Q&A: Dotan Melech
United AMS president
Fri, Dec 4, 2009 (3 a.m.)
Dotan Melech has seen the ups and downs of the real estate market in Las Vegas and tried to capitalize on them.
A native of Israel, he moved to the United States at age 26 in 1996. Melech is president of United AMS, an asset and property management firm that represents everyone from lenders to investors.
Melech rode the wave of the condo conversion market when home prices were too high. After the market turned, he focused on property management, working as a receiver on foreclosed properties, working with investors on deals on Las Vegas’ single-family homes.
IBLV: Why did you come to the United States to study?
Melech: You come to a new country and you study, but at the same time you see the different culture. That was the purpose of me coming here initially. I was 26 already. I didn’t want to take a bag and travel the world for two or three years. I wanted to take advantage of studying and at the same time travel and see other things.
What did you see yourself becoming?
Engineering was never a field I practiced. I studied it and know the field. I never practiced design. I have always been in management — in the field or the construction side or the planning behind it or the financial aspect of it.
How did you come to Las Vegas?
I was researching a lot of universities when I was in Israel, knowing this is what I would do. I was researching what cities I could get a great education and great exposure to the profession and be able to afford. I enrolled in universities on the East Coast and West Coast, and I checked them.
It was kind of by elimination. I didn’t like any of them and said Vegas it is. The attraction was that it was growing. There was a lot of construction and development going on in 1996. It was really taking off. Some megaresorts were (being built). I really saw that as an opportunity to be exposed to such large projects and at the same time go to school (UNLV) and get a good education.
How did you come to work on the construction of the Venetian?
There was an ad in the paper for interns for one of the construction companies that was doing the general contracting work, and I applied for it. I worked for it from the beginning of the project all the way until it was completed.
What happened after college?
When I graduated I was offered a job with the same company to move to the Caribbean and build a Four Seasons.
What about after that?
I was transferred to Turkey. I was sent there to develop the market. Then 9/11 happened when we were there, and American companies were a bit nervous having their people overseas doing projects. We were asked to come back. I went to Pittsburgh. That’s where the company is based.
How did you end up back here?
I had good friends here. I read and talked to people during the time I was away and heard the market was great in 2003. Prices were going up, and it was a great time to go into real estate. I always wanted to do that, and it was a perfect time to come back.
What did you do?
At the time, I started a company for development, and we did some condo conversions here. We had a group of investors that followed us, and we acquired apartments.
What was your role, and why did you do that?
I was the managing partner. I always was fascinated because real estate, in a way, was always my field. Whether you build it or you buy it and improve it, there is always an element of construction, engineering and financing in every project. I was always attracted to doing the project from A to Z and not just one component of it.
What was the first thing you did?
We bought this small, 32-unit apartment building and divided it and sold it to investors, and it went very well. From there, we kept buying bigger projects.
What happened to cause the collapse of the condo conversion market?
The reason the condo conversion even became a great opportunity was because the prices went so high. Everything was so expensive, and you couldn’t find a house in a decent location for $100,000, $120,000 or $130,000. The condo conversion replaced the high-priced single-family home. It was a good answer to it. It went downward very fast — as soon as the single-family prices came back to what they used to be.
How many did you do and were they all successful?
Three projects; over 800 units. The last one was tougher. It still remains to be seen because we were able to negotiate with the bank and acquire the note at a discount. Right now, it is a rental property. Time will tell if things will turn around again.
You couldn’t make sales, and we bought the note back from the bank and now it is operating as apartments (Avalon at Seven Hills). Our management company in town runs it. There are many partners involved. We sold about 40 percent, and 60 percent is owned (by the shareholders).
How did United AMS come about?
When we saw what was going on, we brainstormed and thought there would be a need for what United AMS is today. We decided to take the expertise and know-how and create this organization.
What did you think was needed?
I thought service to banks on assets that require people on the ground handling their issues and handling the management aspect of these assets. Banks are handling things from a remote location, especially national banks. When borrowers default and things become as bad as they are, there is a need for people on the ground who have the system in place to handle those issues — whether it is the project management aspect of it or whether it is a receivership that is required to complete the foreclosure or whether it is any other asset management service from valuation, inspections, opinions.
What type of properties do you deal with?
We handle land to commercial to residential.
So you work for a lot of lenders?
Our focus has been primarily on the receivership and asset management side for the lenders that are looking to foreclose on properties and need the person appointed by the court and is responsible to report back to the court on all the activities — anything that relates to security, daily activity or financials. Anything that is going on with the asset we need to know and we need to report back.
What does the receivership apply to?
You don’t appoint a receiver to foreclose on a house. It has its own procedure and own statute. The receivership mainly applies to properties that are income producing — multifamily, commercial, residential, industrial that generate income. If it doesn’t have any income to manage, it doesn’t have a need for a receiver.
What is your involvement in home foreclosures?
We have property management services that manage these assets; in some cases for banks, because they might have a pool of homes that they own and took back — they need a company to service those houses.
What do you do?
The expectation on property management, especially when you work for institutions, is that financials will be immaculate. You will have good reporting. The job is in the trenches. You have to make sure it is ready for rent, marketed for rent, that you take all the calls and do all the walk-throughs.
Have you seen a lot of home vandalism?
I haven’t seen a lot lately. There was a wave of vandalism in the beginning. I don’t see that much now.
What have you learned from the foreclosure problem?
