Heres my answer. All of us in the lending business expected the bubble to burst sooner than later. All bubbles burst, its not if…its when. As Issac Newton suggested, what goes up….must come down. (except for gas prices). But here is what very few, if any, real estate experts expected and or anticipated. Along with the real estate bubble bursting, one of the most financially significant events of the past 25 years also occured – the sub prime meltdown. Coupled with soaring energy prices (topping out at just under $100 per barrel, the price of oil rose 57% in 2007), turbulent stock markets and record commodity prices…..we entered into one of the deepest housing recessions of record.

 Did we expect – anticipate the bubble to burst ? Yes…absolutely. Did we ever expect the confluence of all of these economic issues all in the same year ? No….absolutely not.

I don’t have the answers. But I do know this. The people that control, manage and often own these companies, are highly competitive, highly OPTIMISTIC and charismatic. More often than not, the people that have succeeded and worked thier way into these postions used optimism, competitiveness, forward thinking, proactivity and charisma to thier advantage. The high energy, the glass is always half full person that has lofty goals, bulls past the naysayers and creates a persona and corporate cluture of optimism, ultimately gets rewarded with the corner office, stock options, an impressive title, a huge compensation package…..and lots of power.

The power always includes the power to influence others. The power to influence board members, investors, the media, employees and consumers. Its their optimism and influence that spreads and becomes infectious. Everyone wants to be assocaited with an optimist. Its great energy, its enlightening, invigorating and at times even intoxicating.

 Here’s my point. If you are an investor and find yourself being influcenced by or otherwise intoxicated with the optimism of your investment advisor, pension fund manager, real estate broker, trust deed company owner, etc., stop, take a breath, and gather yourself. Look past the persona, look past the corporate culture of the company you invest with, and truly understand what it is your investing in and the risk associated with that investment.  Now is not the time to invest based soley upon optimism.

The numbers are staggering. Billions upon Billions of dollars lost by institutional lenders and investors who are sophiosticated, risk adverse, conservative, and by all rights have some of the most talented financial minds in the world working for them. If these institutional lenders and investors are loosing Billions, what is happening to those second and third tier lenders and investors that aren’t so risk adverse, aren’t so conservative, arent’ regulated by the FDIC or FSLIC ? We don’t know…….yet.

 The next meltdown will be when the failures of those company’s finally gets reported. Hedge funds, Real Estate Opportuity Funds, Mortgage REIT’s, Endowments, Pension Funds, Retirement Funds, etc. These groups participated in higher risk investments including land for development, new condo development, condo conversions, joint ventures, mezzanine debt, and participating debt. If you want to see the next finaincial meltdown, watch carefully Q-2 through Q-4 2008 as these companies begin to report thier troubled deals, defaults, foreclosures, impaired assets, bankrupt borrowers and other troubles associated with their higher risk real estate loan portfolio. Trust me when I say these numbers will also be in the Billions….and you will recognize some of the names, big names.

Wouldn’t it be nice if those that really new, those that are really smart, those that are highly educated and have spent a lifetime preparing for highly regarded positions within our government could and would give us their true – heart felt opinion of the economy. Just plain and simple – what they think and why. Unfortunately, they can’t or won’t. They give the politician’s nod, wink and smile…then deliver something like this:

 ”Market turmoil and an evolving economic outlook have produced a volitile situation that has made forcasting the course of the economy even more difficult than usual”….Fed Chairman Ben Bernanke, Jan 10.

 ”We cannot say more than we know, and we should strive to avoid giving people the impression that we know more than we do”…..Fed Vice Chairman, Donald Kohn, Jan 5, 2008

For those of us in the Private Captial business is greatly opens up our opportunities to better quality deals than we have seen in 5 years. Although the banks are pulling back, there are still development and construction deals that make great sense and will need financing. Our biggest competitors (the banks) are now scaling back to pay attention the the problems associate with thier credit losses.

We look forward to seeing not only more lending opportunities but higher quality projects, with higher quality sponsorship. The banks, due to thier pricing, have always been able to compete for the highest quality deals. Those of us with capital, and patience should benefit greatly from this opportunisitc time

I am confident these things will happen……but I also feel there are bigger issues that could absoultely stall the comeback 1) Continued collapsing of assets values 2) continued huge writedowns by major banks 2) $100 per barrel oil  and $4 per gallon gas 4) increase in unemployment rates due to the collapse of the real estate and construction industry 5) further devaluation of the dollar.

No one has a crystal ball and I have always said there are two jobs in the world where you can be absoulutely wrong every day with your predictions and prognostications and never get fired. An economist and a weather man. So….lets hope for the best, find the bottom, and start scratching our way back up.

Many expected that private capital lenders, hedge funds and other largely unregulated pools of money, would either cause or amplify the next financial crisis. But as the crisis unfolds, it is very aparent that commercial banks, big banks - the most regulated, supervised institutions in the entire financial system – are at the epicenter.

I am in the Private Capital business, which is known for being an alternative to bank financing. However, not I nor any of my direct competitors participated in sub prime residential lending. I will admint, we are suffering from the sub prime debacle as are many others in the real estate industry, but we were not associated with it in any way.

Many people in the financial industry perceive Private Capital lenders to be risk takers, gamblers and lack discipline when it comes to assessing risk. Those same people perceive commercial banks as being conservative, competent and responsible. Not so fast…..who’s at the root of the current crises ? Not Private Capital lenders.

