A recent deal near Sacramento, California, illustrates a key strategy many investors are following in the distressed real estate field: They're opting to buy defaulted mortgage notes on projects from banks rather than the real estate itself.

Months later they take full control of the property by foreclosing on it as the noteholder, often yielding a much lower total acquisition price than they'd have gotten in a competitive public foreclosure proceeding.

Earlier this month, real estate investment firm PCCP LLC, formerly known as Pacific Coast Capital Partners, took over a 25-acre new housing community called Folsom Treehouse, in Folsom, California.

The development has 291 finished lots, 99 single family lots, 164 condo lots and 28 constructed or partially built houses.

Folsom Treehouse's original developer defaulted on a $22.5 million loan in late 2008. Last March, PCCP bought a discounted note on the project from United Commercial Bank and the Federal Deposit Insurance Corp.

The size of the discount to PCCP was not made public, but in purchases of severely distressed notes, the price can go to 50 cents on the dollar -- even less, depending upon the circumstances.

If the discount was 50 percent in this case, for example, the investor might have gotten effective control of property that had originally been valuated at well over $22 million for less than half that price.

PCCP did not return phone calls from Real Estate-Realtor Times seeking clarification on what it paid, but in a statement Jim Galovan, a vice president for the firm, said the deal typified the company's opportunistic approach.

Three thousand miles to the east in New York City, where growing numbers of residential and commercial building owners are defaulting on loans and seeing property values plummet, savvy investors are pursuing a similar strategy.

Developer and investor Ed Mermelstein says multifamily properties, especially newly or partially built new condos, are in serious distress.

Lenders are faced with a terrible choice: Either hang on to a nonperforming note on a building declining in value, OR listen to investors like Mermelstein who'll offer to take the note off their hands for a deeply- discounted price, all cash, in thirty days.

Banks slowly but surely are becoming more receptive, Mermelstein told Real Estate-Realtor Times last week.

But how do you find deals with potentially big discounts and know the right moment to approach banks stuck with nonperforming paper?

"You've got to know people who's business it is to know," he said, especially brokers, lawyers and lenders who are hardwired into the local market, and know who's in pain.

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