I had mentioned this a couple of days ago...I have no idea how multifamily units bought in the last 6-7 years are staying afloat in the hard hit areas. With rents at current levels,even with 20% down,i am very sure with current occupancy rates a unit will still cash flow negative.
I currently have over 25% my units empty,rents vary between 92-98 prices and yet have not had a single call to rent in over TWO weeks. We advertise in the paper/signs at all properties...The renters just up and quit calling.
If this continues after the first of the year it will get reallllly ugly here in Southwest Florida.
The only saving my family from panicking is we have no debt on any properties...
Thank god we didn't try to expand with one of the 3-5% down loans offered !!!
Anyone who loaned this guy money deserved to lose it.
Smuck is no stranger to adversity. In the 1980s, he built a huge portfolio of apartment properties in the Louisiana and Texas through the syndication of limited partnerships. His company at the time, Equity Group, was the largest real estate syndicator in New Orleans, controlling nearly 20 limited partnerships.
Those deals began to unravel following the closing of the limited partnership tax loopholes in the infamous Tax Reform Act of 1986. Many of the partnership properties, largely garden-style apartment complexes, were either deeded back to mortgage holders, foreclosed upon or placed into Chapter 11 to prevent foreclosure.
His garden-style complexes today will likely end up with the same fate. Special servicers assigned to the problem loans by the CMBS trusts have already started initiating foreclosure actions on Smuck properties, according to November bondholder reports
This is why there is still persistent fear in the financial markets--nobody knows where the risk really lies. Start looking at a company in Texas that's facing default, and you could end up looking at losses in a central bank in Singapore, after passing through a half a dozen intermediaries, each of which has varying levels of exposure to the risk.
Why rent in a rental complex? There are so many private rentals available. People can get a nicer place for a lower rent, as long as they don't mind that they might have to move if the owner loses the property.
Most of the individual properties are still doing fine:
Walnut Creek (60 days delinquent):
Dec-2005 DCR: 1.18
Dec-2006 DCR: 1.23
June-07 DCR: 1.31
They have a 30% cushion in making payments every month and have been stable since origination. I think this is the most significant paragraph in the article:
To put that number in perspective, Fitch Ratings counted only $96.3 million in total delinquent multifamily loans across all CMBS deals in October. MBS Cos.' delinquent CMBS loans in November were already more than six times that amount, and could go as high as 10 times that amount.
I am actually fearing for this type of thing in NYC - not because it's hard to rent places, but because it's hard to rent (and keep high-paying renters) at the prices needed to maintain a multifamily (especially if you've leveraged it to buy other multis)
I'm not speaking of Manhattan (yet), but the other boros, which are filled with smaller multifamilies and apartment buildings that can't command manhattan rents.
RealEstateRisk is the only one hinting at the real problem here - its not the Texas MF market (that's old news) Smuck owns the buildings, but he's not supposed to be co-mingling funds. Several complexes are operating fine, others have holes in the roof and are being condemned for "vermin infestation" among other things. These are not cross-collateralized, cross-defaulted loans - they are supposed to be individual entities, so the loans with decent DSCRs should not be delinquent. I'm not going to drop the F bomb (Fraud), but he's definitely not playing by the rules.
He's not the only one, by the way. There are a handful out there that went down a similar path - my favorite is another guy with MF in Texas (which is a tough sector anyway) who is quoted in several articles back in 2004 flipping single-family homes in the slums (just like Flip that House , and today he owns 20 MF in Texas and a few other states that are 30, 60, and 90+ days delinquent. He went from 15% hard money loans to multi-million CMBS loans in a 3 year period, lives in a 1.5 million house on the river, and didn't bother to learn the real estate business during his luck/unlucky stint in a real estate bull market.
I inquired about refinancing for a lower monthly payment (combining my mortgage and HEL) with the idea of lowering as many monthly costs to get through the years to come. I was too late, as I thought, but interestingly I am receiving offers in the mail to refinance, and the offers list the actual amount of my mortgage, HEL and credit card balance. What's up with that? Why hasn't that sort of thing stopped? Why are they wasting the postage?
