Putting Out a Distress Call
With a 40 percent vacancy rate and shoddy maintenance, a Louisville practitioner knew it would be a challenge to sell this multifamily building.
June 1, 2009
Location: Louisville, Ky.
Square footage: 18,000
Lot size: 2 acres
Number of units: 12 (2-bedroom, 1-bathroom units)
Year built: 1951
THE CHALLENGE: Neil Blumberg, broker-owner for Metro1 Realty in Louisville, Ky., faced a myriad of challenges when he agreed to list a 12-unit apartment building, which had once served as a U.S. Army barracks. Property values in the area were depressed, the building had a 40 percent vacancy rate. Plus, it was steps away from a strip club, a bar, and a tattoo parlor. To make matters worse, the building’s owner lived 3,000 miles away, and poor management had resulted in severe physical deterioration.
“I really didn’t think I would be able to get this one done at first,” he says. “The property had lost one-third of its value since the seller bought it in 2006, and he wasn’t prepared to sell for less than he owed, plus my commission, plus a 10 percent pre-pay penalty on the first mortgage. And because the seller had borrowed money from friends to purchase the property, he also wanted to have these unsecured creditors paid in full as part of the deal. So I was really up against a lot.”
How did you overcome the challenge?
BLUMBERG: I put out a call to my network of past clients, including investors who I knew who were not afraid of difficult properties. I prepared spreadsheets showing various scenarios of potential, probable, and possible return on investment and capitalization rates [a measure of the ratio between the net operating income produced by an asset and its capital cost rate]. And I opened a candid dialogue with all parties involved. In doing so, I was able to persuade the bank to accept the seller’s demands, including paying off a substantial amount of those unsecured debts he owed to the creditor friends from whom he had borrowed money to purchase the property.
We were in a declining market, with a lot of uncertainty as to where the bottom was. But I was definitely helped by the fact that Louisville has traditionally been a very stable market, which tempered that uncertainty to a certain extent.
How long did it take to sell the property?
BLUMBERG: I got the listing in July 2008. The listing price was $400,000. The property sold on Sept. 15, 2008, for $210,000. The bank received a $175,000 payoff.
How did you get the initial listing?
BLUMBERG: I make a point of staying in touch with former clients. This particular client was an investor I had worked with previously. He was in trouble and needed to sell but at first he didn’t want to tell me what was going on because he thought with all the obstacles, his property was unsellable. Finally, one day, he told me he was in trouble so I agreed to help.
How much did you spend marketing the property?
BLUMBERG: Nothing except for the cost of making phone calls.
How many times did you show the property?
BLUMBERG: Once, but I kept other buyers informed in case the deal I was working on fell through.
How did you find the buyer?
BLUMBERG: I have a network of people who are prepared to buy distressed properties. So I placed a call to previous client who I knew would take a look at just about anything.
What do you attribute to closing the deal?
BLUMBERG: Open communication. I attempted to conduct a very transparent transaction and copied seller, buyer, and both lien holders on most e-mails. I often conducted three-way and sometimes four-way calls. Obtaining the confidence and permission of all parties to share details normally not shared in this way was invaluable. Everyone knew everything and knew they weren’t going to get any more or any less. The truth made this deal work. It’s a potent tool.
What lessons did you learn from this transaction?
BLUMBERG: I learned not to prejudge a bank’s bottom line. When I originally heard what the seller wanted, I honestly thought there was no way the bank would go for it. But once everybody started talking to each other, they were able to settle any differences. All the parties involved had strong personalities. If you do this with one weak party and a strong party, you may find the weaker person gets into trouble. So you have to be careful. But in this case, it worked.
Do you have a specialty or niche?
BLUMBERG: I often work with owners of distressed properties, as well as investors and disadvantaged buyers. My goal is to find creative solutions in residential and commercial real estate transactions. I also attempt to stay abreast of the latest technologies and I have a live webcam feed that lets me chat face-to-face with clients and use video e-mails extensively. My clients love that they actually get to see me respond to questions over the e-mail.
How did you get into distressed properties?
BLUMBERG: When I started in real estate, I was just a guy at a desk with no clients. So I started looking for a niche. One day, my broker asked me to try and help this woman, who had been struggling to sell her home for years. Her husband died of cancer 10 years earlier. Now, she had cancer. It was a terrible situation. I had no idea what to do. But I got on the phone and called the bank and started negotiating. Eventually, I did a short sale and made $13,000. At the time, I didn’t know I had done a short sale. But the client and her family were so grateful and crying at the close and hugging. It brought out the social worker in me.
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