Buying Foreclosed Multi Family and Retail Commercial Property
Article by Brent Wilson
Buying Foreclosed Multi-Family and Retail Propertyby Brent Wilsonhttp://Reochronicle.com/blog
A lot of the same sloppy lending that went on with residential property also went on with commercial property.
In some cases loans were made for over 100% of appraisal, loans were made assuming that rents would increase perpetually, loans were made to weak borrowers who didn?t know how to manage properties correctly, etc.
The bottom line is that commercial properties will be foreclosed on just like residential. One main difference, however, is that most of the commercial lending in many areas was done by local banks, who still hold the loans. With residential, most of the loans were done by larger mortgage companies and/or the loans were sold upstream to companies like Fannie Mae.
Dealing With Local Banks
Many local banks don?t even have an REO department, since until recently they haven?t had much foreclosed property. Normally they just assign someone in the bank to handle their REO inventory, someone who also has other duties.
It?s fairly likely that whoever is handling a particular bank?s REO inventory is not an expert in managing apartment complexes, strip malls, or whatever it is that they might be holding. Consequently their cash flow is often poor, even with existing tenants.
Commercial property foreclosures are actually far more likely to bring down local banks than residential real estate foreclosures. Commercial property hasn?t cratered yet to the extent that residential has, but it?s on it?s way. If the FDIC starts sniffing around some of the weak banks, some banks will have even more incentive to dump some of their problem assets at fire sale prices, before the FDIC forces them to raise capital.
If you decide to invest in foreclosed multi-family or commercial property, you first need to find out about the inventory of local banks.
Some banks will list their inventory with local commercial brokers. In many places commercial brokers don?t share listings, so you just have to go around to various brokers and inquire.
Other banks will try to market their properties themselves, for various reasons. In this case you just have to go to each local bank and inquire about any properties they may have, and ask to be put on a ?please call? list, so they will call you whenever they get something in inventory. If you become one of their favored customers, it?s possible that you may not have to compete against anybody else in bidding on a property.
For commercial properties the pool of buyers is generally small anyway, and for foreclosed properties it?s usually microscopic.
Lots of commercial properties are priced on a percentage net basis? ?yields 8% cash on cash? or something like that. Banks may trot out some percentage figure of that sort.
In practical terms this percentage net isn?t very useful when buying a foreclosed property. For starters there?s probably some deferred maintenance. Maybe the rents are already too high. Obviously the property didn?t work out for the last owner, so you have to get it cheap enough to be sure it works out for you.A return of only 7% or 9% or whatever on rents isn?t enough when you?re taking a chance on a problem property with a lot of issues to be worked out.
Another advantage of dealing with local banks is that the bank may not only sell you the property, but they may finance it for you as well, particularly if you have 15-25% to put down and a strong balance sheet. You may not be able to chisel them down on the price as much if the bank is offering financing, but if the terms are good that can be worth more than a lower price.
To Buy or Not to Buy the Dogs
Some investors make a lot of money buying doggy properties, and others lose their shirts.
A doggy commercial property might be a strip mall in a really bad area, Class C office space in a so-so area, an apartment complex in a low income area, etc.
Some people are very good at making money on problem properties, but it?s not for everybody. Many of these places look good on paper, but end up eating your lunch. Not everybody is prepared for the much higher management effort that is normally required.
If you are interested in marginal or doggy properties, do your homework. Some of these places end up making a mint if you know what you are doing?and others could drive you into bankruptcy. Just do your homework and be very conservative on estimates of rents, expenses, etc.
Foreclosed Multi-Family
Fannie Mae and some of the other large lenders have an inventory of multi-family, usually duplexes, fourplexes and so on. They normally list their smaller properties with local real estate brokers, so you can usually find these in the local multi-list.
Local banks are normally a good bed for larger properties. A few phone calls should put you in touch with banks in your area that do multi-family lending.
Some insurance companies and pension funds do lending on really large properties as well. If you find a complex that you suspect is foreclosed and it isn?t listed with any local brokers, you can also check ownership at the county assessor?s web site in your area, if they have an on-line search function.
