Buying Commercial Foreclosures

Although we have seen a slight increase of Bank owned properties for all property types in the commercial segments, we are also seeing an increase in buyer’s who are looking specifically for discounted REOs.  In fact because of all the investor money that out in the market, we are not only seeing that a good REO comes off the market almost as quick as it was put on, but we’re also seeing multiple offers being made.  However, don’t let this be a deterrent for you.  There is still a lot to gain by shopping the Commercial REO market, but there are a few things you will need to know before getting into the game. 

Understanding the Banks Position –

Regulations require that a lender must keep cash reserves that are percentage of their losses.  Because of this regulation, some lenders are able to take a larger loss from their REOs than others.  A bank that has limited capital at its disposal will likely be able to entertain only those offers that are equal to or close to the asking price of what they have a property listed for.  Accepting a lower amount may add to their losses in excess of what they are required to cover under this regulation

However a larger bank with more capital can be much more flexible when taking a loss from the sale of its REO. 

In this circumstance, the lender may be more concerned with being able to get the asset off its book as quickly as possible then it is about the final sales price.  So a low cash offer that will close in under 30 days may be more appealing to the lender than a high offer in which the buyer will need over 60 days to work out the financing.  Also remember that banks are constantly trying to keep their books looking healthy for their shareholders.  For this reason, lenders that have the flexibility of having large capital may need to liquidate some of their toxic assets just to improve their balance sheets for the quarter.  Again, time is a much more essential than the monetary gain.

This doesn’t mean there aren’t deals to be made with banks that are undercapitalized.  In some cases regulators will determine that a bank does not have enough liquid capital, and order them to raise capital in a very short period of time.  To do this, banks will begin to liquidate their REOs at fire sale prices just to comply with the regulators.  Although time still essential in this circumstance, the bank will typically have a predetermined threshold of what they will need to net in order to comply with the regulators after the sale. 

Researching Properties –

I cannot stress enough how important advanced research is when trying to position yourself ahead of the competition.  Most buyers begin their research on an REO property as it comes into the market. By the time they have determined if the property is even worth buying, or if they are going to be able to get financing on it, several weeks may have gone by.  If you’re starting your research at the same time, then you’re going to find yourself fighting and trying to out bid the competition.  However by tracking commercial properties well before they even hit the market, you will be better positioned to get your offer in front of the bank before the competition even knows what’s hit them. 

You can pretty much determine which properties will eventually come onto the market as an REO by paying attention to properties that are currently in default on their mortgage, also those properties that may have an interest only loan coming to maturity soon.  Although there is no exact science that will allow you to know exactly when a particular property will be hitting the market and for how much, you can at least use these trends to help you prepare for when they do. 

For example: I am currently tracking 5 multi-family properties for a client that are likely to be foreclosed on over the next 90 days, and will inevitable come back on the market as REOs.  My client and I have already gone to the properties to get an idea of their exterior condition, and also to get a feel for the areas.  Based on our observations and sales data for the areas, we have already determined a what price my client will be an interested buyer (provided the interior condition meets or exceeds our expectations).  Once these properties do hit the market, my client will be in a position to write up an offer the same day after we’ve been able to view the property.  This advanced preparation allows my client to have an edge on his competition, who may be as much as 2 weeks away from being able to make a decision about making an offer.

If you are thinking about Purchasing REOs, then you will want to make sure the agent you choose is already tracking property in this manner as part of their daily business activities.  If you currently have an agent who isn’t tracking properties in advance as described above, you may want to consider finding one that is.

alternative markets –

You have probably noticed that the majority of this articel is focused on getting ahead of the competition.  However by taking advantage of markets that most buyer’s aren’t even aware of, you can get away from the competition all together.

Buying from the wholesaler:

When it comes to larger commercial properties, most banks will either have a department that handles the sale of such an asset, or they will have a dedicated asset management company that will take care of all marketing and sales activity for the property.  However this is not always the case when it comes to smaller properties, such as small multifamily properties (5-10 units) and small retail/commercial buildings. 

When a lender decides to liquidate smaller properties, many times they will just unload them to what we call a bulk REO purchaser at a much discounted price.  Since the lender is able to unload up to several thousand units in one transaction, they save a lot of time and money that would be spent if they tried to sell them one at a time.  Once this transaction is over, the bulk REO purchaser will typically turn around and sell the units in smaller groups to investors, or individually on the open market.    When selling the units in groups to investors, the properties will typically be sold for an amount over what the purchaser paid for them, but still below actual market value.  If you are looking to pick up multiple properties below market value, this can be a great way to do it.

Be the Lender

With all the REOs on the market, sometimes it’s easy to forget that most financial institutions really don’t want to be in the business of selling real estate.  The truth is that banks/lenders would much rather dedicate their resources to originating new loans, rather than having to deal with the processes and expenses involved in foreclosing on properties and trying to sell them as REOs.  One way banks/lenders resolve this problem is by selling off their troubled notes (loans) before they have to begin the foreclosure process. 

When a bank/lender sells off their troubled loans, they will normally do so for pennies on the dollar.  Although most large lenders sell off these troubled notes in bulk (1,000 or more at a time), smaller lenders (or credit unions) will sell their troubled notes in much smaller batches to local investors (maybe 10 or less at a time).  If you are not interested or unable to by in batches, by getting involved with the local exchange groups in your area you may be able to purchase these notes individually from the individual investors. 

I recommend extreme caution when purchasing through an exchange group.  In many cases by the time it has gotten down to the exchange group, any profit to be made has already be absorbed throughout the previous purchases.  In addition, you will want to verify whether or not the note you are purchasing is in primary position against the property.  This can be accomplished by utilizing a title company.  If you have a preferred real estate agent, they should already be teamed up with a local title company in order to accommodate you.

Be Aware: Purchasing a loan may carry more risk than property.  You will want to be sure to do your research, and be aware of what all is required of you in order to carry out the potential foreclosure on your new loan.