Commercial Real Estate – Access the "Shadow Market"
In a more normal market … where there is a reasonable volume of Property for sale and a reasonable number of Buyers … we recommend you build your Lead Generation System around active Brokers and Commercial Agents. In normal times the vast majority of Properties change hands through the Commercial Broker & Agent networks.
In today’s market … with Commercial Sales volumes down up to 90% this year in nearly every market in the nation … you will have to adapt your Lead Generation tactics to find deals.
The Agents and Brokers are in a knockdown, drag out fight for the few properties that are being listed. So you won’t find a reasonable number of deals to choose from by looking at listed properties or working with Brokers & Agents.
Watch for the “Shadow Market”
There is a hidden resource for deals you can tap into in today’s Market. There are a lot of distressed owners and distressed Properties in nearly every market. These distressed properties are ones you can potentially buy with a solid offer AND they are not listed at the moment.
They are held in a Shadow Market … in various stages of being taken over by the Mortgage Holder.
You can find out what properties are in distress and what Lenders have bad loans and make direct connections for deals. This gives you access to Properties that are currently hidden in this Shadow Market – where even a good Commercial Broker can’t get to them.
When an owner defaults on their loan and the Lender chooses to Foreclose to take the collateral back … there are several stages to this repossession process.
An Owner is in Default when they fall behind on the Loan Payments. Non-payment violates the loan agreement and can result in the Lender taking the Property back if the Default is not “Cured”. Foreclosure is the name for the process of taking the Property back.
At this stage:
You can find out what local Owners are in Default and approach them directly.
The Court can appoint a “Receiver” to manage the Property while the Foreclosure process proceeds. The Receivers are Property and Asset Management Companies or even Attorneys you can connect with.
At this stage:
You can find out which Properties are in the hands of a Receiver and which Property Managers take on receivership work. Then you can approach the Owner, Receiver or Lender directly.
Real Estate Owned (REO):
Real Estate Owned is a term for a Property that is now through the Foreclosure process and is actually owned by the Lender. All REO Properties need management to preserve the value of the Asset. In this case the Lender hires a Property and Asset Manager to do the job.
At this stage:
You can find the Lenders holding REO. You can find the Property Managers who manage REO Property. You can approach either the Property Manager or Lender directly.
Listed and/or Sold
At some point, the Lender will sell these Properties. However, the decision to sell can take a significant period of time for one simple reason. If the Property sells for less than the Loan Amount, the Lender will have to realize the Loss on their books. This decision to take the loss and move on is usually one made in the higher levels of the organization. While the “Sell” decision can be delayed … once it comes you can see a flood of Property on the market as the Lender attempts to clear their REO inventory quickly.
At this stage:
The Lenders will often have preferred buyers by this point. Many times these properties are sold without being listed … often in large portfolios.
You have the best access to this Shadow Market by taking action in the first three stages of this process:
How do you get this mysterious “Access”? The answer is actually quite simple. You get access to the Shadow Market of Distressed Property through NETWORKING.
Commercial Property is a Relationship Business. You are constantly networking in all levels of the industry with every conversation you have in the course of your normal business.
Ideally you are talking with the following individuals every month:
- Your Broker Network
- Your Mortgage Broker
- Your Property Manager
- Your Real Estate Investing Group
- Your Local Property Association Meeting – such as the local Multifamily Housing Association meeting
In every conversation, let the other person know you are in the market for distressed Commercial Property. Ask them who they know who is
- In Default or in trouble
- In Receivership or managing Property in Receivership
- What Lenders have REO Property and who are the companies that are managing REO in this market
Ask for referrals and introductions. Then make connections with these folks and let them know your level of interest and ability to make offers.
With consistent Networking, you can end up with direct connections to multiple levels of this Shadow Market in a matter of weeks. It is these relationships that will give you a first peek at the Distressed Properties and give you the chance to make a direct offer to whoever controls the Property at the moment.
And the Deals can be very Impressive. We have recently seen Lenders sell Distressed Commercial Property for very little cash down and with a significant discount on the Loan Principal. This can result in your purchase costing 25 – 40% less than the previous owner with very little cash out of your Investor’s pockets.
And as the Commercial Crunch gets deeper, the deals are likely to get even sweeter.
So get out there and NETWORK your way into the Shadow Market. With consistent effort you will soon be making offers on deals that will set you up for long term profitability in the years ahead.