If the owner of a QSR is selling a distressed commercial property, there’s a reason, and it’s essential you find out why.
Often the seller is in financial trouble, but even though they would like to get the deal done with as quickly as possible, dealing with creditors can create numerous delays.
Still, just because a property is distressed doesn’t mean you have to rule out completely. After carefully considering several factors, you might find that the property is a good deal after all.
Common Reasons Why A Commercial Property Can Be Distressed
There are several reasons why a commercial property may be distressed.
In some cases, the property owner may have delayed maintenance, leading to a run-down property that they don’t have the funds to fix. This could be due to poor management, or to lack of funds.
Financial problems is another common reason why owners decide to sell a property. In some cases, the property is underperforming and has negative cash flow, while in others, the owner may have a heavy debt load.
All of these financial difficulties can end up snowballing, meaning by the time the commercial property is put out on the market, it might already have liens, lawsuits, or a pre-foreclosure waiting in the wings.
Occasionally the commercial property has no serious financial problems, but due to personal issues – a divorce or serious illness – the owner decides they can no longer manage the property.
And lastly, a smaller number of commercial properties in financial distress are due to partnerships going awry; either one or both partners then decide to divest themselves of the property.
It might seem awkward, but it’s always a good idea to ask the owner directly why they’re selling the commercial property, as long as you phrase your question respectfully.
Although not all sellers are 100% upfront about a property’s deficiencies, usually their goal at this point is to get rid of the property as quickly as possible. They may not tell you the whole story right away, but if you spend the time to listen it’s likely you’ll hear some information you wouldn’t have learned otherwise.
The more you know about the commercial property, the better idea you’ll have of how to make it work. You’ll also get a better idea of which financing strategy to use to make the property work, and you might even get some valuable information about what the owner thinks could have been done differently.
Regardless of the reason, investors should carefully evaluate all aspects of the distressed commercial property. The physical premises should definitely get a walk through.
You’ll also want a lawyer to take a close look at the legal issues that may affect the commercial property.
It’s not uncommon for an owner to insist that everything is “okay”- only for you to discover that the roof needs to be replaced and the tenants’ lease is due to end soon.
Find The Opportunity First
Once you’ve ascertained the level of distress a property is in, it’s time to examine each factor carefully and decide whether or not the property can go from being a liability to an opportunity.
Of course this is a decision that will differ significantly depending on your investment goals and your risk tolerance level; still, any decisions you make should be based on how the numbers work out – not on an irrational desire to save the day.
The most important numbers are the ARV – after repair value – in relation to the acquisition cost and repair cost. The ARV must be higher than the total cost of purchasing and renovating the commercial property and taking care of any liens or other legal issues on the property. If it is, then if your due diligence checks out well, it is likely the property has profit potential.
If you’re ever in doubt, picking up the phone and asking someone who has more experience than you for their opinion never hurts. Particularly when you’re talking about properties that cost close to a million dollars or more.
Make An Offer
It shouldn’t take long to prepare an offer once you’ve nailed down the liabilities and other problems that might come up. Basically, you want to make sure that any offer you make should be framed in the context of what the seller wants.
That way, the seller views you as a someone who’s willing to help him out, rather than an adversary.
Show how you’ve gotten to that specific price point if need be backing it up with facts that show how the commercial property compares to similar properties, estimated renovation costs, liens or other legal issues, and so on.