A MODERN FAIRY TALE FOR THE HOMEBUILDING INDUSTRY

Having raised two children and now having two grandchildren, I continue to enjoy fairy tales.  They tend to have happy endings and often include a moral that teaches a lesson that applies to everyday life.  So here is a modern fairy tale appropriate today for the homebuilding industry. 

     A little old lady sold pretzels on a street corner for 25 cents each.  Every day a young man would leave his office building at lunch time and as he passed the pretzel stand he would leave her a quarter, never taking a pretzel. 

     This went on for more than 3 years, day after day, week after week. The two of them never spoke.  

     One day the young man was laid off from his job and although he was angry and depressed, as the young man passed the old woman’s stand he again left his quarter as he had done every day for the past three years.   

     And today, for the first time in three years, the pretzel lady spoke to him.

fairytale       Now if this was a classic fairy tale, similar to the ones that you have read to your children, the old woman would have turned into a beautiful young princess and, to reward the young man’s charity, she would have married him and they would have lived in her castle happily ever after. 

     But this is a modern fairy tale.   

     So, the old woman, without blinking an eye, turned to the young man and said:   

     “They’re 35 cents now!”

That is very similar to what I have seen as the operating philosophy at several of the major banks lately when attempting to work with my clients to purchase some of their distressed real estate assets. 

One of the major money center banks has REO (“Real Estate Owned”) consisting of a partially built upscale single family community.  The property is fully developed with an impressive entry and clubhouse.  Ten homes had been started of which three have been sold and closed while the remaining seven are in varying stages of completion and currently suffering physical deterioration.  Forgetting the overall economy and the current condition of the local housing market, this would have been an extremely challenging development for any new homebuilder to take over due to the conditions and limitations already in place on the property.

Nevertheless, my client loved the location and believed that an opportunity existed so I prepared a market analysis and redevelopment strategy for the property including a residual land value.   My client agreed with my conclusions but really wanted this property so he offered the bank $5,000,000 more than what we agreed it was worth and he submitted my report and Excel spread sheet so that the bank could examine the analysis and dispute any conclusions with which they disagreed. 

The bank’s response was not that the analysis was wrong nor the value was incorrect but, rather, that their basis substantially exceeded the offering price and even though the property had been abandoned for over a year, they would pursue a higher price. 

An additional year has now passed, the bank has been paying taxes and maintenance on the property, the partially built homes have not been touched (and continue to deteriorate), and the property still sits as REO on the bank’s books apparently as they continue to wait for Prince Charming to ride in on his white horse with that higher price.

Perhaps it is time for the banks and the overall homebuilding industry to stop relying on the old fairy tales and move into the 21st century where not all of the fairy tales have happy endings.  But that’s just my opinion.

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2 thoughts on “A MODERN FAIRY TALE FOR THE HOMEBUILDING INDUSTRY

  1. Thank our great tax law system on this and others like it. It is better for the bank to hold on to it, write the loan off as a loss, collect the tax credit on it, then later sell it. Because it was written off, every dollar they get for it at sale will be a “profit” dollar, looking great on the books and the bank prez gets the big bonus!!!

  2. Dan,

    You could not be more right about this subject. I can recount another 100 stories just like this one. I keep saying “why am i the only one who gets this” when we talk to bankers. The fairy tale needs to end.

    RFTtampa is correct. This is all about how the banks can look good not about what is best for the country and the housing industry.

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