Archive for commercial short sales
Commercial short sale opportunities are being presented to investors all around the country. The pressure on business from the high residential foreclosure rates and mortgage woes have put weaker business properties into distressed situations.
Properties that are mis-managed or suffering from previous poor decisions in better times are missing their mortgage payments and approaching foreclosure.
Far from an indication that they are not good properties for investment, it’s related more often to management or expenditures made in better times that are now coming back to haunt their owners.
Basic Short Sale Concepts
Commercial short sales are similar in the basics to residential short sale situations. The owner of an income-producing commercial property is having trouble making their mortgage payments, and the lender is threatening further action.
It isn’t a foreclosure yet, and a buyer may create a great purchase opportunity by stepping in and relieving the bank or lender of the costs and hassles of foreclosure.
A buyer in a residential short sale provides the lender with comparable sale data, current comparable property listings, and other data to support an offer significantly lower than the current mortgage balance.
The homeowner/borrower helps by providing documentation of their distressed financial status and eminent foreclosure or bankruptcy. The goal is to get a deep discount deal from a bank or lender wanting to avoid the foreclosure process.
Commercial Short Sale Specifics
In commercial rental properties, whether office complexes, shopping malls, or other property types, the cash flow is the primary valuation factor and lending decision component. It could be assumed that the property wouldn’t be in a short sale position if the cash flow was as it should be.
This could be the case, but it needn’t be because of factors outside the owners’ control. Poor management or decisions on major expenditures could create drains on otherwise good rental income flows.
There is also the strong possibility that the property in mortgage trouble has been subsidizing other losing investments of the owners. As these other property situations deteriorate, an otherwise very desirable property is unable to stay afloat because its cash flow is being drained to fund other poorly performing investments.
When an investor can uncover an opportunity like this and negotiate a successful short sale with the lender, an excellent investment is the result.
Commercial short sale opportunities do require a high level of due diligence, but it can be very well worth it.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
In most loans you deal with something known as the “Loan To Value”
which is referred to as LTV.
In commercial real estate investing you do too, but there’s also
something else that commercial lenders consider and that’s
“Debt Coverage Ratio” which is referred to as DCR.
A commercial lender will calculate the LTV and DCR on a
property and often loan the lesser of the two.
For example, let’s say you had a property worth $100K.
If a lender is willing to loan 80% of the property value, then
that’s 80% loan to value. You would need to come up with another
20%, or $20K. That’s how LTV works.
Now let’s talk about the “Debt Coverage Ratio”, or DCR. With
commercial real estate, a lender wants to see MORE income
being generated than is necessary to fully pay the monthly
mortgage payments on the underlying commercial financing.
Why?
Because if your property is generating say $80K a year in
monthly income, and your underlying mortgage payment
adds up to $80K a year, you don’t have any room for vacancies
or other things that might require cash.
So the commercial lender wants to see often 125% of the
payment owed being generated in income from the property.
That’s one of the reasons why it’s so important to be able to
maximize the amount of monthly income an apartment
can generate.
When investing in apartment foreclosures or commercial
short sales, you can zero in on properties where you know
you can increase the amount of income being generated by
doing improvements or lowering the vacancy rate.
That will also increase the value of the property and that’s
where the fun really begins!
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Often times when we think of doing due diligence, we think
it means checking things over that are physical with a property.
But it also means “Market Due Diligence”, “Legal Due Diligence”,
and “Financial Due Diligence”.
In market due diligence, you want to find out want the vacancy
rates are in the surrounding commercial properties.
If they are experiencing 80% occupancies rates, then there’s
no reason you shouldn’t be able to achieve the same, all things
considered…unless there’s a problem with the property, which
is why you’re researching this.
Also, you want to find out what comparable rents for 1,2,3
bedroom apartments in that area to see if the apartment complex
you’re considering is the same, high or low.
When considering legal due diligence you’re focusing on zoning
and what can be done with the property. This is particularly
important if you ever want to do a condo conversion.
Then there’s financial due diligence. When the owner of an
apartment gives information on it, there are financial numbers
that are presented.
It’s important that you make sure these numbers are correct
and being appropriately represented by checking financial
statements, back accounts, tax records, etc.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
