Commercial Real Estate Myths – Distressed Properties are Good Value
This is part of our ongoing series that debunks commercial real estate myths.
Myth #2: “Distressed properties are cheaper and easier to buy than those offered by a seller who’s under no particular pressure to sell.”
1. Distressed sales often take much longer than normal sales to close – if they close at all.
Chalk it up to difficult lenders – be it a lack of communication or sheer incompetence – but it typically takes many months to get approval on distressed properties. And in the end, a buyer may lose out on the property anyway, as well as any number of other opportunities that were missed as a result of holding out for this “good deal.” When you’re buying a foreclosure from a bank or dealing with a lender on a short sale, you can’t expect logical, rational or remotely timely decisions. Banks work on their own set of rules and have their own priorities. They make decisions based on the financials at the moment and usually don’t consider the future costs of a delayed sale or the condition of the property.
2. Distressed sales are far more difficult to successfully close.
Even the most straightforward real estate transaction has complex aspects, and it’s the job of your real estate professional to help you navigate through the twists and turns, insulate you against surprises and do what he or she can to significantly streamline the process. When you’re dealing with a distressed property, lenders commonly bring an entirely new set of timelines into play. In many instances, just when it seems like progress is being made, we’re suddenly handed a new timeframe that throws the whole transaction into a tailspin – and that’s never a good thing.
3. Distressed properties can often be in far worse shape than they appear thanks to their time of vacancy.
In many instances, the degree of distress to a property during its time of vacancy can be quite substantial. What’s more, it may not be easily discovered until the property is reoccupied and in full use again. Inexplicably, most lenders do not maintain any supervision over distressed properties – and they certainly do no maintenance. We’ve seen properties go through freezing winters with no heat in the building, resulting in split water pipes that only show up when the utilities are reactivated. We’ve seen landscaping go long periods with no watering, resulting in stressed plants that die after new owners take possession. Real estate that goes unattended for long periods can negatively impact the longevity of costly building systems, adversely affecting the new owners after a sale is closed. Unfortunately, trying to quantify the damages done by long periods of vacancy and lack of maintenance is challenging.
So what’s the bottom line when it comes to the true value of distressed properties? While some foreclosed properties may yield a viable and valuable purchase to the fortunate and savvy investor, that’s definitely the exception and not the rule. In this case, the sage advice of “Let the Buyer Beware” certainly holds true for distressed and/or foreclosed real estate.
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