Vulture fund eyes California land at "Armageddon" prices

From L.A. Times staff writer Scott Reckard:

Will California become the central feeding ground for real estate vulture investors?

That’s what was suggested today in a report from London describing something called the California Distressed Land Fund Ltd.

The fund’s manager, David Michelson, plans to raise $150 million from European investors to buy raw land from developers and banks in places like the Inland Empire where home values have sunk lowest.

Michelson told Bloomberg News that he has developed and managed residential projects in California for more than 25 years. He said he's currently bidding for Riverside County land at “Armageddon” prices -- 20% of what it had been valued by builders.

The idea is to hang onto the property for six or seven years and then resell it. Michelson predicted he will eventually be buying from some updated version of the Resolution Trust Corp., the federal agency that liquidated the property the government inherited from 700 failed savings and loans in the 1980s.

He said his fund won't compete with dozens of hedge funds that are raising capital to buy securities whose prices have been battered by defaults on exotic mortgages.

“They're all looking to buy paper, we're looking at the dirt,” Michelson told Bloomberg. “We're builders. They wouldn't know how to file a building permit.”

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: Cape Vultures in South Africa, via A.P.

Comments

[mike]

he sounds smart to me.

now please everybody make the following floggings swift !!!!!!!

[Laker]

ohhh, yeah baby.
There is a huge shortage of housing in the riverside area...buy land now...at 20% of last appraised value...In 5-7 years, it would be worth 10%....
With the great employment centers and record low gas prices, there is/will be huge demand for housing, and there are no houses for sale...
"“We're builders. They wouldn't know how to file a building permit." ...yeah you better use that land to grow potatoes...or corn.

[JW]

Ah yes, the parade of fools just keeps marching on, don't they?

[jpn]

only 20%? That seems odd when from what I hear Centex is selling land at 50% off. If it is indeed 20% off, the regional bank who funded the purchase of the land just got a gift from god. Maybe bank balance sheets aren't as bad as we thought?

[Rob]

I will bet the investment brochure does not have a picture of a cactus or tumbleweeds on it.

The gene pool never lacks entertainment...

[bigunit]

Don't tell the vultures but they are looking in the wrong neighborhood. They might be able to pull this thing off if they start looking in Palmdale & the Antelope Valley as Northrop Grumman has announced some big contracts recently:

http://www.latimes.com/news/la-fi-
northrop10-2008may10,0,5085198.story

Laker is correct in his assessment of the IE as the area is extremely dependent on the construction trade. There are a good amount of infrastructure projects in the works but LA County may be the safer bet.

[Rich]

Kind of odd perspective when you think about it--why not cherry-pick foreclosed houses selling for the cost of the land and touch them up a bit? With all the recent construction by the mega-builders there must be tons of quality recent housing, whole developments of it, at below cost to build. No permits to file, no nails to hammer, it's all done for you--can the logic of buying improved land in those locations be any worse than the logic of buying dirt in those locations?

[Brady Westwater]

Jos are moviing there faster than people are right now - and that trend will only increase.

Rising gas prices will in the long term help not hurt those areas as workers will increasingly no longer have to commute to LA or Orange Country.

[Inland Empire]

only 20%? That seems odd when from what I hear Centex is selling land at 50% off. If it is indeed 20% off, the regional bank who funded the purchase of the land just got a gift from god. Maybe bank balance sheets aren't as bad as we thought?

Your reading comprehension skills need work. Just where is this bargain priced property/land? Sounds like another scam to me.

[LA]

Rich wrote, "why not cherry-pick foreclosed houses selling for the cost of the land and touch them up a bit?"

Because of the much reduced profit margin and exponentially greater number of headaches. You can't take an assembly-line approach with individual properties. It's much cheaper per unit to build a tract of homes than to rehab the same number of existing homes. You'd have to treat the existing homes as essentially custom. They'd each need different kinds of work done, separate permits for each property, etc. You'd have much more trouble scheduling and moving crews around because no two jobs would be the same, not even in the same location. Compare that to the locust swarm of workers involved in a new development. Everything is streamlined from design through landscaping.

[MyLessThanPrimeBeef]

JW, this just confirms my Peak Brain Power Hypothesis.

Apparently, there is only a limited amount of brain power available in the world and for decades now, its extraction has not kept up with the number of skulls produced globally.

That's why we see more and more fools...sorry, geniuses.

Another confirmed example of my hypothesis: Today's CPI numbers. It's hard to believe them.

There you have. Say it's mean. Say it's nasty. I only tell it the way I see it.

[Susan]

Gee, anybody remember the Hunt brothers trying to corner the silver market, before it collapsed?

[David]

People, remember the timeline... he's talking 6-7 years, when conditions may be very different from what they are now, as conditions now are very different from 6-7 years ago.

IF he can afford to sit on property for that long, and buy only at fire sale prices, he may end up making an extraordinary profit from the venture.

He hasn't made any purchases yet... by the time he gets around to it, prices will be even lower than they are now.

I'm going to be the contrarian here and say this guy has a good money making idea on his hands. He, unlike legions of homebuyers over the past few years, will not be bidding against speculators and flippers at bubble prices.

[SReno]

I think they're offering 20 cents on the dollar.

[SReno]

From what I hear he's not far off. Non-performing loans are being sold at 30 cents on the dollar(some bank in Sweden just sold for that) and performing loans are being sold at 70 cents on the dollar. So 20 cents on the dollar for undeveloped land in these areas is pretty close to being correct.

