So, you’re interested in buying distressed commercial property? This can be a great way to get a good deal on a property that is otherwise out of your price range. However, it’s important to understand the process before you dive in. In this guide, we will walk you through everything you need to know about buying distressed commercial property.
A distressed commercial property has been foreclosed on or otherwise acquired by a bank or other lender and needs significant repairs. The owner of the property is typically unable to keep up with the mortgage payments, which results in foreclosure and ultimately puts the property on the market for sale.
- Business owners looking to save money often consider distressed properties – those facing foreclosure or already owned by the bank.
- While these business properties offer a great opportunity for investors, it is important to remember that they may require extensive repairs and renovations.
- Distressed commercial property is a property that has been foreclosed upon or otherwise taken over by the bank due to lack of payment. These properties come in all shapes and sizes, from large office businesses to small ones.
What is a Distressed Commercial Property?
A commercial property that is in danger of foreclosure or is already bank-owned is considered to be a distressed property. To save money, many investors look for foreclosed business buildings to purchase. However, purchasers should be aware that there is a chance the building will require extensive maintenance.
Why people might be interested in distressed commercial properties
Real estate investors have the opportunity to purchase buildings at prices significantly lower than their current market worth when they buy distressed properties.
Many first-time buyers are drawn to the distressed property market because of the attractive price points available in this segment. However, it is essential to have a comprehensive understanding of the various sorts of distressed properties to avoid and conquer the challenges that are intrinsic to the types of listings being considered.
You’ll be able to get the most out of your investments in foreclosed and foreclosed-upon properties if you have an understanding of the challenges that come along with distressed real estate, as well as the best techniques for mitigating those hurdles and finding solutions to problems.
The Risks and rewards of buying distressed commercial property
Here are the rewards and the risks of buying distressed commercial properties:
Possibilities of Gaining Income. The prospective rental revenue is the biggest motivation to invest in commercial real estate business. Indeed, national asking rents have increased by 11.3 percent over the previous year, indicating a boost in the earning potential of commercial property. More security in your cash flow is possible with renters that stay for longer periods because business leases tend to be longer than residential leases.
Having a diversified portfolio is a smart move. You can reduce the overall volatility of your investment portfolio by including commercial property holdings. Since commercial real estate tends to move independently of other investments like stocks and bonds, it makes for a great tool for hedging against market volatility. Your real estate holdings may fare better than average in the event of a financial crisis elsewhere, and the same may be said in reverse.
Inflation hedging. Inflation can be protected against by investing in commercial real estate, as property values and rentals tend to rise over time. The added flexibility of periodic rent increases only strengthens this advantage. Research shows that commercial real estate outperforms inflation after being held for five years.
The Needed Investment. The time and money needed to invest in commercial real estate can be substantial. There may be a hefty down payment needed, as well as significant repair and upkeep costs before the property is ready to be rented out.
In addition, you’ll need to invest both time and money in hiring the correct people to handle the many tasks involved in commercial real estate ownership, such as building development, tenant relations, and routine building maintenance.
Aid from the Experts. Your commercial real estate appraisers and real estate agents are the first steps toward a successful investment, which will not be complete until you have reliable property management in place. These experts will also verify that the property you choose is a good fit for your business and financial goals.
Liability. Last but not least, the possibility of an accident or injury occurring on your property and holding you liable as the owner is one of the greatest dangers of investing in real estate. The possibility of harm increases while dealing with commercial property due to the more significant number of visitors and visitors’ vehicles. You can lessen the impact of potential negative outcomes by doing a careful risk assessment and buying adequate insurance.
Where to Find Distressed Commercial Real Estate?
Loopnet is an online service that provides listings of available commercial properties. They have a comprehensive database that includes foreclosed, bank-owned, and auctioned-off properties.
Just recently, RE/MAX reached 10,000 Certified Distressed Property Expert (CDPE) agents, giving it 53% of the industry total. Real Estate Max (RE/MAX) agents are dedicated to assisting purchasers and sellers despite the current market conditions.
Realty Bargains is a website that has been around for quite some time. They specialize in finding distressed commercial real estate and making it available to investors. They have a wide range of listings from office buildings to warehouses, apartments, retail spaces, and more. Realty Bargains’ focus is on finding properties that need renovation or just need some tender loving care.
Reonomy’s property intelligence platform can provide the information you seek in a matter of minutes, regardless of the location or type of commercial asset you’re researching.
One easy first step (before you get more proficient with the platform) is to look for commercial properties that are in pre-foreclosure.
Diving into more in-depth, proactive research, might give you a clearer sense of the prospects in your target market. Additionally, you can narrow your search for commercial real estate on the platform by auction date and pre-foreclosure status.
