The former president of home builder Barratt American, which last August was forced to liquidate because it couldn’t recapitalize itself after a bank group led by Bank of America cut off its $125 million credit line, is back in business again, buying, building, and renovating foreclosed homes and developments for resale. But Mick Pattinson, who has re-emerged as chairman of The Barratt Group, still finds his immediate fate in the hands of lenders and how willingly and quickly they release REO property. Pattinson tells BUILDER that he and five former Barratt American officers, working out of a “small office" in Carlsbad, Calif., have been “beating the bushes for broken deals we can buy with private investors’ money.” After several months of negotiating, The Barratt Group’s first acquisition is The Villas of Montecito in Atascadero in San Luis Obispo County. A dozen of the 28 luxury townhouses and duplexes planned for this project are completed. The rest will range from 1,465 to 1,775 square feet and have prices starting in the low $200s.
Pattinson says he learned about this deal from Mike Armstrong, Barratt American’s former general counsel and now with The Barratt Group, whose brother-in-law is the former mayor of San Luis Obispo. The Barratt Group did not disclose the final purchase price, but was able to acquire this project for 35% below its original asking price, according to Pattinson.
The Barratt Group so far is being financed by individual investors. “We’re talked to some smaller private equity firms, too,” says Pattinson. His company is now looking for other “broken deals” throughout California and other states. “This distressed arena could be around for another 10 to 15 years,” he says.
However, finding those deals is still tough, as banks continue to hold onto distressed properties under the belief that they will eventually be able to command higher prices.
Pattinson recounts that one broker he recently spoke with brought 14 offers for a small parcel of land to a bank, only to have all of them rejected. He also points to another project The Barratt Group has looked at in Palm Desert, where a local bank is suing builder/developer Bruce Maize for the $6 million outstanding on a $14 million loan. The bank, under regulatory pressure, has steadfastly refused offers below its most recent appraisal of this project, which Pattinson says is significantly higher than previous bank appraisals of the same project.
The San Diego-based researcher MarketPointe Realty Advisors estimates that through June 30, 2010, there were 50,536 REO lots and homes in Southern California (between Kern and Imperial counties) that banks controlled. That represents a sizable drop from the first quarter, when MarketPointe estimated banks were holding 58,900 lots and homes.
But these numbers still point to the ton of property in financial limbo. And the success of The Barratt Group, and other companies like it, hinges on how much debt banks will eat before they release distressed real estate and how soon they make those decisions.
“Banks not releasing these assets back to market, on top of the credit crunch, is prolonging the distress we are all dealing with,” says Pattinson about the housing industry. He points to a recent report in The Los Angeles Times that stated that California home building industry has lost 84% of its jobs from its latest peak.
That’s a big concern for him, because eventually Pattinson wants to start developing and building homes again on his own. He is hoping that if former eBay chairman Meg Whitman is elected California’s next governor, the housing industry might get a break from regulations and impact fees that Pattinson has long railed against as deleterious to this home building's growth.
“What exists now is a paralyzed system,” he says. However, Pattinson also concedes that builders themselves need to re-examine some of their own construction excesses and move back to homes “that are smart, simple, energy-efficient and more sensibly priced.”
John Caulfield is senior editor for BUILDER magazine.