Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/102789
FINANCING FOCUS Distressed Decisions Can you spot a diamond in the rough? With the real estate collapse several years behind us, the industry has been riding a wave of available distressed commercial properties. But this groundswell of opportunity also brings a groundswell of risk. Knowing what to look for can ensure that a bargain doesn't become a burden. While some analysts believe we may have hit the peak, there are still good deals to be had for savvy investors. Many lenders are still dealing with troubled loans, and while some of them will be worked out with the borrowers, others will make their way to the market. The key is to understand the intricacies involved in purchasing a distressed property and do a proper investigation so you — or your clients — don't end up losing money. Complete Due Diligence What makes a distressed property attractive is also what makes it a risky opportunity. A property priced below market value means it has issues — delinquent taxes, possible liens, potential tenant issues, and more. You need to identify all the property's warts before investing. Ofen the lender may not know or care to know those details, but the buyer doesn't have that luxury. When a property is distressed fnancially, there's a good chance that the previous owner has allowed it to fall into disrepair physically. A thorough inspection from the foundation to the roof is imperative in order to understand the actual cost to improve the facility. If you're not familiar with the area, get on 14 January | February | 2013 the ground and learn the market. Looking at pictures and numbers won't give you an accurate understanding of what's going on in the surrounding neighborhood. Identify the demographics and the socioeconomic makeup of the property's community. Some investors miss out on opportunities to purchase distressed properties in smaller markets because they view them as having less value. But this ofen is the home of the hidden gem. Additionally, fnd out if the area needs ofce, retail, or housing. If it is sufering from an overcapacity of active medical ofces, strip malls, or industrial parks, then adding similar space with a depressed market value is going to be an uphill battle. Use Local Expertise Real estate always has been a local product in a local market. Many times out-of-town investors zealously jump into deals with great expectations but shortchange their reconnaissance of the local market. The result is they overpay for a property, then they have to backtrack and bring in a local service provider to make the property profitable or help develop an exit strategy. To avoid this trap, identify professional, experienced local service providers upfront. Tey can help you avoid overpaying as well as identify potential complications, including fnancial and structural problems — things you're never going to see in a picture or on a spreadsheet. Local market experts can work to preserve and protect your investment while creating value and cash fow. Here are three ways to qualify your provider: • Check for professional accreditations, such as the CCIM designation. • Ask the tough questions. Determine the frm's experience in that particular market, ask about their recent successes and failures, fnd out how they measure results, and look for proof that they pay attention to details. • Talk to enough providers to understand the market and average costs for services to avoid overpaying. Commercial Investment Real Estate Bettman/Corbis w by Richard Broder, CPM