Buying a commercial real estate foreclosure isn’t as simple as buying a house. Foreclosed commercial real estate can be tough to find, and when you do find a property you like, contentious court proceedings could tie up a purchase for months or even years.
So, how do you find a viable and available commercial real estate foreclosure? Investors can find deals by checking online databases, such as Crexi, and looking through obscure courthouse listings and online or print advertisements.
They can also partner with a knowledgeable real estate agent. For those working with a tight budget, there may be low-commission agents who can help you find your commercial real estate foreclosure.
Here are four tips and strategies for buying commercial real estate foreclosures.
1. Identify Zones of Interest
Instead of competing for every property on the foreclosure market, try to proactively identify areas that might produce future foreclosures.
Research nontraditional market variables, such as declining power usage in area buildings, reduced foot traffic, negative online reviews of nearby establishments, and the closure of neighborhood fixtures, such as coffee shops and grocery stores. None of these variables guarantee the possibility of foreclosures in the area, but combined, they could suggest a future slowdown.
Tools like Crexi Intelligence can also provide insights into loan interest rate data, allowing property seekers to research upcoming loan maturity dates and determine the likelihood and potential timeline of foreclosures.
Once you’ve identified potential zones of interest, you can fall back on traditional methods of finding possible foreclosures. For example, check the county tax assessor’s office to see if commercial properties are behind on their taxes, often preceding a foreclosure. You can also check real estate investing apps for hard-to-find listings.
2. Buy at Auction
Buying a commercial foreclosure at auction is one of the best ways to procure an underpriced investment, but there are several steps to consider.
First, you must decide whether to attend a physical auction or bid online. There are many legitimate commercial real estate auction platforms, such as Crexi, but there are also less scrupulous platforms that may not present a straightforward, entirely ethical auction process.
For example, some platforms extend auctions until the desired bids come in, or they may employ in-house dummy bidders to drive the price. Do your due diligence to ensure you’re bidding on a reputable online auction platform.
Whether you’re bidding in person or online, most auction houses require the highest bidder to close on a purchase within a very limited time after the auction. If you only start pursuing financing after you win the auction, you probably won’t get approved before the deadline. You should already have a line of credit or a bank loan approved when you start bidding.
Most properties at a foreclosure auction will have pre-arranged show times when you can tour them, evaluate the present tenants, and get repair information. Do your research well before auction day to avoid any unpleasant surprises after your winning bid.
Finally, don’t let your emotions get the best of you during the bidding process. Once the price exceeds your budget, bow out gracefully. Don’t get competitive and submit bids you’ll later regret.
3. Research Potential Properties
Once you’ve compiled a list of possible foreclosures, perform intensive research so you know exactly what each property has to offer. Many investors barely look past the assessed value, but if you dive into elite investing resources and gather a surplus of information, you can gain a decisive edge.
How old is the property? Is it in good condition? How will the condition affect prospective tenants? How is the location? Is the local market on an upward or downward trajectory? Will the tenants you’re targeting be able to maintain a healthy rent-to-income ratio?
A property is considered a good investment if the after-repair value is greater than the total cost, including the purchase, renovation, and holding costs. That’s why accurately calculating the after-repair value (ARV) is critical.
For financing reasons, the project’s total cost, including holding and carrying costs, should be at most 75% of the ARV. Miscalculating your ARV may mean you can’t get a loan to cover your investment.
Be cautious when calculating the after-repair value. If you underestimate it, you might not borrow enough money to complete the needed repairs. If you overestimate it, you could have trouble refinancing the cost of the project post-rehab. Get multiple estimates for the renovations you’re considering, and don’t forget to include the landscaping and grounds.
Conduct a uniform commercial code search to uncover any code enforcement, IRS, or secondary mortgage liens on the property. Also, ensure you have title insurance to protect you in case of liens.
You’ll also want to visit the local planning office to see if there have been any code violations at the property or if there are any open permits. Finally, inspect the property professionally and review any environmental assessments.
Before making an offer, whittle your unknowns down to zero or as close to zero as possible.
4. Be Patient
Purchasing a foreclosure can take a long time. The timeline will depend on the type of foreclosure process, whether it’s judicial, non-judicial, or uniform commercial code.
Judicial foreclosures occur in the court system and are initiated when the lender files a lawsuit. These foreclosures can take over a year to unfold, so they will require patience and commitment. Non-judicial and uniform commercial code foreclosures occur outside the court system and can conclude in as few as 90 days.
Regardless of the type of foreclosure, the process will immediately stop if the borrower files for bankruptcy. Buying commercial real estate foreclosures can offer exceptional value, but the process can be long, uncertain, and winding.
Ben Mizes is the Co-Founder and CEO at Clever Real Estate, the nation’s leading real estate education platform for home buyers, sellers, and investors.