They say that one man’s trash is another man’s treasure, and oftentimes that can be true in the foreclosure market. However, taking over a property that was foreclosed on for one reason or another carries plenty of risk, so you need to do your research before you jump on a foreclosed property. Below, we take a closer look at some of the benefits and risks associated with purchasing foreclosed commercial properties.
Foreclosures - Potential Benefits
Many savvy commercial investors keep an eye out for foreclosed properties because they offer some unique advantages over more traditional properties. For starters, because they have been foreclosed upon, the purchase price is typically lower than market value. The property may be extremely discounted depending on what issues exist with the property, and if you are handy or you’ve been in business long enough to develop relationships with builders and contractors, buying low and putting in the work to improve a property can lead to a financial windfall.
Some additional potential benefits of purchasing a foreclosed commercial property may include:
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Higher return on investment with low entry price
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Fast purchase process if seller wants to move on from the property quickly
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More bargaining power, as the seller is moving a distressed asset
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There may be tax benefits to purchasing property with deprecated value
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Diversification of your investment portfolio if your other properties are pretty standard
Foreclosures - Potential Risks
There are also plenty of risks that you need to be aware of when purchasing commercial property. However, many of these risks can be minimized if you bring a title agency aboard to assist with the process. For example, sometimes foreclosed properties have cloudy titles, unpaid property taxes or an unclear line of ownership. Working with a title agency to clear the title or secure title insurance can ensure you aren’t in for a major surprise once you’ve moved forward with the purchase.
Other potential risks associated with purchasing foreclosed commercial property include:
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Purchase price can increase if multiple parties get in a bidding war, which in turn affects your bottom line and makes it more difficult to ensure it is a profitable purchase.
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Environmental issues may exist with the property or the land due to how the area was used by the previous owner.
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Many foreclosed properties are sold “as is,” meaning the buyer will be on the hook for all necessary improvements, both known and unknown at the time of purchase.
There’s no way to completely mitigate the risks associated with purchasing foreclosed commercial property, but if you are willing to put in the work (or at least properly budget for someone else to perform the repairs) and you bring a title agency aboard to conduct inspections, surveys and assist with the acquisition of title insurance, you can tilt the risk-benefit scale in your favor.
To learn more about the ins and outs of purchasing commercial property, or for help with any other aspect of commercial real estate acquisition, reach out to the team at Commercial Partners today at (612) 337-2470.