So now I am really a renter with a tax deduction and I have to pay for repairs myself. I have definitely reduced my trips to Home Depot and put off painting the house indefinitely. As the neighborhood deteriorates...
Alo, it is only difficult if you overpaid in the last few years.
If you have owned in New York for a long time, you are golden. If you bought in the last 5 years thinking you would gain instant riches . . . well.
My last landlord (a scumbag slumlord) carved a 4 story into 16 studios and 1 bedrooms. Even with rent stab, the guy has a rentroll nearing $200M/yr. Does zero maintenance to encourage high turnover. Paid $200,000 ten years ago for the building. So he's basically printing money.
Current landlord (a saint) charges less than market b/c she wants long-term tenants in her family house. Three rental floors over two family occupied. Tenants get a good deal, she gets great tenants, and bills are paid with plenty of cushion.
Now, as for all the people who paid 400-800,000 for one bedroom condos in hopes of renting them out and flipping . . . they're f*ed.
Yes, there was the theory that house prices would force people back into renting. However, what most don't realize is that the person per household rate has dropped dramatically over the past twenty years.
People will move in together, get married, move back to parents, etc,
when money becomes an issue. Not start renting.
"Somehow, this needs to be spun and repackaged as sub-prime."
This is sub-prime.
That is what the financial markets are slowly waking up to. Sub-prime borrowing behaviors spread through all tiers and products of the credit markets. Both personal and commercial. Mom & Pop and Major Corporations. The products all had features that encouraged subprime style behaviors and they were targeted at all credit levels.
It didn't matter if you had an 800 Fico, you still found those people drinkng the koolaid and leveraging their properties with cash-out refi's. Going to the "Go Zone" to buy rental properties even though they didn't previous own rentals. People exporting their appreciation from San Diego under the cheerleading of the Real Estate pundits on Radio to Phoenix, Vegas, SLC, FLorido buying properties.
If you played from 2004-2007, you were subprime. Even if you were buying not to get priced out forever, you likely straddled it with a subprime product with optional features to make it work.
Why rent in a multi-unit? While renting a real house is MUCH nicer, I'd prefer not to have move on a whim when the owner goes under... that, and considering how many f'd buyers these days are crooks, I hate the concept of giving them a rental check and hoping they don't screw me in some fashion.
That being said, I'd much rather buy a place of my own, but since I am not stupid or irresponsible, that goal will have to be postponed for years to come. Thanks to the Fed and the I-banks - if the goal was to screw over responsible people and encourage greed and corruption, then Mission Accomplished!
I know a few of those long-term landlords, Gary - and it's true - they can weather practically any storm if they haven't leveraged.
But I imagine quite a few have in the boom years -- I remember a couple of years ago calling banks about buying a multi and the mortgage banks/brokers made quite a sales pitch about leveraging properties to purchase additional buildings. (Perhaps there were great fees to be gained by pushing commercial buyers into these deals, much like traditional buyers)
So you could be a landlord with a solid building (much like a homeowner with a paid-off house) who fell into the trap of buying additional properties because your building was worth so much more, and interest rates are low, and yada yada.
Not sure how many building owners took the bait, but there sure are a lot of 6-fams I see going into foreclosure now...
Renting a SFR or Condo or Multiplex unit isn't the issue. You want to rent from a professional landlord. The way things are now prospective renters should be asking to exchange financial information when searching for a place to live. The renter needs to come up with the rent every month. That's a much easier calculation than the landlord keeping current on insurance and taxes and setting aside enough for mantainence while keeping your deposit secure.
In my upstate NY city multi unit buildings have been selling at prices that result in signifcantly negative cash flow. I've never understood this approach and thus I stayed out of the market since 2004. Much of it was NYC money.
It will be interesting to see how many of those come back on the market at prices in line with rental income. At some point losing money on your buildings year after year must get annoying.
I'll give ya some hope. I transferred to Florida 3 years ago to help the parents with our rentals. When i got here i had my money from the sale in Ohio. I looked around and said "This is insane". So i rented an apartment from myself . I haven't bought yet....
ABCP extended it's 'winning' streak, contracting for the 18th straight week to the tune of -$10.3 billion, total CP down -$5.3 billion through December 12th...
