How to Identify Distressed Properties


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In commercial real estate, there are many different strategies in which to pursue investments. A very popular strategy that even the most astute of investors use is rehabbing old or distressed properties. It is a widely used strategy because there are many properties in need of some help, and anyone can do it! A little vision and patience, and the once distressed property will become a beautiful, money generating machine.

And, after all, that is what every investor wants in a well operating property.

This strategy can take an old, run down building and completely renovate it, therefore creating value that previously was overlooked. It can also help out a distressed owner who, for one reason or another, can no longer maintain or care for the property. These properties can increase in value greatly with jut a little focus, maintenance, and the implementation of a solid management team.

Distressed properties are identified by some sort of problem. This problem generally resides with two aspects of the property: either the property itself or the owner. The problem can be simple, like a high vacancy rate of an apartment complex, or something much larger like the possibility of a property going into foreclosure because the owner cannot make the mortgage payments on time. This can ultimately ruin a person's credit if a property is to go into foreclosure.

So how do you identify these distressed properties? One way is to drive around your community looking for buildings that look vacant, run down, not fully leased, and those that display for sale by owner (FSBO) signs. If a property looks like a sore thumb in a nice area, then that is a flag that there might be something wrong. You can go to the county, find out who owns these buildings and send out a letter campaign telling them you wish to purchase the property. Many deals can develop this way, and you can get great prices on properties you didn't even know would be for sale.

Another way to find distressed properties is to call brokers on listings you find on the internet and simply ask why the owner is selling. You may have to call on quite a few properties, but eventually you will find that gold mine property being offered way below the market rate. With just a few changes that distressed property may be a money generating machine once more! You can even call on brokers to locate and bring you properties with problems that fit your targeted criteria. This strategy of finding distressed properties is a great one, as you can very quickly cut through the many listings that do not fit your criteria.

Now that you have identified a few ways to locate distressed properties, let's look at the characteristics of distressed properties.

A distressed property may have:

  • high vacancy rates
  • below market rents
  • poor management
  • old, run-down condition
  • poor common areas
  • no amenities
  • low net operating income (NOI)

    A distressed owner may:

  • be too old to maintain the property
  • have inherited the property and doesn't want the hassle
  • cannot pay the mortgage
  • be facing foreclosure
  • be in bankruptcy
  • be going through a divorce

    The list of problems can literally go on and on. There may be problems specific to a property or owner that may not be as common as the ones listed here.

    If you are not currently working with distressed properties, I encourage you to check it out. It can be a great way to purchase a potentially awesome property very inexpensively, rather than making a purchase of a profitable property at a premium retail price. Purchasing a distressed property can get your foot in the door of the commercial real estate industry, and it can also supply you with an outstanding passive income for years to come.

    Modest repairs, marketing, a change in the management team, a few added amenities, a change in the leasing agreement, rents brought up to market level, filling vacancies and lowering expenses are all ways to increase value in these distressed properties. These simple strategic moves can turn your now dumpy building into a current market retail property in which a retail investor would definitely be interested.

    Tony Seruga, Yolanda Seruga and Yolanda Bishop of specialize in commercial and investment real estate. As of May, 2006, they and their partners are managing over $600 million dollars worth of new projects.

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