Distressed Homes: Toll Brothers Invests Instead of Building More

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You can't blame them for trying to make lemonade. Toll Brothers, the nation's largest builder of luxury homes, says it has launched an investment firm to take advantage of the housing bust.

Gibraltar Capital and Asset Management, a wholly-owned subsidiary, will trade distressed property and loan portfolios, take over struggling construction projects and resell them to other builders, and help banks and developers deal with the distressed real estate on their books.

Translation: Toll Brothers, which made a ton of money selling pricey homes during the boom, is now using that money to scoop up some of those properties at cents to the dollar. Makes perfect business sense, right?

Doug Yearley, Toll Brothers' CEO thinks so, too. "We believe there are many potential investments arising from the distress in the real estate industry," he says in a press release, adding that the company plans to tap into its relationships, expertise, and of course, "capital access" to "add value."

How does this affect you?
On one hand, Gibraltar's activity will be largely financial, so it will probably do little more than give Toll another source of income. On the other hand, getting to play in the financial arena will allow Toll Brothers to buy properties extremely cheaply, since they'll be cutting out the middle man, says Mitchell Hochberg, a real estate investor and advisor at Madden Real Estate Ventures.

This could affect you one of two ways. It's good news if homebuilders pass on the savings to their customers in a few years. It's not such good news if builders use the savings to give themselves a bigger margin.

"It's a supply-and-demand issue," Hochberg told HousingWatch. "It could go either way."

Toll's foray into distressed property investment isn't completely new. Last year, the company began increasing its land holdings -- and buying distressed real estate -- for the first time since 2006, Bloomberg reports. Apparently, Toll spent $143 million in the second quarter alone on buying or optioning land, with about half of the deal falling into the distressed category. Bloomberg goes on say that others have been doing the same, with competitor Lennar buying a chunk of a $3.05 billion loan portfolio from the FDIC earlier this year.

Eli Tene, a managing director at Peak, a firm that specializes in dealing with distressed properties, told HousingWatch that homebuilders always try to load up on land during downturns.

"Homebuilders feel the bottom is near," says Tene. "They can buy land at amazing prices. It doesn't make sense for them to build yet, but this is the best time for them to buy."

For publicly traded companies, he says, it's more sensible to have a separate subsidiary that can raise funds and make investments that don't affect the parent company's bottom line.

In the grand scheme of things, however, homebuilders are small players in the massive distressed-property market. Billions of dollars change hands between banks, private equity firms, hedge funds and other investment firms each year in this space.

Many of these investors -- especially distressed-asset investors whose job is to figure out which industry is getting the biggest beating -- have been fixated on the property market all year. A survey by DebtWire, a market research firm, earlier this year found that 41 percent of distressed-debt investors thought real estate would offer the best deals this year, compared to 19 percent who thought so in 2009.

All this raises the question: Why are homebuilders so pessimistic? You may recall that a report on U.S. homebuilder confidence (released by the National Association of Home Builders on Monday) showed that it dropped to its worst level since April 2009.

My best guess is that Toll Brothers and others seem to be preparing for a long, slow recovery, not for an immediately stellar profit. The homebuilder survey only looked at short-term expectations, while Toll Brothers has its eye on the long haul.

American homebuyer, take note: If you want to make it in the real estate market, buy when prices are low and be prepared to hold on for a very long time.


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