Bottoming Out : Savvy Investors Are Buying O.C. Real Estate on the Cheap
A New York firm has arrived in Orange County to do a little bottom fishing in the stagnant local real estate market--though the company’s executives probably wouldn’t phrase it quite that way.
“We think that term, ‘bottom fishers,’ really has a negative connotation. We prefer to think of ourselves as reality checkers,” said John E. Quinton,) principal with Clifford Cos., a Manhattan firm that has scooped up more than $40 million worth of Southern California property at bottom-of-the-market prices since it opened its Irvine office in February.
The phrase “bottom fishing” doesn’t show up in dictionaries, but it gives an accurate image of one of the hottest trends in Southland real estate. With commercial properties at their lowest prices in years and financial institutions eager to get soured real estate deals off their books, investors with cash in hand and an eye for long-term value are buying properties on the cheap.
“Anyone who is out there looking, who is liquid and would be considered a contrarian and is clearly hoping to strike handsome deals, that is a bottom fisher,” said Donald W. Wise, a hotel broker with CB Commercial Real Estate Investment Banking Group in Anaheim.
Some buyers--among the best-known is Ross Perot Jr., who has plans to develop homes in Aliso Viejo--are working both the residential and commercial real estate markets. Some are in Orange County to establish a long-term presence, others to make a profit and move on.
Clifford Cos. is one of the latter. The eight employees at Clifford’s “lean and mean” Irvine office check out 10 to 15 properties a month. For every 100 buildings the company looks at, it makes bids on five and closes on one. It deals in cash.
“If someone would have told me these buildings were worth nearly nothing several years ago, I would have burst into tears,” said Alan Davison, a principal with Clifford Cos. and a longtime Orange County resident. “Now I just laugh. I know they are worth nearly nothing.”
Clifford concentrates on distressed properties owned by overextended developers and troubled financial institutions. It typically resells its purchases to companies within five miles of the properties or to other investors, either individuals or institutional landowners.
Once the company decides to close on a property, it moves very quickly--in one instance it completed escrow in five days.
Clifford’s specialty is industrial space, 5,000- to 20,000-square-foot buildings valued from $1 million to $5 million. It looks at some retail properties and avoids office space.
“We think there are bargains. If you have cash and are selective, you can purchase good real estate,” Davison said. “We have a saying around here: ‘We can pay for the land or we can pay for the building, but we can’t pay for both.’ ”
The firm decided to open its Irvine office, the only company branch outside New York, after signing a contract with a British bank that needed to work on its $400-million real estate portfolio, which included a number of Southern California properties.
Clifford is well-known among East Coast banks. Last year, it offered First Constitution Bank in New Haven, Conn., a price of 50 cents on the dollar for its $240-million real estate portfolio of non-performing loans and foreclosed assets. The bottom-of-the-barrel offer came too late, though, and regulators seized the troubled bank.
John Shumway, president of Market Profiles, a real estate consulting firm in Costa Mesa, said that while there are a lot of bottom fishers in the local market, he shies away from the term, preferring to call them “astute business people.”
He said that because of Clifford’s relationship with East Coast banks and the way it conducts business, it is unique in the bottom-fisher market. Clifford differs from an investor like Ross Perot Jr. in that the latter is using Orange County’s distressed market to establish a foothold and future contacts, he said.
“I have not seen another company like Clifford in the market. They are the most aggressive. They truly look for crippled situations,” Shumway said. “Clifford doesn’t care about relationships. They will be out of this market in a year or so and off to another distressed market. They do clean up a market.”
Quinton agrees that Clifford has no real competitors in the Southland. Because most banks aren’t interested in owning and operating real estate properties, he said, Clifford becomes the solution for many problems.
For example, the company recently purchased several industrial buildings in Placentia with a current value of $65 a square foot. The buildings were constructed in the mid-1980s for about $85 a square foot. Because of a confidentiality agreement, Clifford will not say what it paid for the buildings, which it acquired by assuming a bank note. Observers value the deal at about $40 a square foot--less than half of the construction cost.
While Clifford invests primarily in commercial properties, other opportunists are looking at the apartment and housing markets.
Weintraub Financial Services Inc. of Malibu invests solely in apartments and is looking eagerly at the Orange County market while avoiding Los Angeles. The company just purchased an 80-unit apartment complex in Santa Ana that was saddled with $5.4 million of debt. Weintraub made a deal for less than $2.7 million.
“I think people, banks and insurance companies are panicking. They just want to get rid of stuff,” said Richard Weintraub, president of the company, which makes purchases primarily for pension funds, trusts and individuals.
“We like Orange County. We think the fundamentals are there,” Weintraub said. “In Santa Ana, you have a strong employment base and a commitment from the city to small businesses.”
Another opportunist, Highridge Partners of El Segundo, is also looking at Orange County but not finding the waters that comfortable.
“I’m not sure you’ve hit bottom in Orange County yet,” said John S. Long, company president. “The supply of space in retail and office makes us a little nervous about going down there. We have looked at a number of properties but have never made an offer.”
