll see the real flood gates open.”
Once that does happen, there’s a feeling among most—especially those who lived through the real estate downturn of the early ’90s—that lenders will put a lot of these units on the auction block. “It’s probably going to get to the point where the bank will be hiring the auction company, not the developer,” says Dan Gumbiner, president and CEO of Orion Residential, a multifamily investment firm based in Chicago. “I think you’re starting see that pop up around the country.”
STAGE 2 Make a decision, for better or worse.
Unfortunately, some developers and builders have been forced to auction units. One of those people was Ken Neumann, CEO and owner of Warrenville, Ill.-based Neumann Homes. Although Neumann made his mark in single-family homes, he also built for-sale multifamily product. In November 2006, soon after the ill-fated purchase of Tadian Homes in Detroit, Neumann auctioned off 23 single-family homes, 24 condos, and 40 home sites at about 80 percent of list price.
In late July 2007, Neumann was back at the auction block in Detroit shedding the last of his inventory in struggling Motor City. A little less than three months later, he declared bankruptcy.
“It’s not uncommon for someone to use an auction to save themselves as a last-ditch effort,” Stevens says. “All you’re doing is throwing a raft at someone who has already drowned.”
More developers are choosing not to wait for their bank to force an auction, though. Gruendl didn’t have any pressure from his lender. Gumbiner says the same thing. After seeing one of the competitors to his EOS Twenty-One project, a 344-unit condo conversion in Alexandria, Va., hold a successful auction last fall, he decided it was time to follow suit this past March.
