Due diligence is critical: Taking the necessary steps can save buyers grief
Distressed properties can be solid investments for people seeking deals in commercial real estate. But you have to be careful.
These are properties that a lender wishes to sell quickly or that are under foreclosure. We’ve all seen them. Sometimes they’re sprawling, abandoned facilities sporting conspicuous “for sale” placards. Empty parking lots often surround them. Other times, there are still tenants in the building but the owner simply can’t hang onto it.
These properties can be attractive – even if they’ve fallen in disrepair – for an obvious reason: They have the potential to be profitable investments if handled right.
“Sometimes a buyer can pick these up well below market value; in fact, it’s fairly common to do so,” said Anthony Migliore, Senior Advisor for SVN First Coast Commercial Real Estate Specialists in Jacksonville, FL. “After the necessary repairs and upgrades, there’s an opportunity to build up equity and eventually sell the property at a substantial profit.”
The reasons vary as to why properties are distressed. A financially strapped owner may have difficulty keeping it maintained. Commercial and industrial facilities that aren’t kept up properly can grow increasingly dilapidated. Once the disrepair reaches a certain level, the property may require more work than the owner can reasonably afford.
In other cases, the owner may be unable to fulfill obligations to the financial institution, or the property is worth less than he or she owes. When a commercial real estate investment is underwater, it often ends up in foreclosure.
There are many different reasons such problems arise.
“Personal issues can force owners to let go of a property,” Migliore said. “Business partnerships dissolve, people get tangled up in a divorce or a lawsuit. For whatever reason, an owner can end up with a lien on the property and it’s simply too much of a hardship to keep things going.”
Even with the price advantages that make distressed properties appealing, there are pitfalls to consider. For example, they can require a great deal of repair and upgrade. If you’re in the market for one of these deals, be sure you can afford all the improvements before signing on.
“A good commercial real estate advisor can help you by evaluating an investment and screening out the ones that won’t serve you well,” said Migliore. “If someone is seriously interested in a given property, a thorough inspection – even multiple inspections – can uncover problems that are not readily apparent and save the potential buyer a world of grief.”
Checking out zoning can also stave off unwelcome “surprises” after the acquisition of a commercial property. A careful inspection of the financial records is also a must. It’s imperative that the buyer determine exactly how much debt is attached and whether any other financial or legal liabilities exist.
“Going it alone can be a risky endeavor,” said Migliore. “You come out ahead of the game by getting a commercial real estate advisor involved in the process, somebody who knows the ins and outs. In the end, a distressed asset can be a tremendously profitable investment, but it helps to have someone on your side.”