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2011 Forecast – Foreclosure Wave

Hundreds of billions of dollars in commercial mortgages and construction loans will mature this year. Extend-and-pretend practices of banks and foreclosure reluctance by special servicers will decrease, based on recognition that increased absorption and rental growth will take more time, and an owner will not invest capital needed to preserve the asset knowing it may eventually be lost. Many banks have had sufficient time to build up cash reserves so they can now write down asset carrying values to market levels, foreclose, and sell the REO, without taking huge losses. The FDIC will likely continue to seize under-capitalized regional banks, which cannot mark-to-market without becoming insolvent, requiring successor financial firms to either work out and modify the loan or foreclose on it. Also, as banks and special servicers sell more defaulted notes, the note buyers will then foreclose. Consequently, expect a wave of foreclosures and REO sales in 2011.

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Opportunities Abound in 2011

In 2010, real estate values appear to have hit bottom and begun to stabilize in most markets, presenting fresh investment opportunities in the form of distressed properties and notes.

Though obtaining financing can still be difficult, an abundance of pent-up investment capital competes for favorable opportunities, creating some risk of irrational frenzy. Properties must now be re-valued in accordance with their over-supply, reduced rents, cost of replacement, and realistic potential uses in changing markets.

The good news — opportunity abounds for the savvy real estate investor. Carpe diem!

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