The laws of economics have created the market distress as covered by the media. Economic woes are on everyone’s lips and easy money in the last decade has been identified as the culprit. Predominantly, economic factors fueled speculative buying creating excessive demand running up prices but not necessarily actual values of real estate. Buyers jumped in with a “gold rush” mentality acquiring multiple properties in heavily promoted regions such as California, Nevada, Florida, and Arizona using credit backed only by “stated income” and a signature. Buyers thought they could get out before the day of reckoning, but this “false demand” resulted in excessive supply. When the day of reckoning finally did come, speculators could not unload before the massive market corrections – creating massive portfolios of non-performing loans and homes for sale with few buyers.
While the states listed above exhibited the most dramatic price jumps, prices escalated across the United States (just less dramatically) for two more reasons: 1) non-speculators – homeowners – were using “paper gains” from new valuations of their homes to borrow 100% or more of the newly inflated values, and no one complained because the economy benefited from lots of consumer spending; and, 2) easy money policies allowed many people to qualify for loans to buy homes (and to borrow against them) who would never have qualified under normal circumstances.
Regardless of the cause, many people received loans without having the means to service them. This led to a market free-fall and the large volume of non-performing loans being bailed-out today.
Owner distress exists when the owner has problems that need to be solved independently of the marketplace. This might include financial circumstances such as when a lender calls a loan; alternatively, the property owner could face business failure, personal trauma like divorce, or pressure from the IRS. A buyer with ready cash is usually the best solution for this problem.
Building distress occurs when tenants have taken advantage of the property through irresponsible behavior that management has tolerated and not remedied. It may be correlated to owner distress. The owner may have siphoned cash that is flowing well from a particular property to prop up sagging performance on other properties or for lifestyle issues. Neglecting routine maintenance and deferring capital projects creates a cycle of deteriorating real estate, decreasing rents, and decreasing value, all of which further deter the owner from contributing capital to address the problems. A buyer with ready cash works well to solve this problem.