Posted by ray@lcorn on February 08, 2010 at 18:35:38:
In Reply to: Re: The perfect posted by William on February 07, 2010 at 15:10:18:
William,
I use the term "white knight strategy" as the description of a situation, specifically the case where lenders are sitting on REO or pre-foreclosure properties in hopes of catching an upturn to avoid major losses. As I discussed in the Forecast, the relaxed FDIC regs have created a holding tank of bad loans and properties with the wrong owner. This has vreated a situation where commercial real estate lenders are much less likely to do short sales. They've got the opportunity to sit on it, and they'll do that for as long as possible to avoid charging their reserves which reduce capital.
So I looked for a way to get control of the property on their dime. Being a white knight means having the resources and ability to solve the problem. In short, I'm offering to partner with the lender to make them whole, over time, and in return I get the upside.
What it takes to make the deal is the same thing I always do... EXTENSIVE due diligence. That includes market analysis, physical inspections, and evaluating the current rent roll (e.g. tenant's business sector and outlook, market position, performance, etc.) and the expense profile. Due diligence shows the strengths, weaknesses, opportunities and threats (a SWOT analysis for you biz school grads) and literally writes the playbook. It may also tell me to not do the deal, often the most valuable intel to have.
Assuming there is potential for upside I formulate an investment plan to turn the property around. It might include anything from just performing deferred maintenance to a complete change of use. It includes a timeline for improvements and absorption, as well as financial performance, cash needs and carry costs, and most importantly, several exit strategies. I present this to the lender as an offer, not a request.
This also applies to amateur owners who are in trouble but not to the point of default, yet. When you find them, the first step is to tie the property up with an option or a contract with say $1000 earnest money to give you a chance to do the due diligence and evaluate the deal. If it has potential, then it is time to get the lender involved. You might have to make them aware they have a problem. Why go to the existing lender? First, because they are the ones with the money at risk. Second, they are likely to grab you like a life ring and offer more money to help you fix their problem.
And that's the crux of the strategy... using the circumstances to leverage your knowledge with their capital to produce a solution that works for all parties.
For details on how to do all that... watch out, shameless promotion ahead... I wrote a book with step by step directions on how to perform every phase. It's in the bookstore, at http://www.creonline.com/catalog/b-140.html
You see there is nothing really new... it still comes down to applying fundamental principles of sound real estate investment. This is just a different environment with a different set of players. If you have the knowledge of how to apply those principles you can approach owners and lenders who don't have the knowledge, and offer to solve their problem. As Dan Kennedy is fond of saying, "In the land of the blind the one-eyed man is king".
I've done three of these in the past year, worked on another one all last week, and spent two hours with a banker this afternoon evaluating his entire non-accrual list. I've also looked seriously at three other deals that I turned down.
Being a white knight is all about presenting your services to a new audience in a new way. The catch is that they need you more than you need them.
ray