Distress Breeds Opportunity | John Burns Real Estate Consulting

Distress Breeds Opportunity


As market conditions continue to soften, even the builders who have already filed bankruptcy are licking their chops – anticipating what will certainly become the land buying opportunity of this generation. In preparation, they’re lining up new equity partners and waiting for the banks to sell assets. But, for a variety of reasons, the banks have been able to avoid declaring a lot of construction loans delinquent, presenting an ongoing frustration for the opportunity funds.

According to Foresight Analytics, only 12.5% of single-family loan balances are delinquent nationally. Construction loan distress is the greatest in California, Florida, Arizona, Nevada, Utah, Michigan, Tennessee and Georgia.

We have also seen which banks had the most construction loan distress in these markets, and it is not a pretty picture for those institutions. (We have shared that list with our retainer clients, but refrain from publicly embarrassing the banks here.)

We realize it is no fun to be patient. But consider this: Every day that you have elected not to buy distressed land is a day where you have saved yourself money (with some exceptions). The dislocation in the banking industry will ultimately create very willing land sellers, even if it means they take a significant loss.

We applaud the diligence of several of the large builders that now have more than $1 billion in cash, debt ratios below 50%, and debt that doesn’t mature for several more years. Times remain tough, but they are very well-positioned to take advantage of the distressed land opportunities if they come soon. With a built-in machine capable of quickly generating cash from the land, they have a significant advantage over opportunity funds, which is why we see more smart funds courting builders.


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