[E]

Funny how people don't mention the "currency play" aspect of this.

To me it appears that they are shorting the Euro (in a way) through land purchases in $'s. If the $ gains enough ground against the Euro, the value of the land doesn't need to rise much (if at all).

Now...do that in Reverse.

It reminds me of a house purchased by a French family (per the listing agent) in late May 2005 when their 1,049,396 Euros afforded them a $1,319,000 house.

The house was on the market up until recently (didn't sell) for as low as 1,399,000.

The house "zestimates" currently at 1,167,000 and I doubt that they will get that either. I toured the house and wasn't impressed myself.

However...for arguments sake, let's say that they get 1,400,000 for their house today. After the $84,000 they have to pay the agent (for sitting around at the open houses, taking a few photos and filling out some forms), they walk with $1,316,000.

Hey!

Wow!

They only took a $3000 loss (carrying costs not factored in)

Oooops. I forgot. They live in France.

Their 1,049,396 Euros has magically turned into 850,794 Euros.

Funny thing though is that when the Fed has to start pumping even more money into the economy when the Alt-A wave hits I doubt the Dollar will have gained much strength vs. the Euro and what little it did will be lost...and then some.

[Liz Wetzel]

thats it, im out of california. Im going to colorado, wait for the global warming, ihope all of these la shacks go burn in hell.

[HulaGirl]

Better hurry - They're not making any more desert!!

I hear the Salton Sea is the new Palm Springs!

"Riverside County geographically, is desert. 7,303 square miles. (7,207 square miles of desert and 96 square miles of it (1.31%) is water). Most of Joshua Tree National Park is located in the county."

Lefty must be heading this consortium of stooges.

[ib wobbly]

Whoever is claiming they are buying at 20% is skimming or not using comprehension skills. The article says they plan to buy at 20% of what the builders valued it at. What I wonder is why the builders? Isn't it the banks are the value drivers? Personally, I think they can make money if they buy for 80% off on todays listing. Given that seven years need to elapse before they recoup investment + profit.

[Liz Wetzel]

Here's something funny. My friend who has a household income of 40k were trying to close a deal on a house in hawaiian gardens. He's mexican so he's not afraid of the Hawaiian Gardens gangs. He thought he's about to close escrow, when the lender, Wachovia reappraissed the house for 30k more, using the "new appreciation parameters". LOL. Hawaiian Gardens is a highly densed poor community with gangs, the house was 2/1 on a 2500 lot. Wachovia claims it 3/1 (unpermitted room) . It is basically a shack and the bank just wants more. Everytime he visits the house, there are loud mexican music everywhere. So if Wachovia thinks they can sell it to a higher incomed person, good luck on that.
Let say an investor buy that house with the intention of lending them to Hispanics. With the income they have they would have to include all relatives to live in it, another illegal immigrant housing . The street is piled with old cars. So the gangland continues. I hope one day that investor finds his new investment completely destroyed. Serves him right when a valid resident cant get a decent housing in a gangland area and he just have to insert himself.

[Uncle Billy]

Per bloomberg, the fund is based in Jersey, Channel Islands. This is a haven for the dirty taxless money of the world (especially now that Lichtenstein has, shall we say, become less attractive).

"The fund will carry a 1 percent management fee and keep 20 percent of profits generated. It's being marketed to European pension plans and family offices, said John Godden, head of IGS Group Ltd., who helped set up the fund"

John Godden came from HFR (Hedge Fund Research), a chicago/london based company that specializes in "hedge fund derivatives" and "research."

See, that's the beauty of hedge funds... they make oodles just on their management fees. Make a profit sometime and hey, that's nice too.

So... regardless of what this new hedge fund does with the land, they're going to be busy making money selling derivatives of the fund, in all likelihood. Another pretty balloon.

From Michelson's website, it looks like they already started a vulture fund:

http://threearchinvestors.com/CRFund.html

Weirdly, from this description, they will be advancing loans to developers.

It looks like most of the development they did was back in the 90's. They do mention one 500 unit project in Moreno Valley that was supposed to open June 2006. Anyone know if this actually happened? With all the sfr's that bloomed in riverside, and everyone getting loans, it's hard to imagine the occupancy rate on 500 rental units would have been that high (though with foreclosures now it could be filled up to the top).

[Uncle Billy]

Hmmm...

From Michelson's linkdin page, he attended "Pacific Palasades [sic]" high school. One hopes he didn't write that himself as it certainly doesn't reflect well on the school.

Where did Reckard find this story? The contra costa times attributes it to a bloomberg news reporter, but it's nowhere to be found on the bloomberg site itself. Howcomefor? If it camefrom a press release, why would they release it here if they're trying to attract money from european pension funds and private investors?

[cd]

Joan Didion's assertion that LA began as and continues to be to a large extent a real estate scam, vindicated once again.

[keith]

Better hurry - They're not making any more desert!!

I hear the Salton Sea is the new Palm Springs!

"Riverside County geographically, is desert. 7,303 square miles. (7,207 square miles of desert and 96 square miles of it (1.31%) is water). Most of Joshua Tree National Park is located in the county."

Lefty must be heading this consortium of stooges.

Posted by: HulaGirl | May 14, 2008 at 06:19 PM

Yeah? Well I heard Palm Springs is the new San Diego