Structured Finance Advisors, a longtime investor in the mortgage- and asset-backed securities industry, is preparing to launch a short-sale fund that will take a different approach to investing in distressed mortgage assets.
Literally starting small, the company is now drumming up commitments from investors, hoping that they will contribute at least $250,000 toward a fund that will have between $2 million and $5 million in capital.
The yet-unnamed fund, slated to launch in April, will buy individual residential properties owned as second homes that would qualify as targets for either a short sale or a foreclosure sale. Managers plan to buy the properties, then rent them out for a cash-on-cash return and, if the ABS market returns to reasonable health, use securitization as an exit strategy.
The fund will also have the flexibility to buy individual houses or small portfolios, said people familiar with the situation.
The strategy deviates from the more popular approach, which entails investors closely scrutinizing loan files on portfolios of as many as 3,000 loans.
Targeted properties include vacation and seashore homes in the Northeast. Those markets have seen significant declines in home prices, and mortgage financing for second homes have all but dried up.
SFA is formulating a strategy that comes at a time when the National Association of Realtors reported that the pace of existing home sales in the U.S. rose to an annual rate of 5.03 million. At the same time, however, there was an 8.2% decline in median home prices from a year ago.
Another reason for targeting properties in the Northeast is that those markets are nearby the Avon, Conn.-based SFA, and company officials feel they can keep close watch over the properties throughout the life of the investment. If the fund expands to the point where it becomes national in its scope, SFA might set up regional offices, from which professionals will keep close tabs on its investments.
"It's important to have people on the ground ... to be close enough to really monitor [the investment] through its life," said a market source.
The strategy of buying second residential properties on which the mortgage is distressed is being employed by investors in other distressed real estate markets, such as Florida, said a market source.
In those cases, investors are shopping for individual condominium units that they can buy, rent and eventually either sell or securitize later.
Officials at SFA plan to hire surveillance professionals to monitor the performance of mortgages in the fund, as well as those who will keep close tabs on the properties.
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