Archive for the ‘Investing & Bank Regulations’ Category

Bank Failures and Real Estate Supply

Investors and Colleagues,

Last Friday, another three banks kicked the bucket…

At the end of last week, the FDIC announced that Integra Bank, Virginia Business Bank of Richmond, and Bank Meridian were officially insolvent and would be merged or taken over by the government.

Bank Meridian hit closest to home as the South Carolina bank was forced into a merger with SCBT Financial – another South Carolina bank. All together, these three banks represented about $2.5 billion in assets, and the total number of failed banks this year is now at 61.

A few generations ago, even one or two bank failures like this would have the potential to damage the entire financial system. If depositors lost their assets at one bank, consumers would be likely to pull their savings out of other financial institutions – igniting a run on the bank and sending the system into a state of chaos.

Today, of course, the FDIC protects depositors by ensuring the first $250,000 for each depositor. So as long as your savings account is below a quarter million, you can rest assured that a bank failure won’t result in you losing money.

Most people understand that the FDIC insures deposit accounts, but fail to realize what happens behind the scenes when a bank goes under.

The Proud New Owner of Real Estate
When a bank is taken over by the FDIC, depositors receive the full value of the assets in their accounts, and the FDIC actually takes over the assets of the bank. Sometimes the assets are able to be merged with another more healthy bank, but often these assets continue to sit on the FDIC’s balance sheet.

For banks who have made bad real estate loans, these assets actually represent property that has been foreclosed on.
Here’s an example… A southeastern developer might take out a $3 million dollar loan from Bank Meridian in South Carolina to purchase development property in Greenville, Nashville and Atlanta. Due to poor planning and a difficult economic environment, this developer goes out of business and the bank forecloses on the property.

Now a few quarters later, the bank is declared insolvent and is taken over by the FDIC. The FDIC pays the depositors cash and assumes ownership of the bank’s assets (including the developments in Greenville, Nashville and Atlanta).

The FDIC is now the proud owner of a few hundred acres of residential property. But of course this is not the position the government entity is supposed to be in. The FDIC’s assets are supposed to be held in cash so they have capital available to insure deposit accounts.

So what does the FDIC do with these developments? Well, the short answer is that they go looking for a buyer. Sometimes the assets are able to be merged with another bank, sometimes the real estate is sold to a private buyer, and sometimes the land is put up for sale by auction.

Today, the FDIC is sitting on a substantial amount of non-cash assets such as residential real estate developments. The number of bank failures over the past two years has been very high – and the longer it takes for our broad economy to recover, the more banks continue to fail.

Bank Failures Create Opportunity
Now no one wants to see banks continue to go under. But for us as investors, these bank failures actually translate to opportunity.

With the FDIC holding significant amounts of real estate (and needing more cash to cover deposit balances) there are some tremendous bargains available to opportunistic buyers.

At Ashford Capital, we are working directly with the FDIC to identify attractive properties and buy them at a significant discount. We only purchase properties in locations that we expect to rebound quickly – and this gives us a chance to sell the locations at a substantial profit for our investors.

Could we grab a few minutes to chat this week? I would love to give you details on some of the deals we are negotiating and help you grow your capital through one or two of these opportunities.

Wishing you every success,
Matt

What Would Another Banking Crisis Look Like?

Investors and Colleagues,

As I write you this letter, Wall Street is under significant pressure. On Monday, US markets were hit by another round of selling – led lower to a large degree by financial stocks.

The newspapers and TV reporters had plenty of negative material to point to. The major US banks have been reporting relatively strong earnings, but when you look at the details, the picture is much less clear.

Banks are shifting capital around and “creating” income by cutting back on the amount of capital they have set aside as a risk buffer. This is financial engineering at its best… Positive earnings simply by moving numbers around on the balance sheet.

The charade isn’t fooling investors and traders, whose sell orders are now pushing the financial sector to its lowest level this year. And even as executives are wrapping up their conference calls, new risks are rising from overseas.

