Why are Commercial Properties Experiencing Problems

Why are Commercial Properties Experiencing Problems

There are a lot of factors affecting commercial property values and laon defaults. During the boom, commercial property was a lot easier to finance as well as selling for a lot more than they can today, thus, commercial loan borrowers are just as upside down as any residential property owner, because their property is worth less in this market.

Now let's look at what affects a commercial properties value from a lenders standpoint. There are two major methodologies used: apprasial and income. Appraisal is obviously the value now based on others similar properties that have sold recently in teh same area with similar characteristics. Appraisers have had their hands slapped and have been threatened to loss licenses and have fines imposed on them, if they overvalue a property. Therefore, they are going to be a lot more conservative in their value estimates due to these possbile consequences, thus lower property appraisals.

Income is based on what they difference is between the cash coming in verses expenses going out. Well in a down turned market, the rental income will decrease with the decrease in property value (slower, but still move down ward). Therefore, if a proeprty owner has a certain amount of cashflow coming in, but the economy changes and now they have vacancies or need to lower their rents to keep up occupancy, they are operating with less cashflow, but they still have the same expenses. Hmm...not a good thing for a lender to see that the expenses are higher than the cashflow. You can not sell a property for top dollar with this, because no lender will take on that risk in this market.

Also, many of these commericla loans have 3, 5, 7 or even 10 year balloons. Oops!! If all the above is in place and the loan is coming due, how are they going to get it refinanced. They will not be able to, thus their loan will go into default and eventually become a foreclosure.

Short sales are becoming more and more popular on commercial properties. You might find a great deal on a commercial property, due to the discount that most lenders are willing to take on these properties to get them off their books. If they take the property back, they will have a lot of expenses that go along with it. One of the biggest expesnes is that they will have to hold back a certain amount of money to satisfy the FDIC's requirements to secure bad debt. Wow....that reduces their ability to lend and earn money on that money they lend. It ties up everyones hands.
I think 2010 will offer some great opportunites in commerical real estate. If the numbers work, you will find plenty of funding sources who will work with you on this project.

Get out there and get creative!!!


If you would like the chance to work with me or one of my fellow real estate investor coaches and our advanced training programs, give us a call anytime to see if Dean's Real Estate Success Academy and our customized curriculum is a fit for you. Call us at 1-877-219-1474 ext. 125

Syndicate content