5 ms·

I don't see how this prevents economics from taking over. If nobody bid over 12 million, thats a signal that nobody thought it was worth say 20 million. Otherwi

by mucle6 2y ago

I don't see how this prevents economics from taking over. If nobody bid over 12 million, thats a signal that nobody thought it was worth say 20 million. Otherwise they would have bid.

harry8 2y ago
My understanding of OP: Say the loan amount on the building is 100m you know you ain't getting for less than that because the lender will bid up to there at least if anyone is bidding. You think it's worth 20m? Go home, that bid will not win and everyone knows it. You bid 20, lender outbids you. you bid 30, again outbid as far as the loan amount at least. This 12.3M is the equivalent of the auction being passed in with a reserve price of the loan amount, whatever that amount is, possibly much higher than 12.3M. In this circumstance the auction is a farce and you could not buy it for 12.3M+ or anything like it. I can't vouch for the truth or accuracy of _any_ of that, but I believe that is the point being made.
bruce511 2y ago
The worth of the building is only one of the factors. The other side is the risk. Actually, the worth side is relatively easy to calculate. But the risks are hidden. Likely there wasn't access to do a proper inspection. Likely tenant leases are not visible. In some cases outstanding bills (especially taxes) come with the building (and are unknown, and likely significant since the seller defaulted on this loan.) So auction prices don't reflect "worth" they reflect "risk". Usually these unseen costs exceed the hammer price (sometimes by a lot).
- maxerickson 2y ago
  I don't see how there's a coherent split between value and risk. I guess you are using worth to mean potential value or something like that.
- walrus01 2y ago
  A very large office building built in 1981 is going to be coming up on the need for some expensive plumbing repairs very soon, if there's no record of it being done recently. And probably contains lots of other unrefurbished space that couldn't be rented out at grade A office space $/sqft rates. Interestingly enough the building does seem to have a marketing website which shows several full-floor office spaces for rent with floor plans, but no photos of the space.
- Y_Y 2y ago
  Shoulda called it Fort Risk
- usrusr 2y ago
  Who buys the bidding procedure? Is it the main lender or someone instated by the main lender? That would certainly create an incentive for maximising uncertainty if there are other lenders the profits will be shared with. But the mechanism mentioned in sibling comments is even stronger: if there is a clear main lender and your limit is lower than the known lowest limit of the main lender, you won't bother bidding.
  - bruce511 2y ago
    It's the lender that holds the building as collateral.
- michaelt 2y ago
  > Likely there wasn't access to do a proper inspection. Likely tenant leases are not visible. In some cases outstanding bills (especially taxes) come with the building (and are unknown, and likely significant since the seller defaulted on this loan.) I'm confused. Is there not a seller? Does the seller not benefit from maximising the sale price? Even if the building owners are bankrupt, don't the administrators have to maximise the sale price in order to pay back creditors?
  - bruce511 2y ago
    It depends. I can't say for this case. In general though there's the situation of "unwilling seller". They aren't necessarily bankrupt. Usually they have had ample opportunity to sell themselves but for whatever (usually irrational) reasons have not. They often are not cooperative in the sale process. Administrators are much more likely to be cooperative, but even then there is added risk because the seller won't be around to address latent defects. And you can assume other debts against the building (like taxes) may exist. Obviously the specifics will be jurisdiction dependent.
toast0 2y ago
harry8 has it right. If the outstanding loan is $83M and you think it's worth $20M, you're unlikely to bid at all, it's not worth your time, since the lender is expected to bid $83M. Now if you thought it was somewhere $75M to $80M, maybe the lender would rather a quick sale with a small loss, and it might be worth the time and expense to qualify to bid and attend. This result tells us something about the market value, but not that much. It's a rushed sale without due dilligence, so that diminishes the value by an unknown amount, but we can say the diminished value is probably much less than the loan amount (which I believe from the report I linked elsewhere is $83M). I don't follow foreclosure auctions much, so I don't have a sense of what's the typical difference between a foreclosure auction value and a later willing seller sales value, but I imagine it would be significant most of the time.
pests 2y ago
The buyer is the lender in this case, it either gets sold at auction for a profit (repays lender) or the lender just keeps it - they can bid as high as the loan amount , they're just paying themselves. The idea is to later resell it with additional time and prep for a better price.
- willcipriano 2y ago
  Why not just start the bidding at the loan amount?
  - pests 2y ago
    They probably have fees + taxes they have to pay on the amount and want to reduce them. Why get hit with a (made up) 5% auction fee and 20% tax burden on $80m vs just $12m.

