Publisher’s note:

New York – Here is a timely article: 2007 has been a difficult time for many Ethiopian-American home owners, as a large number have defaulted on their payments. However, there is a brighter side to the crashing real estate markets. In the following piece, Mesfin Ayenew, a former senior executive with Union Bank, Metrobank, Comerica Bank, First republic Bank and a developer of mixed use residential and retail developments, argues that the current bust can be a bonanza for smart investors.

Market Meltdown as a Buying Opportunity

By Mesfin Ayenew

The TV pundits and the headlines would have you believe that we are headed for economic armageddon. If you fall for such fear mongering, you would conclude that the only thing that makes sense is to sell all your assets and buy gold bullions and head for the covers.

But we have been through such scenarios many times over the last 30 years. It is precisely in times like these that the greatest opportunity exists! As one of the greatest investment minds of our time, John Templeton who created the Templeton Funds, once said that the greatest opportunities lies in times of maximum uncertainty.

Ironically, banks do not listen, let alone act upon the economic advice of the wise, like John Templeton. Instead, they are swept up along with the madness of the crowd, and lose their bearings when times look “hipper good” or hipper bad”.

Banks do not act counter cyclical to irrational behavior. Instead they fuel it. For one thing, the Government Regulatory Agencies, such as the FDIC, State and federal regulators pressure banks to cut their loses and run when there is bad news in the air and yet they seem to let them run unregulated when they lose their head and make idiotic decisions such as lending to mortgage companies that have no interest in economic prudence. To top it all, the banks see the profits the mortgage companies make and when the cycle is about to end, they too throw caution to the wind and jump in the same game. We have gone through this same scenario in the 70s, 80s, 90, and now repeated in ’07.

But look what has happened to economic growth, the values of stocks and real estate after each one of those economic panics has passed. Economic growth has been stronger and values have been higher than anyone expected. When times look good the pundits and the headlines are filled with endless optimism, and so the cycle goes on. It is said that the market is driven either by greed or fear. This is true. When the desert winds of fear have passed, most people will say, “I wish I had bought then!”

Advise You Can Bank On:
When the market is hot, banks lend excessively to developers. Since developers pay themselves a hefty sum of money from the loan proceeds while they are in the process of developing the real estate project, they have every incentive to keep building regardless of the over supply of inventory in the market.

In addition, the builders get their construction loans based on the future values of the condominiums or houses they propose to build. Therefore, they have every incentive to paint a rosy picture of demand for their products at ever higher prices as if prices go up in a straight line without any corrections. Herein lies the opportunity.

When economic reality hits, the banks panic; the regulators are embarrassed for not having done their job and the developers lose their credit supply and are pressured to sell their inventory as fast as possible. If the pressure is too high and the developer can not service the debt, they will simply give the property back to the bank. The bank regulators step on the accelerator and force the banks to write down the loan to what they believe is the “real” economic value of the units of inventory which of course is likely to be an over correction. If the bank ends up owning the inventory of condos, they are forced to report every quarter as to what actions they have taken to reduce the amount of inventory they are holding in their problem loan portfolio. This means the banks will take whatever measure they can to sell the units.

This will be the best time for you to negotiate with the banks or for that matter with the developer while they are under pressure from the banks to unload their inventory.

If the bank owns the condominium project, then the bank is paying for all the expenses of running the building such as taxes, utilities, insurance, security, maintenance and so forth. Since the bank now own inventory at a lower value than the developer estimated, and since they have the added burden of paying for all the monthly expenses, they have all the incentive in the world to bend backwards to sell the units to anyone that ventures to ask. You can buy the units at a much lower prices than the developer has been asking.

More importantly, you can ask the bank to finance the unit below market rate and you can ask the bank to pay the home owners association fees for your unit for a number of years or until the building is sold out! That can take several years. If you are among the first buyers in a development project, you may be able to negotiate as much as 5 years of no home owner’s association fees!

What all this means is that you are buying at near the holding cost of the bank which is probably 30% to 40% lower than the developer’s asking price and you get the bank to carry the home owner’s monthly fees for an extended period of time. When the market swings back you would already have built equity. When, once again, everybody begins to be swept up with greed, you will be in a position to cash out and wait for the next economic panic!

This strategy works best when the project is a big building complex where it takes the bank several years to unwind their ownership in the building. This is not about chasing one-off foreclosed properties that is hyped up by brokers just to get you in the door.

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Mesfin Ayenew holds MBA from Drucker Management Center of Claremont University. His career in banking includes senior executive positions with Union Bank, Metrobank, Comerica Bank and First republic Bank. He also served as a senior executive with Worldspace Corporaton, a global satellite company. He develops mixed use residential and retail developments. He lives in Potomac, Maryland, with his wife and three children.