Feb 27, 2012

REO Properties Prove to be Assets in Commercial Real Estate Industry

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By: Jason Lamoreaux

With many investors concerned about the existing state of the economy and questioning their decisions when it comes to the stock market and other investments, commercial real estate is proving to be a tangible and solid investment. Many investors are choosing to reallocate their resources and capital into more secure and concrete investments, providing the buyer with a bit more control over their investment strategy.

Real Estate Owned properties, referred to as “REO’s” are proving to be in extremely high demand, not only in the High Desert, but nationwide. REO properties are owned by lenders, banks and other financial institutions, typically acquired through foreclosure sales or a deed in lieu of foreclosure.

REO properties offer great opportunities to obtain commercial real estate at considerably discounted prices, and in most cases below market value. In fact, according to the Orlando Sentinel, banks and lenders aren’t in the business of being landlords. They often want to get REO’s off of their books as quickly as possible, creating some truly excellent opportunities for buyers. 
 

Because many lenders are anxious to clear their books of these assets, the prices are typically far below the replacement cost. A recent example is an industrial building which sold in Barstow by Coldwell Banker Commercial. The 20,482 square foot building originally priced for liquidation at $249,000, sold for $210,000, only $10.25 per square foot. The sales price is a fraction of the replacement cost, estimated to be $60.00 per square foot.

Another REO sale recently completed by Coldwell Banker Commercial’s Broker Associate, Walt Wehrmann, is the sale of a 10,878 square foot office building in Victorville. The final sales price of $31.35 per square foot was less than a quarter of the replacement cost. The unfortunate increase in REO properties entering the market also seems to be increasing opportunities for investors and business owners to acquire properties at discounted prices.

In addition to the aggressive pricing on these properties, there are plenty of other incentives to purchase. Lenders of REO properties often are willing to accept less money down and pay for closing costs, which can result in substantial savings for the investor. With the financial institutions pressured to reduce inventory, they are able to offer competitive loan rates and financing options in an effort to expedite a sale. With loans such as SBA (Small Business Administration) available, many business owners can finance an REO property for less than the cost of leasing.

In fact, the Wall Street Journal’s Market Watch recently stated REO loans have increased from $71 million in June of 2011 to $87 million as of September 2011. A 22.5% increase in loans, in a mere three months, speaks volumes of the loan options for REO’s. Financing is available and investors now have more options than in the past few years, when financing was difficult at best.

Not only are these loans a bit easier to obtain, they are often less complex and much timelier. It is important to work with a commercial real estate firm that specializes and understands REO’s and the process of selling and purchasing REO properties. Coldwell Banker Commercial has been at the forefront of the REO market, helping clients through the complicated process with ease, saving time and money for all parties. 

Another major benefit many investors are finding in purchasing REO properties are the clear titles which often play a major role in the favorable time frame of these transactions.  Often times during the process of real estate transactions, buyers are faced with minor obstacles along the way which delay the completion of the deal.

An alternative to acquiring distressed properties is at court order sales and foreclosure auctions, or often referred to as buying a property on the court house steps. While properties sold at the court house steps are similar in value to REO properties, the element of risk increases considerably. When an REO property is sold, clear title is transferred and insured by a title company, offering the buyer protection while confirming their total acquisition cost; No surprises. To the contrary, properties purchased at the court house steps are sold as-is, with no guarantee of clear titles. Often times, a property sold at the steps of the court house will have additional liabilities including unpaid property taxes, IRS and FTB liens, as well as possible mechanic, professional and judgment liens. Additionally, the court requires that all properties sold at auction are paid at time of purchase in cash, or cash equivalent, excluding any financing options for the buyer. REO properties have a clear advantage over court auctioned properties.

When purchasing an REO property, the banks typically make every effort to deliver a clear and marketable title to potential buyers. “Prospective buyers of REO properties typically do not have to worry about cloudy titles, back taxes, or other surprises, since the lender will almost always take care of them before closing,” stated the Orlando Sentinel.

With a majority of the sales, both court ordered and REO, little to no detail is provided to potential buyers. Many of the lenders selling REOs are not located in the area, or even the state, and in most cases, have not seen the property. Lenders, including court sales, are not required to complete the same disclosures as traditional sellers. For this very reason, it is important to have a knowledgeable and specialized commercial agent assist with the acquisition process. From title research, comparable sales in the market, to inspections of the property, a commercial agent can assist and make the process easier for the buyer.

Don’t get caught up in the emotion of the sale process. Establish your value for the property you are interested in acquiring, set a maximum bid you are willing to pay, and stick to your plan. Many buyers get caught up in the emotion of the auction or offer/counter offer process, believing it’s a competition, and overpay for a property. Conversely, submitting a bid considerably under market value, and your predetermined value range, may result in losing the property to another bidder who was more realistic with respect to the property’s value. Again, an experienced commercial agent can guide you through the process and make recommendations on how to approach each property.

There are many opportunities in the commercial real estate market today. The old adage is your profit is made on the buy, not the sale. For buyers, there hasn’t been a better market since the new millennium.