Hidden Gems Await in Distressed Property Market for Multifamily Sector
Amid the new, glass high-rises and trendy podiums going up in the urban core and beyond are still some hidden gems. Bank distressed homes or apartments that need repairs await the right kind of owner who can add polish and create a comfortable, safe residential experience.
The playing field for distressed property landlords doesn’t include new construction or spruce-ups of recently built properties. Instead, communities that bear the long-term effects of poor maintenance and management practices or those that are ridden with crime can be good investment opportunities. It’s not uncommon for some to be heavily discounted and sell for far less than current value.
“They require more work, more effort,” says Jim Stock, who owns Florida-based Vision Management, LLC*, which specializes in turning distressed properties into viable communities. “They may be older, it’s not the type of product everybody says they’ll put an ad out and increase their occupancy.”
The north Florida property owner looks for sub-prime or distressed multifamily properties to revitalize. Typically, the properties are B, C and D, usually the kind that once had a bad reputation. Maybe they were crack houses, and need more work than a good remodel.
The properties usually aren’t candidates for high-tech amenities and the latest gadgets that come with more mainstream apartments. Discontinued carpet and paint provide the right eye candy without going to great expense for the community’s clientele.
The goal is to create a safe, clean environment for residents who are often on low budgets, but deserve better than depressed living conditions, Stock says.
Despite soft market for distressed properties, opportunities exist
The market today for distressed properties has diminished because of a strong economy that has propelled new construction and development. Inventories pale compared to six years ago, when foreclosures brought on by the recession led to a flurry of activity.
Today, the distressed property market is running at all-time lows. At mid-2015, distressed sales, cash sales and institutional investor sales were down to multi-year lows even though sales for first-time buyers and others using FHA loans were up.
The multifamily market has been equally soft since a number of properties were available in 2009-11 as the bottom dropped out of rents. Four years ago in Las Vegas, fixer-uppers near the strip were widely available.
Upward pricing pressure today is minimizing the number of opportunities where an investor can pick up a distressed property for a low price. Within every market, however, are the ugly ducklings that Stock says investors can turn into Cinderella stories, even in multifamily.
Revitalizing a distressed property goes beyond aesthetic repairs
A new coat of paint and upgraded carpet is but a small piece of turning around distressed apartments. The bigger brush strokes come with rebuilding the tenant base by providing a safe, clean place to live and, in some cases, working more closely with residents.
Tenant budget counseling sometimes comes with the territory, says Stock, who shared his philosophy on distressed properties at June’s National Apartment Association Education Conference & Exposition in Las Vegas. He recommended to use the available leasing and management tools, and don’t be afraid to go beyond convention approaches.
Call it a little character underwriting
“You verify what matters, like criminal background checks, rental history, employment history, expense to income ratio,” he said. “We meet people where they’re at, but it’s not a plug in number and social security and let the computer tell them if they are approved or not. Use your common sense. Help the person who deserves to be helped and cut your losses on the ones who don’t.”
Working with local vendors on close-outs, leftovers keep costs low
A key to keeping a property affordable, Stock says, is being frugal but smart. When he acquires a property or upgrades an existing one, he doesn’t pan designer websites for the latest trends in exterior or interior design. Instead, he heads to the area’s “carpet row”, where carpet and flooring companies warehouse. He builds relationships with vendors, and that helps get first dibs on discontinued items, leftovers and other products that don’t move.
While the carpet or fixtures may not match the unit next door, and it may not always be soft and squishy under the toes, he banks it will be an improvement for the incoming tenant.
“You can have cool looking trim, but it doesn’t have to be expensive,” he said. “Make it such that when someone walks in, it’s, ‘Wow, this is nicer than what I’ve been in.’ It doesn’t have to cost that much to make the entrance look nice.”
He hasn’t paid more than $2.50 per square yard for carpet in six years, and he makes use of new paint that will be disposed of at the city dump. Every dollar saved is worth $7-$8 in capitalized value, he says.
“It’s out there,” he said. “It takes work. Our homes get nicer with age, because we keep doing the little things that keep making the home look newer and nicer.”
Going extra steps to keep property clean pays in long run
Stock pays an employee to walk the grounds of his communities each day and pick up trash, do spot weed cleanup or even make a run to the city dump if garbage pick-up is a few days away. It’s one of his golden rules: Keep the property clean to ensure long-term safety. An overflowing dumpster or trashy grounds are invitations for unsavory characters who can affect the reputation of the property and sour resident confidence.
The added expense is just pennies spent compared to remedying a potential greater problem that could require law enforcement intervention.
“It’s lose the battle and win the war,” he said. “The goal is to create community that’s clean and safe, full of tenants who pay their rent. If we do those things, we win the war. If we win the war, good things happen. We stay around longer, we get paid more and we have opportunity.”
*For more information on Vision Management, LLC, please contact email@example.com.