The Credit Crunch Is Creating Insane Real Estate Deals

Obviously, a lender is going to finance something that's stable. And so you've got all these scenarios. And so when you start getting into bridge or you start getting into short-term debt, it's price higher. So, which actually makes it worse for the project because when you're buying something distressed, you know, you don't want really expensive debt, like hard money almost. So it's this kind of catch 22 that everybody's in. The interesting thing is, is that the lenders are taking big haircuts. And so I'll give you an example. We have an investment committee that we meet with every week. In the last month, we had two assets and we probably looked at six or eight assets, but there's two of them specifically. One, we made an offer at $8,000 a unit. Now, let me just wrap your head around that. $8,000 a unit is below the land replacement cost. Now, here's the thing, 100% vacant next to a military base and it's in Texas. And so the question would be, why would I ever buy anything like this, right? Well, because I know because I've done it, I could spend maybe 25, 20 to $30,000 per unit to fix that thing. It might take me two years and my entire basis is going to be, let's just say around $30,000 a unit. And so then I solve to the end and then I figure out, is it worth it or not? Right? So what would the market be today with today's rates, today's expenses, today's rents, my basis was 30 to 35,000 a door. And the answer on that particular one is it's around 60. So it's worth the short term. Now, it's not financeable. Have to buy it all cast, have to finance all the improvements. You would have to be out of pocket for basically everything. Correct. Yeah. Because who's going to finance a 100% vacant deal that's in full distress. Now, there are ways to do that and it's going to be expensive. So that's part of what we're looking at. But the upside, of course, is when we stabilize that, if we get it, when we acquire it, we know that we're going to be way in the money. And there's some variables there that we could be off on even, right? I mean, maybe it's $40,000 a door, but we're going to be fine on that asset when it's fully fixed and fully stable. The interesting thing and the irony is it's lender-owned. It was purchased four years ago at $90,000 a door. You know, think of the people before us, right? The equity's gone. The lender has certainly taken a massive haircut and who knows where all that goes. But we get this opportunity to fix it. And so those deals, they're not everywhere, but they're out there. You're dealing directly with the lender and there's massive risk on our part, of course, because interest rates could keep going up. We might completely mess up the renovation. I have done this for 30 years, so we have a pretty good understanding of how to pull this off. I've certainly bought a bunch of stuff like this in 2008 when what's now called the GFC was happening. So I'm used to this. The question is, what's your basis? What are you buying it for? What's it going to cost to fix it? How much money are you going to spend to get it to that point and add all that up? And that's your new basis and that's your full investment. And then what's that in today's market? And of course, if interest rates keep going up, then it makes more of a problem. If they stay flat, all things work. If their interest rates go down, that thing's going to be worth even more. And that's ultimately another risk. Well, there's a lesson, right? The lifelong lesson in any kind of investment, but especially real estate, is to be the guy on the other side, picking up the bargains. You can't be the one who's panicking, being forced to sell. You've got to be the one who has the resources and everything ready for the other side of it, right? That's what keeps coming up to my mind. You said the lender owns the property, so they're taking a huge haircut. Are there a lot more of those opportunities showing up or are these just one-offs that are here and there? Are you seeing that as more common? Or is it just lenders trying to clean up their balance sheets while they can? Yes, yes, and yes, I would say. It's interesting. I think they're certainly one-offs. We're seeing them, though, in different cities, different lenders. And the process is interesting, right? Because the lender's been involved for a long time. The lender's obviously, at first, trying to meet and negotiate with the borrower, perhaps. And then there's that process, and that could take time. And then, somehow, this thing got basically 100% vacant. Who knows why or how that. They obviously messed that up completely because you should not be 100% vacant anywhere. But I actually found two properties like this in two different cities. And so they are one-offs at this point. But every lender, of course, just like, let's say, you are a lender. You have to look at your situation personally. What do I want to do here? Do I exit? Do I sell it? Do I take my loss? Do I not? Obviously, a board, probably, and shareholders. You have to get approvals on all this stuff. So it's not like a light switch, right? Sometimes it's a death of 1,000 cuts. And then you're just sitting there fully defeated. Sometimes you have very sophisticated lenders, banks, debt funds that are like, yep, let's just take the cut and move on. We'll figure it out, move it the other way. And the process can be faster. In all cases, there's usually a broker in the middle somewhere trying to figure out, one, trying to get the listing for sure, but also negotiating with both sides. But what you say, we've got a lot to talk about. There's a lot to discuss here. We've got the energy shock. We've got interest rates, AI, which is on everybody's mind. Probably the stock market a little bit, though. That's one thing I do like about the limitless crowd is it's less about equities and more about deeper commercial matters and things like that. So let's talk about that. Let's talk about interest rates a bit here, because we got the CPI report for June, which I think shocked some people in how weak it was. I'm not sure the market was all that shocked, because you look at Treasury Inflation Protection Securities, who have been saying there's no inflation risk, yet the marketplace is pricing higher rates because the market's looking at the Fed and Kevin Warsh, who are focused on oil prices and not the rest of the economy. So you understand where people are thinking, all right, where are interest rates really going to go? Are oil prices going to stay high? And is that going to lead to a regime where rates are going to go up? And so from your perspective, Ken, in real estate, I imagine this is something that people are just laser focused on. They are. You know, it's interesting, because I saw that come out this morning and I saw the CPI drop. Core inflation, however, didn't change all that much, as you know. It does matter. The 10-year and the two-year matter to us a lot, right? And we did not see dramatic movements in those yet. Obviously, there were some, but they, you know, those matter. Like this, this all matters a lot. What's interesting to me is I actually don't know why the energy costs went down that much. I mean, I saw the price. It doesn't look to me like there's anything meaningful that really happened in the last 30 to 60 days, like around any of this, like the straights are still a mess and the reserves are still a mess. And, you know, and so I'm like, well, why, why is all this happening? You know, there's somebody behind the curtain there that's pushing this down. And it's very interesting. Well, if you look at what's going, if you look at the CPI, just start with the CPI numbers themselves. What they said is that, you know, what the Fed keeps focusing on is energy prices go up. And because energy, you can't really get away from it, is energy prices go higher than say you're a service provider and your energy costs go up, your input costs go up, then you've got to raise your prices, providing whatever service to the public in order to get that money back. And so the Fed, it's an institution staffed with economists. So they're always thinking ceteris paribus. So all else being equal, if energy costs go up, then other prices should go up alongside them because it only makes sense. But we live in a real world where all else is never equal. So what the CPI report reported was essentially that energy costs went up and then they came back down, but other costs didn't go up. Other costs went down. I mean, this is something that Walmart was talking about just recently. Walmart said, we would love to raise prices on our customers, but we know what happens when we do, we raise our prices, they disappear.