by mucle6 2y ago

I don't see how this prevents economics from taking over. If nobody bid over 12 million, thats a signal that nobody thought it was worth say 20 million. Otherwise they would have bid.

harry8 2y ago

My understanding of OP: Say the loan amount on the building is 100m you know you ain't getting for less than that because the lender will bid up to there at least if anyone is bidding. You think it's worth 20m? Go home, that bid will not win and everyone knows it. You bid 20, lender outbids you. you bid 30, again outbid as far as the loan amount at least. This 12.3M is the equivalent of the auction being passed in with a reserve price of the loan amount, whatever that amount is, possibly much higher than 12.3M. In this circumstance the auction is a farce and you could not buy it for 12.3M+ or anything like it. I can't vouch for the truth or accuracy of _any_ of that, but I believe that is the point being made.

bruce511 2y ago

The worth of the building is only one of the factors. The other side is the risk. Actually, the worth side is relatively easy to calculate. But the risks are hidden. Likely there wasn't access to do a proper inspection. Likely tenant leases are not visible. In some cases outstanding bills (especially taxes) come with the building (and are unknown, and likely significant since the seller defaulted on this loan.) So auction prices don't reflect "worth" they reflect "risk". Usually these unseen costs exceed the hammer price (sometimes by a lot).

maxerickson 2y ago
I don't see how there's a coherent split between value and risk. I guess you are using worth to mean potential value or something like that.
walrus01 2y ago
A very large office building built in 1981 is going to be coming up on the need for some expensive plumbing repairs very soon, if there's no record of it being done recently. And probably contains lots of other unrefurbished space that couldn't be rented out at grade A office space $/sqft rates. Interestingly enough the building does seem to have a marketing website which shows several full-floor office spaces for rent with floor plans, but no photos of the space.
Y_Y 2y ago
Shoulda called it Fort Risk
usrusr 2y ago
Who buys the bidding procedure? Is it the main lender or someone instated by the main lender? That would certainly create an incentive for maximising uncertainty if there are other lenders the profits will be shared with. But the mechanism mentioned in sibling comments is even stronger: if there is a clear main lender and your limit is lower than the known lowest limit of the main lender, you won't bother bidding.
- bruce511 2y ago
  It's the lender that holds the building as collateral.
michaelt 2y ago
> Likely there wasn't access to do a proper inspection. Likely tenant leases are not visible. In some cases outstanding bills (especially taxes) come with the building (and are unknown, and likely significant since the seller defaulted on this loan.) I'm confused. Is there not a seller? Does the seller not benefit from maximising the sale price? Even if the building owners are bankrupt, don't the administrators have to maximise the sale price in order to pay back creditors?
- bruce511 2y ago
  It depends. I can't say for this case. In general though there's the situation of "unwilling seller". They aren't necessarily bankrupt. Usually they have had ample opportunity to sell themselves but for whatever (usually irrational) reasons have not. They often are not cooperative in the sale process. Administrators are much more likely to be cooperative, but even then there is added risk because the seller won't be around to address latent defects. And you can assume other debts against the building (like taxes) may exist. Obviously the specifics will be jurisdiction dependent.

toast0 2y ago

harry8 has it right. If the outstanding loan is $83M and you think it's worth $20M, you're unlikely to bid at all, it's not worth your time, since the lender is expected to bid $83M. Now if you thought it was somewhere $75M to $80M, maybe the lender would rather a quick sale with a small loss, and it might be worth the time and expense to qualify to bid and attend. This result tells us something about the market value, but not that much. It's a rushed sale without due dilligence, so that diminishes the value by an unknown amount, but we can say the diminished value is probably much less than the loan amount (which I believe from the report I linked elsewhere is $83M). I don't follow foreclosure auctions much, so I don't have a sense of what's the typical difference between a foreclosure auction value and a later willing seller sales value, but I imagine it would be significant most of the time.

pests 2y ago

The buyer is the lender in this case, it either gets sold at auction for a profit (repays lender) or the lender just keeps it - they can bid as high as the loan amount , they're just paying themselves. The idea is to later resell it with additional time and prep for a better price.

willcipriano 2y ago
Why not just start the bidding at the loan amount?
- pests 2y ago
  They probably have fees + taxes they have to pay on the amount and want to reduce them. Why get hit with a (made up) 5% auction fee and 20% tax burden on $80m vs just $12m.