If you are a borrower contemplating Private Capital financing or an investor contemplating trust deed investments with a private capital lender remember, we are not sub prime lenders, nor did we play any role in the sub prime debacle. We may not hold Warton MBA’s, get our pictures in the Wall Stree Journal or get seven figure bonuses, but we do understand risk and we do our absolute best to protect our investors money.

Land, land and more land. Especially residential land transactions (subdivision land) in Arizona and California. (if you see alot of land deals or have been getting calls for land refinancing, visit my website at www.dougesteves.com and visit the Press Room. There you will find a recent article on land valuation “Don’t Fall for Outdated Appraisals”. You will find this helpful as you review land loan requests.)

Let me begin by saying I am not an appraiser. But over the past 10 years I have closed over $500,000,000 in land loans and have reviewed hundreds of appraisals during the underwriting and due diligence process. Over the past 5 years valuing land was fairly simple. Everywhere you looked there were land deals closing. As such, there were as many land comps as you could use in nearly every major market of the nation.

What a difference a year makes. Today investors and appraisers area scrapping to find land comps that, among other things, are less than 12 months old. In most land valuation situations they have to use alternate or additional methods of valuation to the sales comparison approach, including the land residual analysis approach.

As you know, appraisals are based upon historical data. What has sold and closed within the past few months. The data reflects what the market value was…..not necessarily what it is today, especially in a downward trending market. Here’s What You Need to Know:

Using old comps in a stable or upward moving market is not a problem. Using old comps in a downward moving market can give the borrower, lenders and investors a false sense of value. Here’s How I Got There: Let’s say the appraisal on 65 acres of development land planned for 250 lots is dated June 2007. After careful review you notice the comps (the few that were available) are all closings that occurred in the past 9-12 months, during the period of time between July 2006 and October 2006. No problem right ? Best and only comps the appraiser has to use. Wrong ! Generally speaking land purchase and sales transactions are negotiated 6 to 18 months prior to closing. This long option or escrow period allows for due diligence, financing, completion of third party reports and-or platting. What this means is many comparable land sales transactions that closed in 2006 were negotiated and the price agreed upon in 2005. In 2005, at least in the southwest region of the country, residential land prices were at their peak. From mid 2004 through early 2006 there was an absolute “feeding frenzy”. Sellers with multiple offers at 2 to 3 times their original cost, and in many instances, there were bidding wars. Buyers were no longer prudent, analytical, land acquisition experts for large homebuilders. They now included doctors, lawyers, chiropractors, engineers, and policemen. Everyone wanted in on the double your money land flipping game.
Borrowers and Brokers Beware:

The two most significant issues impacting land financing today are market value vs. marketability, and supply vs. demand.

Although the definition of market value is based upon the “willing buyer – willing seller” theory, in today’s market, savvy land lenders and investors are applying a new kind of analysis in determining their internal value of land. Not market value, not bulk sale value, not fire sale value, but marketability of the property. At what price, given the current market conditions, can the borrower and or the lender expect to sell the property if need be.

We are grappling with the “willing buyer” component of market value. Given the current market conditions and the exodus of homebuilders and speculators from the land buying business there are serious questions about whether or not there are any potential buyers This uncertainty further exacerbates the “at what price question”. We are still using the “willing buyer-willing seller” theory……but it now has a twist. What would a willing buyer pay for the property “if” one could find a willing buyer ?

To further complicate the value question is the question of supply. Today, investors and lenders are fully aware that demand for residential land, platted subdivisions and finished lots is nearly non existent. This being the case, they are now very sensitive to supply. As part of their underwriting and due diligence they will research how many lots are in the various planning stages in the sub market wherein the subject property is located. This is easily determined by visiting the city or county and talking to their planning and zoning officials. Not only will a huge supply and demand imbalance affect the value and the marketability, it will surely dampen the investor’s interest in the deal.

Although land appraisal reports often estimate “exposure time” and “marketing time” seldom do they opine as to any supply and demand imbalances that may exist. Recently, I was reviewing an MAI appraisal that was very well done. Although the comps were 12 to 15 months old the appraiser included the applicable adjustments. Also included in the appraisal report in the “Neighborhood Description” section was the number of building permits issued for single family residences for the past three years: 2004 – 52 permits; 2005 – 77 permits; 2006 283 permits. This gave a clear understanding of what historical demand has been. What was not in the appraisal report, and did not come to my attention until a visit to the city planning and zoning office was the fact that there were over 85,000 single family residential lots in various planning stages in that sub market. To further complicate issues, of these 85,000 lots, only about 1,500 had vested sewer and water rights.

Here’s My Point: Given the current market conditions, land financing will become more difficult than ever. Be prepared to field the investors questions regarding value, marketability, sub market supply and other probing questions that help the investor understand the plan of repayment and the probability of repayment. Be prepared for investors to not take appraised value as the absolute and final value. They will pay close attention to all of the facts presented in the report, but will also do an internal valuation followed by in-depth market research in an effort to fully understand their risk prior to committing to a deal.

Doug Esteves-Principal of Developers Capital Funding, Corp. a direct lender, and correspondent, specializing in private capital bridge lending. 4500 S. Lakeshore Dr. Suite 322, Tempe, Arizona 85282. Phone: 480-831-2666 Fax: 480-831-9077 email doug@devcapfunding.com