It is no secret that the residential real estate world is experiencing tremendous pain and chaos today. Homeowners are losing their homes. Default and foreclosure rates are higher than they have been in decades. Lenders of all types are incurring huge losses. As a result, the opportunists are starting to get really interested.

In every crisis, there is opportunity. The last huge real estate crisis occurred in the early nineties when the commercial real estate world underwent tremendous upheaval. At that time overbuilding, changes in the tax code and bank failures combined to cause a lot of pain to real estate owners and developers. And into the chaos flowed the opportunists – people like Barry Sternlicht who started Starwood Capital (and then Hotels) by raising outside capital and buying distressed properties from the government. And, in the process Mr. Sternlicht became very wealthy.

Now that real pain is back in the real estate world (limited so far to the residential arena), the opportunists are back – circling areas like Southern Florida where there is a huge surplus of condominiums for sale – both new construction and converted rental units (buildings in the process of conversion). And banks and other lenders are beginning foreclosures and, in fact, starting to take back properties through negotiation with troubled owners (sometimes called obtaining a “deed in lieu of foreclosure”). This process will accelerate in the upcoming months.

One thing that became very clear to lenders of all stripes during the early nineties is that they are not equipped to own and operate real estate. As a result, they want to sell very quickly. Hence the opportunity for entrepreneurs.

From single-family houses to large apartment properties (or blocs of units) that were to be converted, the real estate entrepreneur with capital, or access to capital, should be active today. The key is to build relationships with the lenders. In doing this the real estate entrepreneur will learn of potential deals early and oftentimes before a lender forecloses for there are many situations when a deal is struck between the lender, the current owner and the buyer – all before legal proceedings have begun.

There is even talk that the commercial real estate world, too, will begin to experience problems. If so, the entrepreneur will find a whole new slew of opportunities to consider.

The problem is risk of course. Of assessing when is the right time to move aggressively and when to wait. There is no answer to this. Most of the smart investors and entrepreneurs are projecting a 3- to 5-year turnaround and calculating the return on their investment assuming prices rebound within this time period. Any calculation that potentially yields an internal rate of return in excess of 20% warrants your taking action immediately – as that is a worthy return in light of a defined risk. return to front