Why Investors Like a Commercial Real Estate Auction
While tumbling real estate prices and increasing foreclosure rates are not beneficial for the short-term economy, they are presenting investors with opportunities to purchase bank owned lots, office and apartment buildings, and other industrial properties at unprecedentedly low prices. According to a survey of commercial real estate experts, conducted by Price Waterhouse Coopers LP and Urban Land Institute, the prices for commercial properties are expected to bottom out in the near future, making this an ideal time to buy. A commercial real estate auction is an excellent opportunity to invest in properties whose prices will rebound.
The trend is towards investment in foreclosed commercial properties. When a business or individual purchases a property by taking out a mortgage, the bank uses the house as collateral. This is a secured loan, meaning that if the loan becomes delinquent, the bank can begin foreclosure proceedings. Essentially, the bank reclaims possession of the house if the owner cannot meet the loan obligation. The bank or lien holder owns the property and because in this market, they would rather have liquid assets than real property, they offer the property at lower prices though auction.
The appeal is scooping up valuable property at a time when it has the lowest market value. Because the market is bottoming out – or prices are reaching the point below which they will not likely fall – it is an opportune time to invest. As the economy regains steams, the values will rise.
While investing in commercial property is sound and profitable, it is always wise to be cautious before purchasing any property, whether industrial or residential. The first consideration is location. Buying a property in a sector with a host of other foreclosure properties indicates the economic health of the neighborhood. While the prices can be extremely low, it may also mean that the area will take longer to bounce back from the financial downturn. If you are willing to wait it out, this can be a good deal. However, you also have to weigh the possibility that some areas will not recover completely and values will not rise to levels seen before the recession.
Next, you want to understand zone and property usage rules. The property you are interested in may be zoned for industrial uses but not for residential purposes. If you wanted to invest in an apartment building, you would either have to forgo that property or have it rezoned if possible. Be sure you know what you’re getting into. It is also useful to have an idea of what you want to do with the building. Many investors rehab the building or lot and sell it. This may be a good idea as the market gains steam. Others lease it to businesses, and others reserve it for their own use and decide to sell when the market is strong and they can get a better price.
As with a residential property, you want to have your financing in place. Many foreclosed commercial properties require a fifty percent deposit or even an all-cash transaction. Is this a joint venture? Will you have other investors involved in the property? Another important step, after you have bought the property, is to become incorporated. This eliminates personal liability in the event of financial difficulties with the investment.
The commercial real estate market has typically been dominated by experienced investors; however, because of the recent onslaught of foreclosures, many private citizens and first-time investors are looking into commercial property. Many people purchase apartment buildings and use the proceeds to pay their mortgage. Others purchase buildings for business. Whatever the purpose, it is a good time to buy – and a good time to learn all you can about the process so you can keep up with the big boys. Professional investors are savvy, so it is important to be knowledgeable about the auction process, know your limits, and make sound decisions.