For real estate agents, distressed commercial properties are viewed as hidden gems of opportunity. If done correctly, these assets can prove very profitable, so if you’re looking for an undervalued asset to add to your portfolio, this guide will take you through the steps of finding and obtaining these commercial properties.
To get started, let’s divide the process into two segments – Finding distressed properties and Acquisition.
Finding Distressed Properties
1. Define Your Investment Strategy
Before you begin searching for distressed commercial properties, you first need to know what your investment goals and strategy are. This will help narrow down the search.
- Asset Type – The type of asset will determine the profitability and structure of what you plan to do with the property once you purchase it. Therefore, you should decide whether you’re interested in office spaces, retail units, industrial facilities, or other commercial property types.
- Investment Goals – Then you should determine whether you want to make short-term profits through the renovation and resale of the property, or long-term income through leasing or renting the property.
- Risk Tolerance – You should also understand your risk appetite. Distressed property investments can be risky because they are complex and unpredictable. If you’re not willing to take on this risk, then you would be better off with other investments.
2. Searching Through Online Methods
- Real Estate Websites – Real estate websites are databases that allow you to search for all types of commercial properties, commercial or otherwise. You can filter these searches using specific phrases or keywords. For example, you could search for properties with words such as “foreclosure,” “bank-owned,” or “distressed.”
- Auction Websites – Auction websites are another place where you can find distressed properties online. Through these platforms, you can bid on any properties that interest you directly. The added benefit is that the property owners of these properties are usually looking for quick sales.
- Property Listing Services – There are localized property listing services that provide detailed information on local properties. You can even find these services that focus solely on distressed assets.
3. Searching Within the Real Estate Industry
Most real estate agents have networks that they have built up in the industry. This is a reliable way of finding valuable leads to distressed properties. As a real estate agent, you can ask around among:
- Other Real Estate Agents – Many local commercial real estate agents tend to have contact with each other and share leads. They may have insights into distressed properties before they even hit the market. It’s a good idea to keep an ear out for these types of properties by asking around your network.
- Real Estate Investment Groups- There are local or online real estate investment groups and forums where investors connect with each other. By joining these groups, you can get help from them by sharing leads and experiences.
- Property Managers – Rather than real estate agents themselves, property managers can also prove to have valuable information. Property management companies often handle distressed properties, so by establishing relationships with property managers, you can get leads early on.
4. Visiting Courthouses or using a Real Estate Attorney
- Public Records – Your local Courthouse will maintain public records of foreclosure proceedings and auctions. By visiting them, you will be able to obtain these records and research them to identify any distressed properties in your area.
- Auction Dates – You can also find out when foreclosure auctions are set to be scheduled. You can then prepare beforehand and attend them to bid on any properties that catch your interest.
But, if this doesn’t seem the right approach to you, you can always hire the help of a real estate attorney to do the work for you. They can also be invaluable in navigating the legal aspects of distressed property acquisitions, such as liens and title issues. They will also ensure that you’re fully aware of the property’s condition and any outstanding legal matters.
5. Researching Off-Market
Not all distressed properties are going to be publicly listed. So it’s essential to also look at other methods to find these properties:
- Direct Mail Campaigns – You can send out letters to property owners in your local area. These should express your interest in purchasing any of their distressed properties.
- Networking Events – Attending real estate networking events and conferences is also a good way to build a network and find leads. You may potentially meet with property owners or representatives who own distressed properties.
Acquisition of Distressed Commercial Properties
Once you’ve found a distressed property that meets your expectations, you should do your due diligence before closing the deal.
1. Analyzing the Property
- Conduct a Physical Inspection – You need to inspect the property in person or hire a professional inspector to assess its condition.
- Do a Financial Analysis – Evaluate the property’s financial viability. You will need to consider any prevalent repair costs and identify the potential rental income or resale value. If there is no profitability, the risk is much higher.
- Do a Legal Title Search – A comprehensive title search will uncover any outstanding liens or legal issues that the property has. You don’t want to be blindsided with this information after the deal is complete.
2. Negotiation and Rehabilitation
The property’s distressed condition can be used as leverage in negotiations to secure a lower purchase price. You could assess the property to check if a lower valuation can be obtained. Once that is done, use a real estate attorney to handle the legal aspects of the transaction, including the closing process.
From that point onwards, the property is yours to set up as you see fit. Whether you want to handle long-term rentals or do a one-off sale is up to you.
Distressed properties can be a lucrative but risky investment. Always make sure you do your due diligence before purchasing a property as these can be costly mistakes. But with the right strategy, you may end up with some gems in your portfolio.