I've never understood this approach and thus I stayed out of the market since 2004.
Same here in northern Vermont. I looked at buying a duplex when I moved here but getting a positive cashflow on something that isn't about to fall down is nearly impossible, even if you don't budget and save for repairs and do your own management. I don't understand why they continue to sell at the current prices.
I can't believe nobody has pointed out the obvious - the number of commercial real estate companies affiliated with schmucks is orders of magnitude larger than being reported here.
that 25 year old guy just has rich friends. He is the chosen face of a faceless group of brooklyn investors (my guess is rich brooklyn Jewish retail traders, perhaps some from the world of those shady camera stores online with brooklyn warehouse addresses that do bait and switch?), they started out building some cheapie hotels - a holiday inn express for instance.
the offers list the actual amount
of my mortgage, HEL and credit card
balance. What's up with that? Why
hasn't that sort of thing stopped?
Because it's opt-out. You have to ask the credit bureaus to stop selling your information, and ask every few years.
You can look it up.
Prescreened Offers of Credit and Insurance sometimes called preapproved offers are based on information in your credit report that indicates you meet criteria set by the ... 404 Not Found
"If you played from 2004-2007, you were subprime. Even if you were buying not to get priced out forever, you likely straddled it with a subprime product with optional features to make it work."
How true. I remember looking at many apartment complexes in OC, LA, counties when i lived there in 2002 and 2003. Couldn't find one i was happy to buy. All were either cash flow negative or just barely positive with standard financing, and required adjustable rate mortgages with low initial rates in order to get a "decent" yield - 6% or so.
Looking at the debt service coverage ratios, the bad properties are almost all in Fort Worth. DCR is calculed using net operating income, and on a couple I showed the NOI using net cash flow (NCF). NCF is harder to manipulate.
Country Village, Alvin TX - 1.10
Walnut Creek, Austin TX - 1.31
Villas of Sage, Austin TX - 1.47
Lodge at Stone Oak, Austin TX - 1.34
Villas of Bristol, Austin TX - 1.21
Northcastle, Austin TX - 1.12
Hunt Gardens, Baytown TX - 1.36
Willow Tree, Baytown TX - 1.39
River Pointe , Conroe TX - 1.11
Timbers of Pine, Conroe TX - 1.27
Regents Cove, Forth Worth TX - 0.82
Hills, Forth Worth TX - 0.60 (NCF 0.44)
The Falls, Fort Worth TX - 0.94 (NCF 0.83)
Crescent Oaks, Fort Worth TX - 1.04 (NCF 0.91)
Trails, Fort Worth TX - 1.09 (NCF 0.94)
Carlyle Crossing, Forth Worth TX - 0.98 (NCF 0.89)
Just to clarify:
Debt Service Coverage Ratio = Debt Coverage Ratio = DSCR = DCR
Net Operating Income = NOI
Net Cash Flow = NCF
DCR (DSCR) can be calculated from NOI or NCF. NOI is typically used by lenders, NCF is used if you suspect accounting exaggerations. Even if there are not accounting exaggerations, NCF is usually lower than NOI.
Awesome post CR!
A perfect bookend at the bottom for the CC Meyers default at the high end; Page not found- msnbc.com
Commercial, luxury... we're all real estate now.
Somehow, this needs to be spun and repackaged as sub-prime.
Immediately.
Sub-prime is contained.
The containment is spreading.
C.R.,
I had mentioned this a couple of days ago...I have no idea how multifamily units bought in the last 6-7 years are staying afloat in the hard hit areas. With rents at current levels,even with 20% down,i am very sure with current occupancy rates a unit will still cash flow negative.
I currently have over 25% my units empty,rents vary between 92-98 prices and yet have not had a single call to rent in over TWO weeks. We advertise in the paper/signs at all properties...The renters just up and quit calling.
If this continues after the first of the year it will get reallllly ugly here in Southwest Florida.
The only saving my family from panicking is we have no debt on any properties...
Thank god we didn't try to expand with one of the 3-5% down loans offered !!!
Chris
Is it pronounced "schmuck"?
Heilige Mutter von Gottes! Alles ist kaput!!
Anyone who loaned this guy money deserved to lose it.
