Stressing distress

A decade ago Brian Davison set out to expand a successful real estate mortgage company from his then base in Las Vegas to Florida.

But the market crash torpedoed that plan, like it did to so many others.

The crash cost Davison nearly everything, but he didn't give up. Instead, he shifted his model and found opportunity in what would become a record number of distressed properties in Nevada.

“I got pretty effective at catching a falling knife,” Davison says. “We would look for distressed properties on the tax rolls, buy them, rehab them, and then sell them before the market had a chance to drop even more.”

Using investors he recruited primarily from California, Davison founded a new firm, EquiAlt, in 2008. The model: Acquire distressed property and then manage the buildings, using rental income to power a return on investment.

Davison moved EquiAlt to Tampa in 2012 at the urging of his wife, who sought a better place to raise the couple's two children. The company has since become a dominant institutional player in what he calls a near recession-proof line of work.

EquiAlt has since built its portfolio to more than 170 properties from Hernando to Manatee counties, focused solely on tax auctions. His competition at these auctions are primarily single-property investors, something that likely won't change in the near future, despite his success.

“It's a messy way of doing it, and it's a lot of work,” Davison says. “The people who typically get into tax deed auctions are individuals or small partnerships. I'm betting there has never been a company like ours coming in trying to buy.”

Those auctions are not just messy, but risky, too. Properties are sold as-is, inspections ahead of the sale limited to little more than a drive-by. There is no title insurance either, meaning a dispute in ownership could be costly in the legal department.

Davison, however, does his homework. Using a small in-house team of real estate professionals, he pores over hundreds of properties. Many auction buyers might look for common strengths in homes -- multiple bedrooms and bathrooms -- but EquiAlt works out rehabilitation cost estimates, what bidding range the company should stay in and how fast the property will be profitable. Davison declined to share target return rates for the company.

That could mean many times buying that one-bedroom, one-bathroom home in which no one else is interested.

“When you have one bathroom, that usually means you're spending a lot less in rehab costs,” Davison says. “We already spend a lot on rehab, and bathrooms are usually the worst. So it's the path of least resistance for us.”

None of the properties EquiAlt purchases is leveraged. Davison instead finds funding from investors, mostly from California.

Since moving his operations to Tampa, Davison has spent $4.5 million in rehabilitation costs, an average of $26,000 per property. So purchase prices have to stay low, which sometimes creates a tough decision on moving on a desirable piece of property.

“It's an environment where everyone shows up with cash, and we end up bidding against people who sometimes are the former owners, or neighbors who simply want to buy the adjacent property,” Davison says. “We never win against them.”

Follow Michael Hinman on Twitter @BizTampaBay