Tag Archives: real estate auctions

Michael Jackson’s “Neverland” Rescued by Colony Capital

Foreclosure was front page news again today, but not the kind based on subprime loans to people who can’t afford them.

In this case, the foreclosure (almost) happened to ’80s pop star and (alleged) child rapist Michael Jackson.  The property is Jackson’s famous 2,500 acre Neverland Ranch, just outside of Santa Barbara, California.

According to press reports, Jackson owes $24.5 million on Neverland to Financial Title Company, and can’t pay.  The foreclosure auction for the ranch was scheduled for this week. 

Jackson was bailed out today by an investment company that purchased the loan.

We think that the company that bailed out Jackson by purchasing the loan — Colony Capital LLC — made an excellent deal.

The folks who run Colony Capital are exceptionally smart investors, and the Neverland deal fits perfectly with Colony Capital’s philosophy of “cautious contrarianism.” 

As they explain on their website, Colony Capital “employs the entrepreneurial investment strategy which has been successfully executed over the past sixteen years. This strategy is designed to consistently achieve attractive risk-adjusted returns by minimizing competition with other capital sources, while maximizing value through intensive post-acquisition management.”

“Three themes define this strategic approach:

  • Cautious Contrarianism during downturns or secular changes, investing in out-of-favor sectors or markets to exploit capital or product misalignments
  • Exploitation of Inefficiencies capitalizing on information advantages to identify micro-market imbalances and secure investments on favorable terms 
  • Value-added Management to Optimal Exits creating capital appreciation opportunities through repositioning, restructuring, development, and intensive management.”

Both Jackson and Neverland will no doubt benefit from Colony Capital’s “repositioning, restructuring, development, and intensive management” efforts.

Michael Jackson himself is certainly improperly managed and “out of favor.” 

And no doubt misaligned as well.

For those of you who haven’t been to the Neverland Ranch area, take it from us that it is amazingly beautiful, and is certainly worth far more than Jackson owes, especially with proper management.

We also like this remark from Colony Capital’s Founder, Chairman, and CEO Thomas J. Barrack, Jr.  

In an interview with the French magazine Paris Match, Barrack explained the financial crisis that has followed the bursting of the U.S. housing bubble as follows: “Confidence has disappeared because no one knows any longer who owes what to whom, or what it’s worth. It’s as if toxic waste had been sold in cans with ‘gold’ printed on the lid.”

We wish we’d said that.

 

 

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Billions Poised to be Invested in Distressed Real Estate — But Small Buyers, Beware!

The New York Times reports today that major investors, fueled by domestic and foreign investment groups, wealthy individuals, endowments and pension funds, are prepared to spend billions of dollars buying distressed debt and real estate. 

These investors – often called “vultures” although the Times calls them “market opportunists” – believe that “some people have thrown the good out with the bad, and that the prices of some investments have simply fallen too far.”

For example, the Times reports that one Wall Street specialist in so-called distressed debt “recently spent at least $450 million for assets of Thornburg Mortgage, the battered mortgage servicing company. Others are buying beaten-down corporate bonds and looking at car and credit card loans.” 

“They are buying up mortgages of hard-pressed homeowners, the bank loans of cash-short businesses, and companies that seem to be hurtling toward bankruptcy,” said the Times, “And they are trying to buy them all on the cheap.”

A former executive of the Countrywide Financial Corporation, one of the mortgage giants that fostered subprime lending, recently helped start a company to buy mortgages.

In addition, the Blackstone Group “just raised $10.9 billion from investors to scoop up real estate.”

GlobeSt reports that “According to a company statement, this fund was the largest real estate opportunity fund ever raised.”

Blackstone senior managing director and New York City-based co-head of Blackstone’s real estate group, Jonathan Gray, stated that  “we believe there should be attractive investment opportunities for this capital given the market dislocation that exists today.”

We agree that the current distressed real estate market offers tremendous opportunities. 

The time is right for active, intelligent investors to take advantage of the multi-billion dollar distressed real estate market.  The real estate market is brimming with profit opportunities for those with leverage and expertise

But this is not an easy market for individual, smaller investors to penetrate.

The truth is that most smaller investors do not have the leverage and expertise to succeed in this volatile and extremely competetive market.

In fact, the effort that the smaller, part-time investor in foreclosures and distressed real estate would need to spend identifying properties, haggling with lenders and distressed owners, attending auctions and establishing financing is equivalent to a full-time job — and even then, success is far from likely.