Smuck is no stranger to adversity. In the 1980s, he built a huge portfolio of apartment properties in the Louisiana and Texas through the syndication of limited partnerships. His company at the time, Equity Group, was the largest real estate syndicator in New Orleans, controlling nearly 20 limited partnerships.
Those deals began to unravel following the closing of the limited partnership tax loopholes in the infamous Tax Reform Act of 1986. Many of the partnership properties, largely garden-style apartment complexes, were either deeded back to mortgage holders, foreclosed upon or placed into Chapter 11 to prevent foreclosure.
His garden-style complexes today will likely end up with the same fate. Special servicers assigned to the problem loans by the CMBS trusts have already started initiating foreclosure actions on Smuck properties, according to November bondholder reports
This is why there is still persistent fear in the financial markets--nobody knows where the risk really lies. Start looking at a company in Texas that's facing default, and you could end up looking at losses in a central bank in Singapore, after passing through a half a dozen intermediaries, each of which has varying levels of exposure to the risk.
Why rent in a rental complex? There are so many private rentals available. People can get a nicer place for a lower rent, as long as they don't mind that they might have to move if the owner loses the property.
The article tries to hang this all on Katrina - and paint MBS as a savior of Katrina victims. I call BS on that.
PNC dodged a bullet by packaging the bonds up and spreading the risk, but this is still going to be a huge headache for them.
Cobradriver, it's good news you have no debt - but I'm amazed by the vacancy rate. I guess it is really bad in Florida.
Thanks for the info.
Best Wishes.
Most of the individual properties are still doing fine:
Walnut Creek (60 days delinquent):
Dec-2005 DCR: 1.18
Dec-2006 DCR: 1.23
June-07 DCR: 1.31
They have a 30% cushion in making payments every month and have been stable since origination. I think this is the most significant paragraph in the article:
To put that number in perspective, Fitch Ratings counted only $96.3 million in total delinquent multifamily loans across all CMBS deals in October. MBS Cos.' delinquent CMBS loans in November were already more than six times that amount, and could go as high as 10 times that amount.
I am actually fearing for this type of thing in NYC - not because it's hard to rent places, but because it's hard to rent (and keep high-paying renters) at the prices needed to maintain a multifamily (especially if you've leveraged it to buy other multis)
I'm not speaking of Manhattan (yet), but the other boros, which are filled with smaller multifamilies and apartment buildings that can't command manhattan rents.
RealEstateRisk is the only one hinting at the real problem here - its not the Texas MF market (that's old news) Smuck owns the buildings, but he's not supposed to be co-mingling funds. Several complexes are operating fine, others have holes in the roof and are being condemned for "vermin infestation" among other things. These are not cross-collateralized, cross-defaulted loans - they are supposed to be individual entities, so the loans with decent DSCRs should not be delinquent. I'm not going to drop the F bomb (Fraud), but he's definitely not playing by the rules.
He's not the only one, by the way. There are a handful out there that went down a similar path - my favorite is another guy with MF in Texas (which is a tough sector anyway) who is quoted in several articles back in 2004 flipping single-family homes in the slums (just like Flip that House
, and today he owns 20 MF in Texas and a few other states that are 30, 60, and 90+ days delinquent. He went from 15% hard money loans to multi-million CMBS loans in a 3 year period, lives in a 1.5 million house on the river, and didn't bother to learn the real estate business during his luck/unlucky stint in a real estate bull market.
I inquired about refinancing for a lower monthly payment (combining my mortgage and HEL) with the idea of lowering as many monthly costs to get through the years to come. I was too late, as I thought, but interestingly I am receiving offers in the mail to refinance, and the offers list the actual amount of my mortgage, HEL and credit card balance. What's up with that? Why hasn't that sort of thing stopped? Why are they wasting the postage?
So now I am really a renter with a tax deduction and I have to pay for repairs myself. I have definitely reduced my trips to Home Depot and put off painting the house indefinitely. As the neighborhood deteriorates...
Alo, it is only difficult if you overpaid in the last few years.
If you have owned in New York for a long time, you are golden. If you bought in the last 5 years thinking you would gain instant riches . . . well.
