Commercial real estate industry responds to changing foreclosure market

A company might acquire foreclosed property for a variety of goals, such as rental income or mortgage securitization. Read on to learn more.

Before the housing market crisis, many mortgages allowed borrowers to pay less initially -- perhaps even with no down payment -- and face higher adjustable payments after a period of years. The theory behind that purchasing strategy depends upon a market where housing prices are rising: Borrowers can simply refinance their loans or sell their properties to pay off their mortgages in a few years.

Unfortunately, when housing prices fell in 2008, many homeowners with little or no equity in their properties were unable to sell or refinance their properties to avoid the higher adjustable rates. Lenders came calling, and many homeowners found themselves under financial stress or even facing foreclosure.

Property acquisition of foreclosed single-family homes

Some in the commercial real estate industry responded to the housing market crisis by purchasing foreclosed or distressed homes. One property acquisition research company estimates that institutional buyers purchased more than 386,000 single-family homes nationwide since 2011. The number of foreclosed homes managed by a single institutional buyer could number in the tens of thousands.

A real estate investment trust, or REIT, is an example of one type of entity that may have purchased some of the foreclosed properties. A REIT is a type of company that allows investors to invest in income-producing real estate, similar to the model of a mutual fund. A REIT could be a collection of foreclosed homes that where renovated for resale or rental.

A REIT might generate interest income by investing in the mortgages encumbering the properties. Mortgages could also be pooled and offered as an investment option. Such securitized mortgages might be backed by hedge funds, pension systems or other private equity companies.

In the case of rentals, a REIT might generate income through rent collection. The sheer volume of properties could require property management companies to deal with issues like maintenance complaints or delinquent rent payments. Yet according to a recent article, the recovering housing market has sharply reduced the supply of foreclosed homes. As a result, some investors are now looking to sell those properties.

Real estate agreements and contractual disputes

Under either REIT scenario, the need for an experienced real estate attorney should be apparent. Of course, disputes may sometimes arise over the contractual terms in a real estate agreement. In that instance, an attorney can provide guidance, as well as representation through any real estate litigation.

 

However, the housing market has provided enough volatility of late; there’s no need for additional drama arising from any after-the-fact discoveries in a contractual clause. From the initial due diligence of a proposed deal to a comprehensive review of real estate contracts, a commercial real estate entity needs to be protected from unintended consequences.

Keywords: mortgage, refinancing, rental income, foreclosure, mortgage securitization