Correction: Unit quantity and cost per unit adjusted.
Latest news: Junior Debt Holder May Get Reprieve
Today, a New York State lower court judge lifted an injunction on a foreclosure sale requested by a junior creditor on Stuyvesant Town-Peter Cooper Village. The junior creditor has concerns that their $300 million interest in the property will be wiped out by the $3.5 Billion due to the senior debt holder on the massive 11,000 unit residential complex (c. $318,000/unit).
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With foreclosures rampant in todays economy, this is a valuable case study for owners and investors interested in negotiating with lenders. This court ruling underscores the privilege to foreclose and the risks faced by junior lien holders. The sale originally took place in 2006 for $5.4 billion (c. $491,000/unit). Hit with a failing economy and a class action lawsuit brought by tenants for over-charging on rents, the owners turned over the property to the creditors.
Economics of a Foreclosure Sale
For the senior lender to fully recover the principle, Stuyvesant Town’s devaluation would be capped at 35%. While this level of loss is not uncommon for most of the country, New York City has stayed closer to %20 (see housing trend data, .xls).
The problem for such a deal is that barriers to entry are so high. Stricter credit controls and the pure size of this investment limit the pool of qualified investors. In the end, it would not be surprising to see junior lenders get completely wiped out.
Using Mortgage Information to Your Advantage
Banks are not property managers. When negotiating with a lender, know these numbers. The lien is on file with the county clerk and with a little research you can conduct your initial analysis and demand a reasonable discount that the bank will accept. Typically, the bank will go into a foreclosure auction with a minimum amount they will accept. If you can speak to them before hand, it’s possible to get an advantage when auction time comes. Remember, these lenders want to work buyers and get these assets off their balance sheets. With enough cash, you may even find that the bank is willing extend you a limited amount of credit.
These are just some basics to keep in mind, but there are many opportunities in this market and learning as much as you can might be a worthwhile endeavor.