My last landlord (a scumbag slumlord) carved a 4 story into 16 studios and 1 bedrooms. Even with rent stab, the guy has a rentroll nearing $200M/yr. Does zero maintenance to encourage high turnover. Paid $200,000 ten years ago for the building. So he's basically printing money.
Current landlord (a saint) charges less than market b/c she wants long-term tenants in her family house. Three rental floors over two family occupied. Tenants get a good deal, she gets great tenants, and bills are paid with plenty of cushion.
Now, as for all the people who paid 400-800,000 for one bedroom condos in hopes of renting them out and flipping . . . they're f*ed.
The renters just up and quit calling.
Yes, there was the theory that house prices would force people back into renting. However, what most don't realize is that the person per household rate has dropped dramatically over the past twenty years.
People will move in together, get married, move back to parents, etc,
when money becomes an issue. Not start renting.
This may deserve a confessional posting:
Lehman Exec Says Subprime Contagion Spread To Prime Loans
(no story link, it was just a headline)
Maybe, instead of St. Joseph, would-be sellers should bury a Sam Zell action figure in the yard.
"Somehow, this needs to be spun and repackaged as sub-prime."
This is sub-prime.
That is what the financial markets are slowly waking up to. Sub-prime borrowing behaviors spread through all tiers and products of the credit markets. Both personal and commercial. Mom & Pop and Major Corporations. The products all had features that encouraged subprime style behaviors and they were targeted at all credit levels.
It didn't matter if you had an 800 Fico, you still found those people drinkng the koolaid and leveraging their properties with cash-out refi's. Going to the "Go Zone" to buy rental properties even though they didn't previous own rentals. People exporting their appreciation from San Diego under the cheerleading of the Real Estate pundits on Radio to Phoenix, Vegas, SLC, FLorido buying properties.
If you played from 2004-2007, you were subprime. Even if you were buying not to get priced out forever, you likely straddled it with a subprime product with optional features to make it work.
Why rent in a multi-unit? While renting a real house is MUCH nicer, I'd prefer not to have move on a whim when the owner goes under... that, and considering how many f'd buyers these days are crooks, I hate the concept of giving them a rental check and hoping they don't screw me in some fashion.
That being said, I'd much rather buy a place of my own, but since I am not stupid or irresponsible, that goal will have to be postponed for years to come. Thanks to the Fed and the I-banks - if the goal was to screw over responsible people and encourage greed and corruption, then Mission Accomplished!
texas multifamilies are a time bomb. too easy and cheap to build.
I know a few of those long-term landlords, Gary - and it's true - they can weather practically any storm if they haven't leveraged.
But I imagine quite a few have in the boom years -- I remember a couple of years ago calling banks about buying a multi and the mortgage banks/brokers made quite a sales pitch about leveraging properties to purchase additional buildings. (Perhaps there were great fees to be gained by pushing commercial buyers into these deals, much like traditional buyers)
So you could be a landlord with a solid building (much like a homeowner with a paid-off house) who fell into the trap of buying additional properties because your building was worth so much more, and interest rates are low, and yada yada.
Not sure how many building owners took the bait, but there sure are a lot of 6-fams I see going into foreclosure now...
Renting a SFR or Condo or Multiplex unit isn't the issue. You want to rent from a professional landlord. The way things are now prospective renters should be asking to exchange financial information when searching for a place to live. The renter needs to come up with the rent every month. That's a much easier calculation than the landlord keeping current on insurance and taxes and setting aside enough for mantainence while keeping your deposit secure.
In my upstate NY city multi unit buildings have been selling at prices that result in signifcantly negative cash flow. I've never understood this approach and thus I stayed out of the market since 2004. Much of it was NYC money.
It will be interesting to see how many of those come back on the market at prices in line with rental income. At some point losing money on your buildings year after year must get annoying.
If that lady next door allows me to take care of the cats again (the new ones she got to replace the old ones) maybe I'll buy it.
Pondering the Mess | 12.13.07 - 10:30 am |
Pondering...
I'll give ya some hope. I transferred to Florida 3 years ago to help the parents with our rentals. When i got here i had my money from the sale in Ohio. I looked around and said "This is insane". So i rented an apartment from myself
. I haven't bought yet....
