When Debbie Corson describes the attitudes of many of the potential apartment buyers looking at deals, it sounds like she’s describing wary circus performers more than apartment executives. The performers are in the ring but aren’t quite ready to startthe show.

“Everybody is scared of catching this falling knife,” says Corson, a principal at Apartment Realty Advisors’ Chicago office. “No one wants to buy into a deal that next year is worth 20 percent less than what you paid this year.”

While it’s true that most of the big money guys—traditional players such as REITs and pension funds—have pulled out, not everyone is afraid of jumping in right now. And no, we’re not talking about foreign buyers, who also seemed to have moved out of the picture. Instead, sellers today must negotiate with a different type of buyer. Many are old-time players who have taken a break for the past couple of years. Some are new faces supposedly sitting on a lot of cash. But whatever type of buyer they are, the goal right now is identical: Find valuable assets at a discount and hold them for the long term.

The Hold Outs

Back before institutional investors overtook the market and securitized real estate in the country, there was the little local operator who owned fewer than 10,000 units. He knew the cost of an asset; he knew the monthly rents; and he expected to retain reasonable cash flow. He relied on long-term fixed debt and didn’t bet on a windfall from short-term appreciation.

But when the major institutions and private equity firms started playing the multifamily game, the local guy was elbowed away from the craps table. “These local owners couldn’t compete with values that got so strong,” says Peter Donovan, senior managing director for multihousing capital markets at Boston-based brokerage firm CBRE. But lately, the big players are cashing out their chips and leaving. “A lot of the buyers before were institutional such as private money. Those are the guys who pulled out in 2008—and understandably so,”Donovan adds.

Their departure opened the door for some of those same smaller operators who had opted to sit out the past few years to come back in. “It was back to the way things were 20 or 25 years ago,” Donovan says. “They understand what it costs to build in their market; they have a portfolio; they think they can run it a little bit more efficiently because of that; and they’re willing to hang on to it. They like the debt, and they like the prices. They’ll hang on to it.”

And they have money. “Those people who have been sitting on the sidelines building up war chests of cash are coming back in looking for deals, and these deals are priced better than they were the past few years,” says Shane Shafer, a senior vice president for Sperry Van Ness in Irvine, Calif.

If they need leverage, they can also go to local banks, many of whom have survived this downturn better than the national lenders. “A lot of them, frankly, have some cash,” Corson says. “If they can’t go through Fannie Mae or Freddie Mac, they go to their bank and do it.”

And, since they plan to hold for a while, the prices falling 20 percent more isn’t as big of a concern to them. “These guys believe that if they can finance the property and its cash flow the way it is now, if it goes down a little more in value over the next few years, that doesn’t make any difference to them because they’re long-term holders,” Corson says. “The fact that they could get in and get it without competition is the way to go.”

The Vultures

So how long will these small regional and local owners continue to get their first choice for prime deals? The immediate answer—until the vultures arrive. Right now, the deals on the market—which range in value from $5 million to $25 million—seem more palatable to smaller owners thanthe vultures.

Donovan says the average size of the deals on CBRE’s multifamily watch list is probably 50 percent larger than the average size of their REO foreclosure. That means that in the current environment, the bigger deals have yet to be foreclosed upon, and the vultures don’t want transactions valued at less than $5 million. In fact, they won’t even nibble unless something more appetizing comes along. And that leaves room for local owner/operators to go into pursuit.

“The first assets to go bad are smaller, lower quality assets,” Donovan says. “Usually, the sponsor didn’t have a lot of liquidity. I think those deals go to private, local buyers. I think the vultures want something bigger and of better quality. I think bigger assets will come to market, whether it’s multifamily or other types of product, that may be a little more attractive to the vulture funds.”

When that may be remains a mystery. Right now, the vulture funds seem more intent on announcing their arrival than making deals. Companies such as Atlanta-based Lane Cos.; The Bainbridge Cos. in Wellington, Fla.; and Herman and Kittle Properties in Indianapolis have all made announcements that they’re in the market for distressed assets. But there doesn’t seem to be a lot of buying. “We’ve been sniffing around, but we haven’t really seen the distress manifest itself yet,” says Eric Hade, general counsel for Lane, which launched its fund as a joint venture with Philadelphia-based Lubert-Adler, a real estate private equity firm specializing in redevelopments.

Corson of ARA says these opportunists take some of the blame, but they’re not offering realistic pricing. Of course, they’re called vultures for a reason. “There are lots of buying groups who claim they’re looking for distressed assets, but there are very few of them who are making offers that are acceptable,” Corson says. “The deals that they’re saying they want aren’t here yet.”

Many analysts, brokers, and apartment executives expect that tipping point to come sometime this year, though. A number of deals made with 90 percent leverage will lose 25 percent to 30 percent of their value in 2009. When those maturities are up, the owners and developers will need a cash influx. If they can’t pony up the funds, they’re going to be in major financial trouble.

“There are definitely maturity risks, and there will be distress this year,” says Andrew J. McCulloch, an analyst for Green Street Advisors, a Newport Beach, Calif.-based REIT consulting and research firm. “I don’t know if that’s in the first half, but you’ll start seeing it in the second half.”

Ultimately, it won’t be the owners making these decisions. It will be the banks. “I don’t know that you could pick a particular time. Anecdotally, it’s going to occur when the banks run out of rope,” Hade of Lane says.

And that’s exactly when the vultures will make their move.

Preparing to Jump

When the time is right, be ready to buy with these three tips in mind.

No one wants to buy right now, especially with the possibility looming that cap rates could rise and 10 percent of the investments could disappear. Still, there are some compelling reasons to get in the market.

1) Get ready. Just because you aren’t buying now doesn’t mean you shouldn’t prepare yourself. “Buyers need to be current with the market,” says Peter Donovan, senior managing director for multihousing capital markets at Boston-based brokerage firm CBRE. “Once you decide the market is where you like it, you can’t spend all of your time getting up to speed. You need people who are in the [deal] flow so they can be seen as credible buyers.”

2) Know your market. Real estate is regional. Just because you have read about the gore and violence wreaking havoc on the national market doesn’t mean it’s necessarily happening in your backyard. “One of the problems with the way people view the marketplace is they lump everything into one big national distress pool, and it’s not,” says Debbie Corson, a principal at Apartment Realty Advisors’ Chicago office. “Real estate has always been local. The guys who have been willing to look at the deals in terms of where they are will end up making a lot of money.”

3) Think management dollars. Even in a market where cap rates are rising, one alternative is to focus on the management revenues. If you can find an underperforming deal where occupancy is at 50 percent or so and raise that up to 90 percent, you’ll make money. “There are those kinds of deals out there,” Corson says. “You have to look for them and be prepared to jump on them when they’re there.”