Bottom Feeder: An opportunist who profits from the misfortunes of others.

Recently one of our agents had a brief exchange with a real estate professional from another office here in Pagosa Springs. The other agent was lamenting the fact that the only interest her office was experiencing was from “Bottom Feeders”. In real estate, a “Bottom Feeder” is a prospective real estate buyer that is only interested in buying when prices are at the bottom of the cycle, or when they can acquire a good property at a price far below perceived value. Some agents and sellers have a disdain for this type of buyer, but I don’t and I will explain why.

During a typical real estate cycle, the market accelerates and prices appreciate rapidly. Then at some point events bring about a drop in demand, (a rise in interest rates, a large increase in unemployment, a huge drop in the stock market, or a meltdown of the mortgage markets) and the volume of transactions and the level of prices begin to decline. The curve downward steepens as demand further declines and supply increases, when more holders of real estate decide to sell. Generally, the first to sell are the experienced speculators, later the novice real estate speculators join in, and finally the more passive investors act out of fear and dump their properties. Eventually, over-extended borrowers find themselves unable to refinance, and lenders begin foreclosing and putting their properties on the market. For some areas severely impacted by foreclosed properties, the markets are driven by the low prices offered on “bank-owned” or “REO” residences. Other sellers are then forced to reset their prices in response to the lower prices offered by the banks. Until demand improves and the supply of property declines, prices continue in a downward trend and the average number of days on the market continues to grow. Pagosa Springs is no exception to this rule.

As the market begins to move toward a recovery stage, new speculators or Bottom Feeders re-enter the market and begin to invest. Typically, they only buy those properties that they have identified as exceptional bargains, often from sellers in dire straits; they look for properties that will appreciate greatly as the recovering market picks up momentum. For our area, these are not the typical second home buyers that so many agents have been used to dealing with during a strong market. They are driven by the potential returns on their investments, not by the thought of creating great memories enjoying the Pagosa Springs lifestyle with their family and friends. They expect their broker to help sort through all the available inventory to find the most motivated sellers, the best choices among all the properties, so that they can lock in a good return on the buy side by purchasing below perceived value.

This type of buyer expects a level of service that many agents never had to provide while the market was red hot. They want comparative market data that shows much more that the basics available in the local MLS program. They also expect the broker to know about rental rates, present and projected, rental inventory and trends, replacement costs, barriers to entry, etc. Many agents within the Pagosa Springs market don’t want to put out much effort in order to earn a fee, but with these buyers, it is what is needed expected.

Personally, I love Bottom Feeders. They are the buyers that fearlessly wade back into the water after everyone else has bailed out. They are the buyers that help confirm the bottom of the market. They help set the stage for the real estate recovery. They are a necessary force within the market that must be dealt with in order for the market to return to any form of normalcy. In exchange for the high level of risk they undertake by re-entering the market early, they are entitled to generous returns on their investments.

During the last major real estate downturn of the 1980′s I worked with many “Bottom Feeders”. Most of them made investments that seemed high risk to the average investor at the time. Five years later they looked like the Einsteins of the real estate world, having watched their early investments grow in value far beyond what anyone expected.

During that same period of time I worked with developers and investors that found themselves on the wrong end of the real estate debt leverage pendulum. Some of the owners ended up deeding their properties back to the lenders, for others we were able to restructure their debt in order to buy more time for the market to recover. The lenders I worked with knew very little about managing and marketing the real estate assets they had acquired in foreclosure. What they soon found out was that they needed someone to aggressively market their REO. The longer they kept real estate assets on their books, the larger the loss reserves they were required to set aside, the less money they had available to loan out. We developed and implemented some very creative marketing strategies to quickly liquidate large blocks of residential real estate and commercial land. In order to move property in extremely slow markets we had to find ways to attract and work with as many Bottom Feeders as possible. It was a “win-win” relationship. The banks disposed of a large volume of non-performing real estate assets, the Bottom Feeders made some very good real estate buys, and the geographic markets where the REO were located moved further along in their real estate recoveries. When I am working with experienced Bottom Feeders in Pagosa Springs, I know the beginning of the real estate recovery can’t be too far off. I love Bottom Feeders!