Investment Analysis Distressed assets

Foreclosure Fortunes

Distressed assets may offer the chance of a lifetime for many investors.

In today’s market, the difference between traditional and distressed sales is mostly in the buyer’s mindset. Traditional sales currently are driven by need — only investors who need to fulfill Section 1031 exchanges or other financial or market-driven concerns are acquiring non-distressed properties. At the same time, investors with immense amounts of private capital are sitting on the sidelines waiting for distressed assets to be listed at deeply discounted prices. At this point in the cycle, buyers won’t buy unless they perceive assets are priced well below market value.

Another major factor in today’s distressed asset market is lender requirements. Currently, investors must put 35 percent to 50 percent down to close traditional deals. However, financing parameters are changing faster than ever before. For example, in July 2008, a company looking to raise cash for its business listed its office building with a national brokerage firm for $14.6 million. The property went under contact for $12.2 million as a sale-leaseback, but there was a delay in due diligence as lender financing became more stringent and less acceptable to the buyer, who eventually pulled out of the deal.

In February 2009, a different buyer placed the same property under contract, but for $10.1 million, or 69 percent of the original asking price. That buyer currently is seeking additional equity as the lender now is requiring a larger down payment.

Looking Ahead
As the commercial real estate cycle proceeds, expect land, industrial, and retail properties to lead foreclosure reports. To achieve long-term industry stability, these real-estate-owned properties must be cycled through the system. In addition, new U.S. tax policies must come to fruition, and the meat of those policies must be realized by property owners and investors, specifically treatment of capital gains, 50 percent depreciation in the first year for investment in certain areas, and favorable rules to encourage investment in real estate. The fuzzy picture surrounding securitization and conduit loans also must come into focus.

A foreclosure boom will only recede when distressed property values approach what buyers consider to be standard market values. In the interim, those looking to throw their hat into the distressed property ring should not delay.

Commercial real estate professionals can arm themselves with strategies to compete in this unconventional environment. Combined with smart financing tactics, these tips can help industry professionals close deals in the turbulent market.

Success With Distressed Assets
To succeed with distressed opportunities, industry professionals must know where to look and how to secure these non-traditional listings.

Finding Real-Estate-Owned Properties. Bank Web sites can be a prime place to find REO opportunities since many lending institutions list their properties online. Searching for “commercial REO properties” online reveals a multitude of bank sites listing REO properties. Foreclosure sites such as and primarily aggregate residential foreclosure listings, but both also have commercial real estate listing sections. Banking industry Web sites, including and (click on Asset Sales) also may be good sources for REO listings. Subscription sites that track commercial default and foreclosure notices include Real Capital Analytics Troubled Asset Radar ( and First American ( Finally, local newspapers list foreclosures on a daily, weekly, or monthly basis.

Securing Listings From Lenders. Up to 80 percent of today’s brokers have never experienced a severe market downturn. Without that past experience, the thought of securing listings from lenders can seem challenging.

One of the most important steps to securing lender listings is to partner. Brokers who don’t have relationships with lenders must partner with colleagues who do. Inexperienced commercial real estate professionals should partner with colleagues who have been through past recessions — ideally experts who worked with lenders during the last REO crisis.

In addition, brokers must expand their businesses to offer as many services as possible. If you don’t have the experience to be considered full service, partner with one or more brokers to create a one-stop shop for lenders, including resources for obtaining brokers’ opinions of value, property management services, leasing, and value preservation.

Finally, do some homework before calling or scheduling a meeting with a lender and be prepared to discuss a specific property in your area of expertise, along with your plans and solutions. Bring a broker price opinion as well as an analysis of the property. Most importantly, understand that banks want to sell properties “as is, where is,” and they probably have them priced to sell.

Marketing Makes a Difference. When it comes to marketing distressed properties, there are a few strategies that will help distinguish your listings. First, every marketing tool must convey that the property is distressed. Today’s investors are only interested in distressed assets at perceived distressed prices. Additionally, distressed assets are the only listings that brokers can finance today without putting a significant amount down using seller financing.

Conduct a comprehensive marketing campaign using a variety of tools, including Web and e-mail campaigns. For example, Sperry Van Ness Real Estate Services recently completed the sale of the bank-owned Trilogy on 5th, a 25-unit luxury multifamily community in San Diego. Several local, regional, and national brokerage firms had been following this property, waiting for it to go into foreclosure.

SVN’s San Diego office made about 25 calls to Bank of America to inquire about the note and secure a listing proposal meeting. The bank selected SVN to sell the property because of its proactive marketing approach as well as its understanding of the distressed asset business. The marketing campaign for this asset included a property Web site, e-mail marketing to 65,000 brokers and investors, direct marketing to specialized industry segments, four broker open house tours, and an extensive advertising
campaign. San Diego-based Conrad Prebys Trust purchased the property from Bank of America for$10.25 million, or $410,000 per unit.

Finally, make sure marketing efforts are tailored to brokers and investors. Brokers are the conduits to investors. They have relationships with investors who may be interested in the listings. They also are the ones who frequently receive calls from investors asking if they know of any distressed properties for sale.


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