Financing for Foreclosed Properties
Whether you’re starting a new business, moving from your home office to professional office space, or opening a secondary location, foreclosed properties are often tempting investments. These properties are often referred to as “real estate owned” properties or REOs, but that term simply means that the properties are currently owned by the bank due to foreclosure. Banks are penalized by the government for keeping these properties on their books for a long period of time, so they’re often motivated to strike a deal with any business able to secure financing.
If you find REO property in an ideal location and have the time to renovate before moving or establishing your business, you may want to jump on the opportunity before you lose out to another commercial investor. Before you make that move, consider all of the expenses involved with foreclosed commercial properties.
No bank wants to hold onto an REO property for a long period of time because they accumulate penalties for doing so and the condition of the property will decline while it is unoccupied, leading to profit loss when they do eventually sell. Yet, many banks are now willing to keep some properties on the books until they receive a reasonable offer because the real estate market is gradually rebounding from the crisis of previous years. This is a delicate balancing act where banks want to hold onto a property that may increase in value with time, but they also don’t want to hold out so long that the penalties and maintenance expenses cut into their profit potential.
For someone interested in purchasing REO property to save money, this means you may not get the deep discount that you would have expected from foreclosed properties 10 years ago. Before entering into negotiation with the bank, consider the following recommendations:
Where will you work while you’re waiting for your new space to undergo renovation? If your business is currently operating from a leased property, make sure that you have enough time left on the lease to complete the renovation on your new space. If you can’t stay in your current location or want to get a new business started while waiting for renovations to wrap up, you may need to find property with a short-term lease option. If you already have multiple locations for your business, you may consider shuffling employees around temporarily until the new space is available. It’s critical to have a solid plan in place because you don’t want renovation on new space to interfere with the operations of your company.
Once your new space is renovated, you may need to invest in furniture, office decor, and equipment. Even if you plan on moving much of your furniture from your previous location, there will likely be some changes that you need to make in order to fit comfortably into your new space. You should also consider the expenses involved in reprinting company letterhead, brochures, and other print materials to reflect a new address.
If the REO property that you want to buy will require substantial renovation, it’s not enough to determine whether you can afford to pay for the loan on the property. While the renovation process is in full swing, you may need to pay for that loan as well as rental payments and upkeep expenses on another commercial property. The transition phase can easily double your current expenses, so make sure that you’re prepared to keep everything running smoothly without a major cash shortage.
This is a lot of information to absorb, and you may see dollar signs swimming in the air around you once all of those expenses are considered. Before you decide to ditch the REO property and go for something more straightforward, contact us to discuss all of your financing opportunities. You may have more options than you realize.