Chris
Hey CR you may want to publish this one..
CIBC's Big Subprime Secret Might Cost Billions: Jonathan Weil - Bloomberg.com
CIBC has what may end up being several billion in losses on subprime insured by all but defunct ACA, that they have yet to reserve for.
OT but relevant,
ABCP extended it's 'winning' streak, contracting for the 18th straight week to the tune of -$10.3 billion, total CP down -$5.3 billion through December 12th...
I've never understood this approach and thus I stayed out of the market since 2004.
Same here in northern Vermont. I looked at buying a duplex when I moved here but getting a positive cashflow on something that isn't about to fall down is nearly impossible, even if you don't budget and save for repairs and do your own management. I don't understand why they continue to sell at the current prices.
NB: This article is NOT a parody.
Young tycoon to open downtown hotel
From my simple calculations, Mr Smuck is about 40 Million smuckers short every month.
I can't believe nobody has pointed out the obvious - the number of commercial real estate companies affiliated with schmucks is orders of magnitude larger than being reported here.
New thread upstairs, but no comment butto
They sure look like a bunch of shmucks now... :-/
"NB: This article is NOT a parody."
that 25 year old guy just has rich friends. He is the chosen face of a faceless group of brooklyn investors (my guess is rich brooklyn Jewish retail traders, perhaps some from the world of those shady camera stores online with brooklyn warehouse addresses that do bait and switch?), they started out building some cheapie hotels - a holiday inn express for instance.
Because it's opt-out. You have to ask the credit bureaus to stop selling your information, and ask every few years.
You can look it up.
Prescreened Offers of Credit and Insurance sometimes called preapproved offers are based on information in your credit report that indicates you meet criteria set by the ...
404 Not Found
Hank Roberts - thanks.
"If you played from 2004-2007, you were subprime. Even if you were buying not to get priced out forever, you likely straddled it with a subprime product with optional features to make it work."
How true. I remember looking at many apartment complexes in OC, LA, counties when i lived there in 2002 and 2003. Couldn't find one i was happy to buy. All were either cash flow negative or just barely positive with standard financing, and required adjustable rate mortgages with low initial rates in order to get a "decent" yield - 6% or so.
Obviously this company doesn't understand how to "cashflow" a spec property like the young wizard flippers.
Looking at the debt service coverage ratios, the bad properties are almost all in Fort Worth. DCR is calculed using net operating income, and on a couple I showed the NOI using net cash flow (NCF). NCF is harder to manipulate.
Country Village, Alvin TX - 1.10
Walnut Creek, Austin TX - 1.31
Villas of Sage, Austin TX - 1.47
Lodge at Stone Oak, Austin TX - 1.34
Villas of Bristol, Austin TX - 1.21
Northcastle, Austin TX - 1.12
Hunt Gardens, Baytown TX - 1.36
Willow Tree, Baytown TX - 1.39
River Pointe , Conroe TX - 1.11
Timbers of Pine, Conroe TX - 1.27
Regents Cove, Forth Worth TX - 0.82
Hills, Forth Worth TX - 0.60 (NCF 0.44)
The Falls, Fort Worth TX - 0.94 (NCF 0.83)
Crescent Oaks, Fort Worth TX - 1.04 (NCF 0.91)
Trails, Fort Worth TX - 1.09 (NCF 0.94)
Carlyle Crossing, Forth Worth TX - 0.98 (NCF 0.89)
Just to clarify:
Debt Service Coverage Ratio = Debt Coverage Ratio = DSCR = DCR
Net Operating Income = NOI
Net Cash Flow = NCF
DCR (DSCR) can be calculated from NOI or NCF. NOI is typically used by lenders, NCF is used if you suspect accounting exaggerations. Even if there are not accounting exaggerations, NCF is usually lower than NOI.
Do CMBS loans typically have recourse?
If two thirds of the loans are already delinquent, the spike won't be that huge.
So the company that owns the largest amount of multifamily residential property is headed by a man named Smuck.
That tells me all I need to know...
CMBS very rarely has recourse. I'd guess 1 out of 500 loans do.