TUNGSTEN REALTY ADVISORS, a Chicago-based investment and operating firm, has purchased two distressed notes on fractured condo projects in the past year. The firm was able to get a 40 percent and 63 percent discount on the notes, mainly on the strength of its banking relationships.

“Some of our lenders are our biggest resources in terms of picking up new deals,” says Michael Flight, co-founder of the firm. “But you need to get a few deals under your belt to develop those relationships, to show lenders what you can do.”

Tungsten was lucky. While many services exist to help you track the delinquent and defaulted loans in your area, that's just the first step. Getting ahead of those distressed notes or REO before they hit the market is the tricky part. Savvy investors leverage their relationships —and their financial strength—to realize the opportunity.

Carlos Vaz has done just that. The distressed asset wunderkind and founder of Dallas-based The Conti Organization arrived in Dallas with less than $100,000 to start his multifamily investment business. That was two years ago. Since then, he has made 10 distressed acquisition deals—and topped his firm's holdings at a sizeable 2,000 units throughout Dallas and Houston worth $40 million.

Conti is now in the process of selling three communities, with expected returns north of 40 percent. But Vaz says there's no secret to working the lender network— just go out and meet as many lenders, brokers, and servicers as you can. “Many people want to do it the new way—send emails to as many people as you can and sit back and expect them to come to you,” he says. “But the old way—meeting in person, shaking hands, trying to negotiate as many REO meetings as I can—is the best way. It's just hard work, homework, and relationships.”

Vaz bought his first project, the 206-unit Huntington Apartments, for just $3.1 million, a steep discount from the $4.29 million asking price. The bank that had foreclosed on it was desperate to clean up its balance sheet. Vaz put the property under contract Dec. 31, 2007—and that's when the panic set in. Vaz wanted to use the FHA's Sec. 223(f) program for the acquisition, but the bank wanted the sale to close within three months—unlikely with an FHA loan.

“That was a huge problem for me—the FHA program would've given me 85 percent LTV, nonrecourse, and a rate of less than 6 percent,” Vaz says. The only loan he could find for a bank-owned property that was only 64 percent occupied offered just 60 percent LTV, had recourse, and a whopping 13 percent interest rate.

Once the FHA loan fell apart, Vaz had three weeks to close the deal, or he would lose the $50,000 in hard money he had put up. So he started talking to brokers, one of whom introduced him to a group of private investors out of Utah willing to commit to the deal.

He ran with the opportunity. The property was ready to rent but wasn't being marketed, so Vaz made 10,000 fliers and personally handed them out in church parking lots on Sundays while the property was under contract.

When the deal closed, it had an occupancy rate above 90 percent. And that Utah investor group went on to partner with Vaz on five more deals.

Vaz' financing frenzy is not uncommon in REO and distress transactions. Finding debt to finance deals, especially if it's a C-class property that needs rehab, can be difficult.

“What we're telling the special servicers is, you're going to have to finance it, or you're not going to sell it,” says Debbie Corson, who runs Apartment Realty Advisor's Distressed Asset Solutions Group. “You can't go to Fannie or Freddie for this stuff, and HUD isn't foolproof, and the local banks don't want to do it.”

For distressed assets in need of a quick close, all-cash deals are common. But Fannie and Freddie will still make a loan for performing assets bought from distressed sellers. For smaller deals, regional banks are a good source, Meanwhile, life insurance companies have also begun re-engaging the market.