Pushing Dirt

A consequence of the utterly lousy commercial real estate market is that suffering landlords and sellers are likely going to need to start to pay higher commissions. Those higher commissions will be needed to lure the best seller and landlord representatives, who are risking more taking on assignments in this market: despite their best efforts not every space will lease and not every building will sell. Representatives of buyers and tenants will demand even higher fees, and deserve them: they control a very precious commodity in today’s market…at least in the case of creditworthy tenants.

I’m not going to win many friends among owners for saying it, but it’s time for brokers to start demanding higher commissions. Don’t get green with envy for the brokers. The volume of investment sales transactions is down 70 to 80 percent. Leasing transactions are not moving robustly either, with tenants staying put and renewing for very short terms in many cases.

The opportunity for brokers in this market is representing the most motivated of sellers: those that are facing distress and must sell to raise cash. We’re seeing many more of those sellers in places like Michigan, Ohio and Florida. In the Washington DC area the distress is primarily in vacant buildings or residential land.

Established auctioneers are a busy lot, and brokerages are ramping up groups to market distressed assets for sale or to deal with workout situations.

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REO - short for real estate owned, or property that has already been foreclosed on and is now owned by the lender, is the “low hanging fruit” of the distressed property world.  Once an asset has been taken back by a lender, it will likely undergo at least some minimal renovation work, listed with a real estate agent at (in theory) a market price and marketed widely.

As a broker, if you want to list these properties, it pays to develop relationships with these lenders before they come to own a property. The same goes for an investor wanting to buy a distressed property on an off-market basis before its widely marketed.

How do you find these opportunities? My advice is to monitor the bankruptcy and foreclosure notices in the newspaper.  When you see a property that you would like to list or buy advertised, you need to work back to the lender.  Lenders record their liens on properties and these lien filings (aka UCC lien filings) are a matter of public record. In Maryland for instance, the actual recorded loan documents are all searchable on the web for free. In some jurisdictions you or a service you employ will have to do the research at the courthouse.

By beginning the dialog with the lender from the first minute the asset is distressed, you will have the inside track to getting the property listed or buying it. If your first contact with the property is after the lender owns it, you’ll face much more competition and much less chance of success. It’s a lot easier to develop a relationship with a lender around a particular circumstance like a troubled loan. Just working through the phone book cold calling lenders is an exercise in futility.

When you call the lender, you’re looking for the individual that deals with “troubled loans” for the asset.

Keep in mind that there could be an opportunity at this point to purchase or broker the distressed note at a discount. Probe for that opportunity with the lender. The discount needs to be substantial as the lien holder may have to fight a protracted battle through the bankruptcy court to gain control of the asset…or the borrower may pay the note holder back at par value. In either case the discount ensure you of a reasonable return on your equity investment. Returns today on investments like this need to be well into the range of double digits (obviously varying with the quality of the asset, cash flow in place if any, risk involved, etc.).

If the lender is a large one you’ll see responsibility for dealing with the troubled loan move from one person to the next, again and again, as the asset approaches forclosure. It takes diligence and a lot of patience to track these opportunities.

Along the way, make yourself a resource to the lender, providing whatever market information and referrals that you can. Be polite, patient and persistent, and you may end up with an amazing deal or a very lucrative listing assignment with a seller that is actually (for once) motivated to sell!

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