How to buy properties out of foreclosure discussed.

Speakers at an Association of Real Estate Women seminar gave attendees an inside look at the disposition of 520 assets valued at $2.6 billion from the Chase portfolio and counsel on buying similar properties out of foreclosure.

Chase Manhattan Bank vice president and portfolio manager Rochelle Dobbs discussed the accelerated disposition of the properties to free up capital and focus on more profitable businesses. "The economics made sense to take the write downs," she said.

Morgan Stanley advised the bank how to maximize the proceeds by selling on an all cash basis and minimizing the reps and warranties. By establishing a long due diligence period and giving potential bidders full access to all documentation, Dobbs explained the buyers would be informed enough to buy "as is.

The assets were divided into seven pools, with one pool of 93 assets in the New York City area. The pools were valued on a Derived Investment Value (DIV), a term that the Resolution Trust Corporation used in selling its assets. The DIV is a way to value loans on a portfolio basis with very conservative figures on a net present cash flow basis. The Chase properties went out at approximately 55 cents on a dollars and the bank ultimately wrote them down to 39 cents per dollar, Dobbs said.

Kenneth Leventhal was hired as the due diligence advisors. They made site inspections and developed condition reports and surveys that went into a library opened in New York for investor research. The investors were charged a refundable $25,000 to enter process.

To make the bidding and subsequent closings go smoothly, Chase sent out sample contracts before the bid deadline and received five back marked up. Where there were similar comments, Dobbs said, and the Chase attorneys felt comfortable with the changes, the comments were incorporated into the final documents, So when they received the bids, they were received with clean contracts, she noted.

One problem that became a "sore point" among the bidders, admitted Dobbs, was the ability of borrowers to re-purchase their loans out of the portfolio.

John Kukral, a principal of Colony Capital Inc., represented the winning bidder of several of the portfolios. He said the closings themselves were a massive undertaking but were all closed before Thanksgiving. But, he said, referring to Dobbs, "Chase set a great example" in its handling of the process.

Colony Capital was formed with some investors from the Robert Bass Group and was involved in the American Savings Bank liquidation. At that time, Kukral said, they realized "you can make money" from lender assets. They subsequently bought another $2.5 billion in assets from the RTC.

"Financing drives your ability to win these large pools," Kukral advised. Initially, because of the risks involved, this investor group was looking for returns of 35 to 40 percent. Subsequently, they actually obtained returns of 150 percent, not unheard of for early purchasers of portfolios.

Now Kukral noted, a recent portfolio was priced at a 25 percent return. Colony likes to get in and out in one year, he added. With securitized buildings, he warned, each piece has to be paid off before the investor can get its money out.

"There is tremendous competition to buy apartment buildings," he observed. And now that office rents are coming out of the doldrums, "there is a lot of money coming into real estate."

It's just like the 1980s Kukral added. "People are coming to us saying |We will replace your debt source.'"

He also noted that real estate investment trusts may be over as a financing vehicle. While his company is considering organizing a hotel REIT, he says they might "end up holding the bag if we haven't bought at the right price to get out."

Shea & Gould partner, Edward J. Martin III, gave advice on buying properties out of foreclosure. He suggested that buyers get a new tide report, or at least a last owner search of the property. "If you are buying a mortgage," he said, "look into a hazard insurance policy."

As for environmental issues, Martin said if the lender has a study or the owner took out a loan four to five years ago, there probably is no current assessment of the environmental conditions. Now, he advised, buyers need an up-to-date report for financing.

Martin said buying a property out of foreclosure if more advantageous the farther along in the process it is. Often, he said, a potential bidder can cut a side deal with the bank so that the lender will protect this bidder at the auction.

One advantage at a foreclosure sale is that such a buyer is freed from the transfer gains tax. New York State has many taxes due on sales, including the transfer stamp tax at $4 per $1,000; a .0265 tax on transfers above $500,000; a mansion tax on residences over $1 million; and the transfer tax of 10 percent of the amount of any gains. These add about 3 percent to any sales price, Martin said. Often, they are a consideration many parties don't take into account until one lawyer says, |Who's going to pay this?,' Martin reported.

He also noted that although the bid documents say lenders want purchasers to close with in 30 days, that time period can be stretched. Additionally, most lenders do not want to take title if they can avoid it to keep them out of the lender liability rut. "Holding the bid open does not put the lender in the chain of tide for environmental liability," Martin said. On the other hand, if a receiver is involved, the lender may want to take title to save those fees.

When going to an auction, Martin advised the potential bidder should come with certified checks to cover the downpayment on the initial bid and have on hand incremental checks to cover downpayments up to the highest amount the bidder is willing to pay.

The panel was moderated by Barry Bloom, counsel to Stockschlaeder & McDonald, and was held at the TIAA conference room at 730 Third Avenue in mid-December.