We all know why it happened. It was loose lending guidelines. It was supply and demand at the time everything went up so high. We had 50 percent of the buyers who were investors and, realistically, that drives prices up. We know why prices went up. It got to the point the fundamentals were not there. People could not afford to keep making payments on the property because they don’t make that much. The job market wasn’t there to support it and if you top it off with unemployment issues and projects being shut down and things like that, it makes things much worse. What is happening right now was inevitable. Things are going to take their own course, and it’s going to have to flush itself and clean itself.
How much longer is it going to last?
I wish I knew. I know the word out there is that it is couple of years to clean up and bring values back to reality. But I am not sure. I think it has a lot to do with how banks will react — the steps taken in the next few months. I think it is critical what will happen. I think banks held back a lot of supply and were very slow to react and control the inventory in the market. It was flooded very quickly, and then it was consumed.
Now, there is the expectation that they will flood it again because they accumulated quite a lot of property over the last two years. There are many more to come because of defaults and foreclosures. It is hard to tell how they are going to manage and monitor that inventory because it’s back to the fundamentals. It is supply and demand and valuation. It is affected by how much supply is out there and how much demand there is.
Are they going to flood the market?
I hope not. I hope they will monitor the release of inventory to the market and not put more than is being consumed, at least to keep things stable rather than create additional deterioration of value. It will have a psychological impact on buyers. They will have just bought a house and thought it was a great deal and all of a sudden next year, the market comes and floods it with a high number of properties and, all of a sudden, what they thought was a great deal two months ago is a bad deal, which will make a lot of people hold.
Why aren’t lenders flooding the market with foreclosures right now?
There has been government influence. There is an economic reason not to do it. There is a school of thought that they just should have dumped everything and just let the market clean itself. It is painful, but short. But you can’t say that. The process of foreclosing doesn’t work that way. Every house has to take its own course. It can take nine months or 10 months.
Do you think there will be a flood and prices will fall?
There is going to be a higher supply and additional impact on prices. I do think there will be an additional negative impact, but I don’t know for sure, and I think it can change. Certain actions and certain strategies that the banks will implement can maybe not eliminate, but minimize it.
Are you worried about people walking away from homes?
That is happening, too. They feel, in a way, they are throwing money away because they will make payments on the principal amount that they don’t know how many years from now it will get back to. People are going to realize that the house on the right and the house on the left are half of what they owe, and it will have a psychological impact and will make people make decisions.
Will the new state foreclosure mediation program work?
If they reduce principal maybe. What I have heard is that they are dealing with monthly payments and the formula is 30 percent of your income. Bring in your income and show your income and whatever 30 percent is, that’s what you are going to pay. That is great, but what about the principal amount and value of the house that relates to the principal. That is an issue that needs to be addressed. It is a problem.
A lot of investors are buying homes here in Las Vegas. What are you seeing?
We have a large number of investors dealing with us. They come from all over. You see them from Canada; you see them from Europe and Asia; you see them from the Middle East. In the U.S., a lot of investors come from California and back East.
Why are they gobbling up these homes?
Vegas is one of the places that got hurt the most, and, obviously, that creates opportunity. Anybody you talk to will say Vegas and Florida, and the reason is they got hurt the most. The expectation here is that the prices will be substantially lower. They see it as an opportunity.
What is attractive?
There is a speculative aspect to it. If we are at the bottom, the only way is up is what they are thinking. The question is how long. Some of them are making bets on two years, and others are making bets on five years. Some are making bets on longer than that. Markets come back when there is the perception the market has reached the bottom.
Where are we at?
I think we are not at equilibrium yet. There is a certain unbalance that needs to correct itself. Rents should stabilize as well as values to a reasonable level. A sophisticated market does not allow rent to be substantially higher than the price. There is some catching up to do there.
Are these investors making money?
They are. You see about 7 to 9 percent — around that neighborhood — on a stabilized property.
How many homes are you managing?
We handle more than 300 homes right now, and it is growing. The reason it is growing is we see groups from Australia … with a bulk of houses that they want managed and to create some cash flow for them. There are individual buyers who bought multiple properties and need a good company to oversee them. We see that trend growing. In a good market and bad market, that is going to be there.
You are not worried about investors coming back to the market?
No. The reason I am not is they are a different type of investor. They are cash investors. The difference we saw in the market a few years back and investors today is those a few years back had 100 percent financing. They really didn’t have to have anything besides a Social Security number or some limited income verification. The investors today realize they can’t get financing unless they put a lot of skin in the game or cash. They are the type of investors who can hold longer and no matter what the fluctuations in the market are, they will be able to stay with it longer without creating an institutional issue.
What are you expecting in the apartment market?
I expect more multifamily to be foreclosed upon and coming back to the market at different values because the loan amount and basis per unit have gone up in the past few years. It needs to go through some adjustments.
So where are we heading?
I think that it is going to take time to come out of this — to correct valuations. The borrowing guidelines have to correct themselves, as well, and the underwriting. We need to go back to fundamentals of what a real estate deal is and level the risk that banks will be willing to take. Down the road that will change, as well. I think there are so many moving parts right now in the market you can have one house that is sold as (a foreclosure), one as a short sale, one at a trustee sale and one a private sale. All four properties could be next to each other and have different prices. It is hard to tell which one is going to drive the value. I think we are going to see some correction. I think potentially some devaluation, but not as substantial as we have seen so far. We are at that point where we can start working hard toward stabilization and increasing in value. But that is probably a couple of years away.
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