You see, the debt crisis in Europe affects our own financial system. European banks own large blocks of government debt that is becoming increasingly risky. US banks may not be very exposed to European government debt, but they certainly have plenty of interaction with the European banks.

If the trouble in Greece spreads to Portugal, Italy, Ireland or Spain, US banks could wish that they still had that risk capital set aside – and not moved into the “earnings” category.

Risk Overseas = Deals at Home
So how does a European debt crisis affect an Atlanta-based real estate company? The dots are more closely connected than you might think.

As the banking industry is forced to deal with their growing exposure to the European crisis, they need to unload risky assets to avoid a crisis like we saw in the fall of 2008. This means that we are still sitting down to the negotiating table, and able to command the very best prices for any properties that we purchase.

Negotiating from a place of strength is a very powerful advantage. When we begin discussions with a bank or even the FDIC, we always start by making one thing very clear:

We don’t need to complete this transaction.

We may want to buy the attractive development. We may even have a builder lined up to begin putting houses on the lots. We may have investors that are anxious to participate in the deal. But we always approach the negotiations from a detached perspective.

If the terms aren’t attractive, if the price isn’t low enough, if the stipulations are too constraining, we simply walk away – it’s that simple.

But the banks don’t have that luxury. For them, the clock is ticking and the risk is mounting. Every day that they are not able to move these underwater assets off their books, they lose capital. More importantly, they lose credibility. The banks are negotiating from a place of weakness which is why we have been able to ink so many attractive contracts over the last several years.

New Developments In Progress
While we’re constantly researching any number of different properties for a potential investment, there is a specific real estate development that I am particularly excited about.

I can’t give you the specific details because we haven’t yet signed the contract. I don’t want to risk this letter reaching a competitor and jeopardizing our negotiation. But I would love to speak with you personally about this opportunity.

The neighborhood in question is in a suburb outside of Atlanta and is one of the more desirable communities in the region. The amenities are beautiful. The surrounding neighborhood is pristine. The community is well established. A builder simply became overextended and was foreclosed on by the bank.

Now we have the opportunity to pick up a number of lots at a tremendous value – and should be able to quickly turn around and sell them to a builder for a tidy profit.

I’d love to discuss this opportunity with you – and determine how we can help you grow your investment capital. Would you call me this week to set up a time? I look forward to our conversation.

Wishing you every success,
Matt

Another Catalyst for the Banks

Investors and Colleagues,

If the banks and the FDIC weren’t scared before last week, they certainly are now.

On Friday, the non-farm payroll report for June was released, indicating that the economy added a mere 18,000 jobs during the last month. This was in comparison to expectations for an addition of 80,000 jobs.

As if this news wasn’t bad enough, the figures for last month were revised lower… a LOT lower. For the month of May, the economy added only 25,000 jobs, less than half of the previously reported gain of 54,000 jobs.

As it now stands, the unemployment rate is now 9.2% and rising. This is bad news for the majority of US banks with real estate exposure. If the employment picture is not recovering as quickly as expected, then the banks’ portfolios of foreclosed real estate likely holds more risk than they expected.

This means that major US banks are once again sitting down at the negotiating table, and willing to take almost ANY offer – just to reduce the amount of risk on their balance sheets.

This is a great development for us at Ashford Capital. Not only are we able to buy these properties at an extreme discount from the financial institutions, we’re also seeing an improving environment for builders who will be BUYING our properties in the next several months.

The Silver Lining for Housing
In addition to the non-farm payroll report, there was another news report that caught my attention last week…

The Wall Street Journal published an article noting that apartment rents were rising, while vacancy rates were ticking lower. The piece made a bullish case for owning the stocks of apartment companies – but it also has an interesting application for the residential housing market.

If rents are going up, consumers actually have a stronger incentive to own their own homes. Interest rates are still at historically low levels, and credit-worthy buyers can get a great deal when purchasing a new home.