Preforeclosure.com is a great place to find distressed commercial real estate. It’s a free service that lets you search for properties that are going through foreclosure and are available for purchase. The site also has a feature that allows you to search for properties that are up for sale, which might be a better option if you’re looking for something specific and unique.
Individual Banking Sites
If you’re looking for a place to start, check out your local bank. They may have a real estate division, or they might be able to direct you to the right person. You can also ask them if they have any properties that are currently on the market.
Distressed Commercial Property for Sale by Owner
It’s possible to find distressed commercial properties for sale by the owner. These owners are often motivated sellers and can be great sources of deals. They may even be willing to finance the purchase.
Buying Distressed Properties And Making A Profit
The first step is identifying potential distressed commercial real estate deals. Here are some of the best ways to locate distressed commercial properties for sale:
- Check public foreclosure listings – Many distressed properties will be listed publicly when the commercial mortgage defaults. Monitor foreclosure publications and websites for any new distressed property listings.
- Network with lenders and brokers – Connecting with lenders and real estate brokers who deal with distressed properties can help you gain access to deals before they hit the public market. Build relationships with bank REO (real estate-owned) departments.
- Search online listing sites – Sites like Loopnet and Costar have special sections for distressed commercial real estate listings. You can search by property type, location and filter for distressed status.
- Drive for dollars – Canvassing target neighborhoods by car looking for vacant, dilapidated, or run-down commercial buildings that may not be formally listed anywhere. Also look for expired listings that could indicate a distressed seller.
- Read the public record – Search tax assessor records, lien filings and code violations to spot indicators of distress like unpaid taxes, mechanics liens or building condition issues.
|Foreclosure Listings||Public Records||High competition|
|Networking||Deal access and insider info||Time intensive|
|Online Listings||Easy to filter and search||Limited distressed property inventory|
|Drive for dollars||Uncover unlisted properties||Very manual and time consuming|
|Very manual and time-consuming||Identify signs of distress||Indirect, may not imply sales motivation|
Do Your Due Diligence
Before you ever consider purchasing distressed buildings or CREs, you must conduct your research. This involves researching the property, the surrounding area, and the market conditions. You must also have a clear idea of how much it will cost to repair the property and how much it is likely to sell after repairs have been made. This is a crucial stage since it will help you assess whether or not the property is a decent value.
Get a Detailed Estimate of Repairs
After conducting due diligence and determining that a foreclosed business is a solid investment, the next step is to obtain a thorough repair estimate. This estimate should be as detailed as feasible and should include both the material and labor costs. If you do not have experience estimating repairs, you should engage a contractor to do so for you.
Determine Your Investing Model
There are several ways to generate income from distressed buildings. The property can be renovated and resold, rented out, sold wholesale, or wholesale. Before making a selection, you must weigh the advantages and disadvantages of each of these possibilities. And the way you select will depend at least somewhat on the property you discover.
Here is a summary of each investment strategy…
Fix and flip refers to the process of purchasing a property, improving it, and then selling it for a profit. This involves purchasing a property, renovating it, and then renting it out to renters. Finding a distressed property, negotiating a contract with the seller, and then selling that contract to another investor is wholesale.
Wholesaling is the process of acquiring a distressed property, making minor repairs, and selling it directly to a retail buyer.
Calculate Your Max Offer
Before you get started with buying distressed properties, you’ll want to figure out how much money you want to spend on each property. This will help you determine how much of a profit margin you’ll be able to make on each deal.
You should also consider what kind of return on investment (ROI) you’re looking for. For example, if you plan to hold on to the property for a few years and have it rented out during that time, then your ROI might not be as important as getting a quick flip. However, if you may need immediate cash flow from the property, then an ROI would be more important than just making money on the sale price itself.
Call The Seller
Once you have determined the maximum offer amount that you can live with, it’s time to call the seller. Try to get as much information as possible about them and their motivations for selling.
If they are willing to sell, make sure to ask them what kind of repairs or improvements they would be willing to include in the sale. This could save you a lot of money in the long run.
With all of these steps, it’s possible to turn a distressed commercial property into a profitable investment. However, make sure to do your due diligence and get an accurate estimate of repairs before ever considering making an offer on any property.
Make Your Offer
If you’ve got a property in mind, you need to start the bidding process by making an offer. This can be a little overwhelming if you’re new to the game and haven’t bought or sold many properties, but it’s not too hard once you get the hang of it.
Decide how much you’re willing to spend on the property. The amount will depend on your budget and how much profit you hope to make when reselling it later on. If there are multiple offers for a single building or office, the buyer with the highest bid will win.
