How to Buy Bank-Owned and Distressed Commercial Real Estate (VIDEO)
Buying distressed commercial real estate isn’t for everyone but one thing everyone agrees on is that a lot of money can be made buying these fixer-uppers. Many old worn-down commercial buildings are in great locations but just need some TLD. Some buildings are worth a lot of money if you find a way to get them fixed. The professionals at the Local Records Office talked to a few experts to get their tips and tricks on how to make money on worn-down buildings.
What is a Distressed Property?
A distressed property is an underperforming asset that significantly challenges the owner in one of three ways physically, financially, or legally.
When the property is physically challenging it is usually because it is:
- Deferred maintenance (roof, exterior, interior improvements)
When a property is financially challenging it is usually because it is:
- Negative cash flow
- Insufficient cash flow
- Underwater (owner owns more than he or she is making each month)
- Personal issue (divorce, sickness)
When a property is in legal distress it is usually because it is:
- Building violations
- Partnership issues
When Does it Make Sense to Buy Distressed Property?
It makes sense to buy a distressed property when the After Repair Value (ARV) is greater than the acquisition costs, repair costs, and holding costs. If the After Repair Value (ARV) is greater that’s when you move in to purchase the property. The question that many people have is by how much greater? The magic number is by 75%.
Where to Find Distressed Commercial Real Estate?
You will find distressed commercial real estate in the same places where you find performing commercial real estate and those include:
- Broker relationships
- Lender relationships
- Direct mail
- Network relationships
Good deals are found, but great deals are created, learn the signal of distress really well.
How to Finance Distress Commercial Property?
There are currently two ways to finance distress commercial property:
- Hard money loan
- Bridge loan
The lender will look at different things to review and underwrite a deal. The lender will qualify you (the buyer), qualify the property and qualify the area. The bad thing about a hard money loan is that they’re expensive and they don’t leverage that great. It will cost you 4 to 5 points to just use the money.
A bridge loan, on the other hand, is a gentler loan. A bridge loan will bridge you from where you’re at now while allowing you to buy the property and fix it while allowing you to make money before you can start paying it back.
- Seller financing
- Master lease agreement
- Joint venture with seller
The creative side of the loan is that something creative needs to be done because of the situation the property is in. The good thing about being creative is that you can create your own terms as long as it’s acceptable by you (the buyer) and the seller. Seller financing is when the seller becomes the bank, the seller can give you a first or second loan on the property to get the deal done. A master lease agreement is when no bank or loans are required.