Once you find an apartment complex or property that you are interested in, you need to start doing your homework. Lots of foreclosed multi-family places have had lousy management (one of the reasons for foreclosure in the first place). When a property starts going downhill, normally maintenance starts to suffer, and you need to make an estimate of all costs to get the maintenance up to snuff.
A lot of foreclosed multi-family properties also have trouble with their tenant base. As maintenance gets worse, there is a tendency to rent to lower quality tenants. In some properties which have gone downhill for a period of time, you have to go in and ?clean house? with your tenant base, getting bad tenants to move as their leases expire, or even consider paying them to move, so that you can keep good tenants in the property. One bad tenant can drive away many good tenants?a single bad tenant can cost you literally tens of thousands of dollars a year, something few investors can afford.
Normally a bank will hire a management company, and while there are good management companies, it?s likely that you could keep a better watch on expenses by overseeing things more directly yourself. Even if you hire a management company after you take over, it?s wise to keep them on a short leash, at least at first.
When forecasting cash flow on a multi-family property, don?t just take the bank?s figures at face value, better to verify every expense and income item. Don?t automatically assume that you can get the cash flow up right away. Above all, be a pessimist rather than an optimist when forecasting the cash flow. If you don?t know construction and remodeling extremely well, get someone who does to go over ever inch of the property and give you estimates for all items that need to be taken care of. Take a very close look at the roof, and if you have any doubts as to the age and condition, at least get an estimate to replace it.
One special thing to watch out for is the property with a boiler-chiller system. With high utility costs, it can cost you a fortune to run a boiler-chiller system, and a bigger fortune to put in individual heat and air units. If rents are high in your area, it?s possible that you could still come out, but with lower rents a boiler-chiller system can be the kiss of death.
Buying Foreclosed Retail Properties
One issue with foreclosed retail and office properties is the vacancy rate, and the likelihood of current tenants staying. With some properties, the property would be close to worthless if the current tenant(s) moved out, since the property may have been designed for their special needs, would need extensive remodeling for another tenant, is in an area or building where other businesses would be reluctant to locate in, etc.
Commercial properties can be vacant for many months or even years in some areas, so you have to be sure your finances can withstand extended vacancies. Retail especially seems to be on a downtrend with the recession that?s starting, so it would be wise to be very conservative with any estimates of income on retail properties. Retail has become grossly overbuilt in many parts of the country. Total square footage of retail space has more than doubled since 1990, and in a recession there is often a reduction in retail square footage. It could be a long, long time before retail space needs grow in some areas.
The flip side is that some good properties with stable long term tenants may be coming up for sale after their previous owners borrowed too much. The right property in the right place at the right price (90% or more of all foreclosed properties won?t fit these criteria) could be a great deal.
In retail properties, the success of your tenants is basically your success, so it would be wise to seek out properties with strong tenants and long leases, even if the property itself is in some trouble.
Traffic counts, local area incomes and so on are very important in retail businesses, so it would be wise to take a look at these figures for any property you?re interested in. When in doubt, weed it out. As with any property, you have to ask yourself whether the area the property is on it?s way up, or on it?s way down.
Some suburban retail properties may tend to struggle more than other areas, since so much recent retail development has taken place in the suburbs. The residential bust has concentrated more in suburban areas, and retail is probably not that far behind. Suburban residents also generally spend more on gas, and thus their incomes are that much more constricted.
About the Author
see my blog at http://Reochronicle.com/blog
Written by: Dan on August 24, 2011.
Posted by Dan on Wednesday, August 24, 2011 at 9:46 pm?
Filed under Commercial Property ? Tagged with Apartment Complexes, Banks, Borrowers, Bottom Line, Brent Wilson, Buying, Cash Flow, Commercial, Extent, family, Fannie Mae, Fdic, Fire Sale Prices, Foreclosed, Mortgage Companies, Mortgage Loans, Multi, Problem Assets, Property Article, Property Foreclosures, Property Management, Real Estate Foreclosures, Rents, Residential Property, Residential Real Estate, retail, Strip Malls
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