Inspect The Property
Before making a final decision to purchase the distressed property, it’s important to inspect it thoroughly. This means walking around the property and looking for any visible damage or signs of neglect. Make sure that everything is in good working condition and that there are no major structural issues.
If you suspect something is off with the building, hire an inspector to assess for structural integrity.
If you do find any damages or need to make repairs, factor this into your offer price. Be wary of properties that may require extensive repairs and consider hiring a contractor for an estimate before committing to the purchase.
Evaluating Distressed Commercial Properties
Once you’ve identified potential deals, the next step is thorough evaluation and due diligence. Important factors to consider:
- Financials – Review income and expenses, outstanding debt, taxes or liens. Make sure the price aligns with financial fundamentals.
- Building condition – Assess the condition of the roof, HVAC, plumbing, foundation, parking lot etc. Get professional inspections.
- Zoning and regulations – Ensure zoning allows for your intended use. Check for any code violations that need to be addressed.
- Comps and value – Look at recent sales of comparable properties to gauge appropriate value. Factor in needed repairs and renovations.
- Tenant situations – Review current leases and understand which will remain. Evaluate options for vacant spaces.
By taking time to analyze these key factors, you can determine if a distressed property represents a smart investment and how much you should offer to purchase it.
Close On The Property
Once you’ve identified a promising distressed commercial real estate deal, the next step is presenting an offer and negotiating the purchase. Here are some tips:
- Get prequalified financing – Having financing already in place will make your offer more attractive to sellers.
- Submit a compelling but fair offer – Don’t try to take advantage of distress with an excessively lowball offer, but do highlight how your offer presents a clean, certain sale.
- Propose favorable terms – Offer flexible timelines, waiving contingencies, and accommodating access for inspections. This can help beat competing offers.
- Negotiate repairs and renovations – Rather than lowering your price, negotiate to have key repairs done by the seller before closing.
- Be ready to act quickly – Distressed sellers are motivated, so expect the deal process to move faster than traditional real estate sales.
If you present a solid offer backed by thoughtful due diligence, you can often negotiate a favorable deal to purchase a distressed commercial property.
Build a Scaleable Business
Finally, you’ll want to create a scaleable business model for distressed property. This could involve renting out the property for long-term tenants or flipping it for a profit in a short amount of time. Make sure to hire a professional real estate agent or attorney to help you navigate the legal process and ensure that all of your paperwork is in order.
With a bit of research, determination, and planning, it’s possible to make money by purchasing distressed properties. As long as you do your due diligence and understand the risks involved, flipping or renting out commercial properties can be an incredibly profitable venture.
How to Finance Distressed Commercial Property
A conventional lender is a financial institution like a bank. When determining whether or not to provide conventional finance, the lender will consider three factors. They’ll determine if you meet their requirements. They will qualify the land and the building on the land.
In addition, the lenders will examine the property’s finances, which is a concern for foreclosed properties and other distressed real estate. Commercial property in financial difficulties will likely not meet the requirements for a standard loan.
A hard money loan can be useful if you don’t meet the requirements for a traditional loan. One of our students got a hard money loan to buy his very first commercial property, and I have a video documenting the process.
High leverage is not possible or realistic with a hard money loan. Interest rates can be as high as 15%, and borrowing the money itself can set you back between 4% and 6% in origination fees.
But a bridge loan is a softer sort of hard money. A bridge loan is a short-term loan used to bridge the gap between the cost of acquiring a property and the availability of long-term finance for its renovation and sale. Therefore, it may be said that a bridge loan is a short-term loan. The origination points are only 1%-2% of the loan amount, while the interest rates range from 7%-8%.
Because of their financial and physical problems, most distressing business properties have a hard time getting approved for standard financing. As long as the seller is on board with the terms, creative financing allows you to be as flexible as you like.
If you’re interested in distressed commercial properties, you might also be interested in the trends with commercial real estate this 2023, I wrote an article about here, which will help you understand the current situation and what to expect in the future.
Types of Creative Financing
The seller acts as the lender. To finalize the purchase, the seller may provide you with either a first or second mortgage on the property.
Master Lease Agreement
It is common practice to take out a second mortgage on top of the seller’s mortgage when entering into a master leasing agreement. Using a master lease agreement frees you from having to involve a bank, through a credit check, or get an appraisal, and allows you to be as innovative as you like.
Collaborative Effort with the Seller
The seller may have had code violations with the city but had the funds to rectify the situation. In this case, you may be able to purchase a portion of the seller’s equity in exchange for helping to rectify the situation.
Exit Strategies for Distressed Commercial Properties
Here are some exit strategies, but remember to consult a real estate professional to make sure your strategy is sound.
- One possible long-term role is as a cash flow investor.
- You may be the sort who looks to make a quick profit by selling the building or office to the highest bidder.
