The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful:
There are a number of key differences between working with special servicers and working with foreclosed single-family properties. Often times, these special servicer properties will be scooped up by funds that have billions of dollars at their disposal as pieces of entire portfolios. With large and workable teams, they’ll work the entire portfolio for a profitable outcome.
Richard Wilson: Interesting that if you compare that to single family residential – people see a home under foreclosure or bank owned, they have to be very patient, they have to pay full cash for that asset, you don’t know if you’re going to get it for 6 to 9 months. I thought maybe with special servicers “Oh, there’s paper on the property for $1.4 million, the property is worth $2 million, the bank is not getting paid, I thought perhaps in some cases you could buy it for what the bank has the paper on it to relieve the bank of that being on their balance sheet. Can you comment on those two perspectives of someone who’s kind of ignorant of special servicers on some level? Is it a “You have to pay all cash, and wait 6 to 9 months to even know if you’re getting the thing or not? And can you ever buy it just for the paper the bank has on it in some cases?
S.L. Van Der Zanden: Well, I think with a single family home, you’re talking about homestead rights. You know, the right to redeem the six month period, where the title isn’t yours until that’s expired. With special servicers, they can sell the paper, but you want the real estate, and to do that you have to successfully foreclose on the property. Which takes, again, your 6 to 9 months or more. So, the hard part about buying notes is if you pay full price, and it’s 80% of what the property is worth or whatever, that’s great – but if the buyer redeems, they pay off the note, you’ve made nothing, right? And you’ve probably expended legal bills. A smart buyer wants to buy that note at a discount. The note holder has to be stressed enough to be willing to sell it at a discount, that’s why it doesn’t happen more often. Usually what happens is these funds with billions of dollars buy out a whole portfolio, there’s performing loans, there’s non-performing loans, and then they sort of separate into stacks and work it. They have the teams to do it, and you work through it. It’s not a lot of fun, but it is profitable.