Real Estate Journal Online

In Chicago, nearly half of all housing sales are distressed properties[1]. And while that does not necessarily mean good things for the housing market as a whole, it has spawned a new breed of real estate investor, called a “workout investor,” that are sifting through the backlog of deals stagnating thanks to failures at the end of the “boom years” and literally working something out. While workout investors are not unique to Chicago, their activities do tend to be focused in hardest hit areas like Chicago. These investors may create online listings to help promote their properties nationwide, specialize in distressed auctions, work for and with banks to make condo buildings more salable or convert them to multifamily properties or even specialize in the more traditional “fix and flip.” Oddly, though, it is a largely secretive group – for the most part because lenders do not want to work with investors who will let the world know the dire straits that many banks are in. If they did, everyone would be trying to get in on the “goldmine” of workouts, explains one investor in the area who says that “everybody wants a workout, but everybody wants to keep it a secret.”

Firms that specialize in workouts are springing up all over the country. They advertise themselves as the next step when an individual property owner’s efforts to keep a piece of real estate have failed. For example, in the San Francisco area, one company “played hardball” when a bank refused to work with the owner of a property facing foreclosure. They managed to negotiate the debt down by 75 percent and brought in a buyer for the property[2]. Ben Thypin, a senior market analyst at Real Capital Analytics, believes that banks actually need the presence of workout investors in many cases because it helps them make the case to shareholders and their own investors that they are getting the best value possible. “Having a third party involved lends credibility to whatever amount they are able to recover,” he explained.

However, particularly in the case of commercial properties, the original owners may have more leverage than they realize. If a bank mishandled a loan or offered to do things for the owner that may not have been followed through on, then a property owner may be able to negotiate the debt on the commercial property down to current market value, the “holy grail” of this type of workout.

Some analysts believe that if workout investors continue to work at their current pace, the housing market could resolve itself in another three to five years. Do you think that this “new breed” is good for the industry and for the real estate market as a whole?

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[1] http://articles.chicagotribune.com/2011-04-29/classified/ct-mre-0501-buying-failed-housing-20110429_1_workout-properties-real-estate

[2] http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/04/22/BUIJ1J5IAQ.DTL