The other benefit of higher rents is that existing homeowners who bought investment properties are more likely to be able to rent out these homes and be cash-flow positive. This also applies to new investors purchasing distressed houses and in-turn renting these houses out.

A Thawing Real Estate Market
As the economics for residential real estate improve, our investment opportunities become even more attractive. Expectations for the amount of time it will take for our developments to sell are declining, while the actual profit margins are remaining stable or even increasing in some cases.

Ashford Capital continues to close transactions at incredible valuations, which is a benefit to our investors. We continue to be in the sweet spot of this economic cycle (at a point where banks are selling cheap, but select areas of the market are still recovering nicely).

Considering the volatility on Wall Street and the uncertainty in the financial markets, it’s important to have a diversified and balanced approach to your investments.

At Ashford Capital, we have the flexibility to tailor a real estate investment directly to your needs. We offer plans that are compatible with your IRA, and we will work directly with you to make sure understand exactly what you are investing in.

Don’t you owe it to yourself to protect your capital and grow your investments (regardless of the market environment?)

Please give me a call today so that we can discuss the best plan for you and create a wealth-building strategy that fits your investment objectives. I look forward to the conversation.

Wishing you every success,
Matt

Home Sales and Bank Regulations

Investors and Colleagues,

The economic news just keeps getting better for opportunistic real estate buyers.

This week, the National Association of Realtors released their report on pending home sales for the month of May. The results showed that last month had the strongest improvement since last November!
The pending home sales index was 13.4% above its level from last year. And on top of the stellar May data, the Association also revised the April reading higher.

The NAR’s chief economist was quoted in the Wall Street Journal as saying:
“This solid gain in contract signings implies that home values in many localities are or will soon be stabilizing as inventories get absorbed at a faster pace.”

The key point is that “many localities” (namely, attractive neighborhoods in communities with strong economic growth) are seeing price improvements.

The data is encouraging because obviously the overall housing situation is getting better. But as an investor, you still have to be very careful where you make your investments. Attractive housing areas are getting more attention and prices are moving up. But if you invest in the wrong neighborhood, your capital could still be tied up for years, waiting for the local market to improve.

At Ashford, we’re pretty pleased with the quality of real estate that we have been able to pick up – and we’re already beginning to see a dramatic turnaround in demand. For many of our properties, we now have to make the decision of whether to sell for good gains today – or wait for tremendous returns a few months down the road.

… not such a bad spot for our investors to be in…

Banking Regulations Still Lead to Opportunities
At the same time that housing statistics have been improving, large blue-chip banks have had to deal with some bad news.

Last week, the Bank for International Settlements (BIS) announced an agreement on capital requirements for large “Globally Systemically Important Banks.” These are the banks that are “too big to fail” and the BIS is an international regulatory agency that helps set the rules for the largest global banks.

The new agreement required huge banks to increase their capital ratios over the next few years. Considering the leverage that these banks currently have, the new regulations are a pretty big deal.

What this means for real estate investors, is that the large banks are going to have even more incentive to get rid of foreclosed developments sitting on their balance sheets. The new regulations require much more “Tier I” capital – and residential property doesn’t qualify. So once again, buyers like Ashford Capital have the upper hand when negotiating to purchase residential developments.

Isn’t it time you took a look at the opportunities we are pursuing at Ashford Capital? Regardless of whether you’re an institutional investor (with several million to allocate) or an individual with retirement assets to put to work, we can find a good investment for you.

The current economic season offers more opportunity than I have seen in years, and I am truly excited about the returns we are generating for our investors.

Ashford Capital typically structures each deal so that our investors are paid a preferred rate of return along with the ability to participate in the profit once we liquidate a particular holding. This setup aligns our interest with our investors, so that we make money when our clients are successful.

I would welcome the opportunity to show you exactly how we can help you generate excellent investment returns. Please call me so that we can set up a time to chat.

Wishing you every success,
Matt

Google+