- Get rid of everything, and then pay the taxes on your profit.
- Do a tax-deferred 1031 exchange and sell the property.
- Take some money out of the property through a cash-out refinance and keep holding it.
- The transaction is a sale-leaseback. If you have a lot of equity in a piece of property, that’s a smart move. It’s time to get it out of there.
- Do the kids a favor and leave the land in their hands.
- You can flip the contract or wholesale the property.
How to Buy Distressed Commercial Real Estate
Physically Distressed Commercial Real Estate
Physically distressed commercial real estate may have a leaking roof or other exterior/interior concerns due to neglected maintenance. Investors in commercial properties in physical disrepair can earn large returns in the long run, but only if they have the resources to execute expensive repairs and renovations that will make the building more marketable.
Financially Distressed Commercial Real Estate
When a commercial property produces less income than its expenses, the owner is placed in an unfavorable financial predicament and must cover costs out of their own pocket. If such cash flow direness persists, this could be indicative of a financially distressed property. Similarly, if the total balance owed to lenders surpasses the current worth of said building or land- it is referred to as being ‘underwater’ – confirming that distressful times are still looming for its proprietor.
Legally Distressed Commercial Property
Legal distress is the third kind of trouble a distressed commercial property can endure. This could encompass pre-foreclosure, liens, lawsuits, building offenses, and even partnership conflicts when things don’t go as planned between partners.
How To Buy Bank-Owned Commercial Real Estate
Hiring assistance is highly suggested if you plan on purchasing foreclosed commercial properties from your local bank. Hire a mortgage broker, an attorney, and an accountant at a minimum. Gather a group of experts who can negotiate to get you the best distressed commercial property deal on the property you want. Getting their assistance will cost you more money upfront, but if they help you get the property fast and at the price you want, that investment might return big benefits.
The banks are willing to sell bank-owned properties, but not for as much as many would prefer. It’s not impossible to strike a bargain, but keep in mind that the bank stands to gain something as well.
For this reason, I think it’s best to make an offer that’s a bit higher than your ideal budget. I wouldn’t advise offering more than you legally can, but you should try to up your bid a little since you’re probably up against some tough competition. Since banks typically select the highest offers, it doesn’t harm to outbid the competitors by a small amount.
Executing Your Business Plan
Once you close on the property, the real work begins – executing your business plan for the asset. Be prepared to:
- Make repairs and improve curb appeal – Be ready to invest some upfront capital into necessary repairs and aesthetic improvements to attract tenants.
- Lease vacant space – You may need to offer incentives like months of free rent to secure quality tenants for vacant space quickly.
- Address operational issues – Properties in distress may have management, maintenance and operations issues that need to be corrected.
- Monitor expenses – Keep a close eye on expenses and collection of rent during early ownership to ensure positive cash flow.
- Explore financing – Look at options to refinance for better terms once the property is stabilized and improved.
With the right plan and execution, a distressed commercial real estate investment that appeared risky at first can ultimately become a highly performing asset.
How To Buy Distressed Commercial Property FAQs
When Does it Make Sense to Buy a Distressed Commercial Property?
After repair value, or ARV, is the market value of a property once it has been fixed up. So, it makes sense to buy a commercial property that is in bad shape when the ARV is higher than the cost of buying it, fixing it up, and keeping it. All of the problems that come with properties that are in bad shape can be turned into chances.
What does it mean when a property is listed as distressed?
A distressed property is a piece of real estate that is in poor condition or is facing foreclosure. These properties are generally sold at a discount to investors who can fix them up and resell them at a profit. Investors should be aware of the risks associated with buying distressed properties, as they can require costly repairs and may not appreciate in value as expected.
What type of distressed property is often sold at auction?
When mortgage payments are not made on time, foreclosure is a distinct possibility. At this point, the lender will repossess the property and put it up for sale at auction. The highest bidder then gets to take ownership of the building as-is with no further negotiation or improvements required from them.
What is a qualified distressed sale?
In times of financial hardship, like when debts or medical bills need to be paid off quickly, a seller may opt for what is known as a “distress sale.” A short sale is one example of this; it takes place when the owner attempts to sell their business property even though its market value is lower than what they owe on the mortgage.
What state has the most distressed properties?
California experienced the steepest rate of foreclosure filings among all states, with a total of 3,483 cases; conversely South Dakota faced zero.
So there you have it—a comprehensive guide to buying distressed commercial property. By following the tips and advice in this blog post, you’ll be well on your way to snagging a great deal on a property that can help take your business to the next level. Of course, every situation is different and if you need more personalized guidance, my team at ToljCommercial would be happy to chat with you about your unique needs. Give me a call or schedule a free consultation today!