Most smaller investors in this market will get caught up in the buying frenzy, spending too much time and money on so-called coaching and how-to courses from self-proclaimed foreclosure gurus, and then spending too much on property that will continue to fall in value and fail to provide an adequate income stream.

Great real estate deals do exist across the country. But to be successful, investors will need a high level of sophistication in identifying properties, acquiring them and developing the right exit strategy for each asset.

Smaller buyers, beware!

UPDATE:

For the lastest on the real estate vulture fund being formed by disgraced ex-Governor of New York Eliot Spitzer, click here.

Real Estate Auction Investigated — Homes Sold May Not Have Been Foreclosed. Angry High Bidders Still Waiting for Properties.

We’ve written about possible bid rigging in real estate auctions.

Now Massachusetts is investigating an auction of 300 foreclosed homes by California-based real estate auctioneer Real Estate Disposition Corp. to determine whether some homes were sold before the foreclosure process was completed.

According to the Boston Globe, about a quarter of the winning bidders at a November real estate auction held by Real Estate Disposition Corp. have yet to close on their homes.

“Frustrated bidders say they have spent thousands of dollars on deposits, fees, and financing only to find themselves mired in delays and legal complications that raise questions about the integrity of the auction.”

The Globe reports that “In several cases, bidders waited months for mortgage companies to take ownership of the homes that the companies had offered at the auction.”

The article also states that “In addition to those properties that the lenders had not yet foreclosed on, in other instances Real Estate Disposition failed to retain the lawyers necessary to conduct closings.”

Letters have been sent by the Massachusetts Division of Standards to several Real Estate Disposition Corp. employees warning them that they could lose their state licenses if they auction properties prematurely.

The Globe also reports that the company “has previously acknowledged the problems with the November auction, and said it has changed its policies to exclude any property from the auction until foreclosure is complete.”

We’re not big fans of real estate auctions. 

Certainly, there are deals out there.  But too often there is not enough time to conduct a proper inspection of the properties, and the opening bids are more opening gambits than real opening offers. 

We also think that the due diligence necessary to participate sensibly in real estate auctions requires the time and effort of a full time job. 

Unless you’re willing and able to make going to auctions your primary occupation, we think you’re more likely to waste your time and money than make a profitable deal.

What has your experience been with foreclosure auctions?  We’d be happy to post any insights you might have.
 

Are Real Estate Auctions Rigged?

We recently came across a study by the University of Melbourne in Australia that questioned whether real estate auctions were “rigged” against potential buyers of the auctioned property.

With the tremendous rise in foreclosures and the auctioning of financially distressed property in this county, we thought we would post the conclusions of the Melbourne report and ask for your comments.

Here is what the professors at the University of Melbourne had to say:

Auctions have always been promoted as a tried and proven method of achieving the highest sale price for a property. It gathers together prospective purchasers in one place at one point in time and sells the property to the highest bidder.

It has been proven in empirical research that auctions generally achieve a higher final transfer price than an open market sale.

Even though both approaches are applied in the same marketplace within the definition of ‘market value’, there have been no valid reasons to explain this difference.

One practice that has been openly acknowledged is the practice of ‘dummy’ bidders, which may partly explain this premium. The use of ‘dummy’ bidders by the vendor and/or auctioneer could have the effect of distorting the true market value, designed to deceive the purchasing public into competing at an inflated price in the auction process.

It appears that the genuine popularity and reputation of the auction process is seriously threatened by the deceitful use of ‘dummy’ bidders. Steps must be taken to eradicate the tactic before the entire residential auction industry is discredited, and the ‘level playing field’ must be returned for the vendor, auctioneer and the bidders alike.

Potential improvements to the auction industry to discourage this practice could include strong fines to both the individual auctioneer and their employer, with endorsement of the fines by the relevant industry body.

Not until after the successful eradication of the ‘dummy’ bid and associated deceitful practices (e.g. ‘two tier’ marketing) will purchasers and vendors be able to confidently trade in a fair and equitable marketplace. Only then will valuers be able to rely on true market value sales with a higher level of confidence.

Does this reflect your experience with real estate auctions? What advice would you give to those who are thinking about buying property today at an auction? Your comments are welcome!

UPDATE:

For our post on the investigation of an auction of foreclosed homes by California-based real estate auctioneer Real Estate Disposition Corp. to determine whether some homes were sold before the foreclosure process was completed, click here.