Is Buying A Building In Foreclosure A Smart Move?

Is Buying A Building In Foreclosure A Smart Move?

Are you familiar with the concept of buying something in foreclosure? The general idea is that you something the previous owners couldn’t finish paying for gets offloaded by banks and other financial institutions below traditional market values, so they can either recoup their losses or just write off what they can and move on. This means tremendous deals for buyers who can get properties cheaper than through conventional buying.

The concept is very popular in the residential real estate sector, especially among single-family homes. Foreclosed homes might be sold for a third or more below market value, so if you had a budget for a full-value home, you’d have the funds and resources leftover to fix up the home as you see fit, be it to live in on your own or to sell or rent to others. Of course, you’d be competing with the many other investors looking for foreclosed homes, either through buying directly from banks or at the cash-only auctions. Also, you’d be buying sight unseen without a chance for inspection in many circumstances, so while you save a lot of money, you also inherit a lot of risk.

However, did you know that it’s also possible to buy commercial properties that were foreclosed? As much as many families turn foreclosed homes into their dream residence or flippers make tens or hundreds of thousands in fixing up abandoned properties, is it equally possible to do this in the commercial sector? Is buying an actual building other than a home in foreclosure a smart move?

Why Would You Do It?

It’s only actually a smart move if you’re doing it for the right reasons that work for you, as you never want to make a major money move just for the sake of making a smart move. If you’re considering foreclosed commercial properties, you likely fall into one of three potential categories in terms of the intention you bring to the table.

First, you’re looking for something you can flip. That is, you buy it cheap, fix it up the best you can to existing market standards and demands with your budget and then sell for much higher. High ROI upgrades and quick turnaround time should theoretically yield tremendous profits.

Second, you might be looking for rental income. If you buy a commercial property and then rent it out businesses, you get the best of both worlds possibly. The structure itself can likely hold its property value or even grow in worth over time, so you enjoy preservation of your wealth. At the same time, you can enjoy rental income from any tenants you rent out space to inside the building. If you’re able to get multiple tenants out of the property, then you have even more financial stability.

Third, you could be looking for a place to house a business of your own. Starting any business is not a cheap thing to do if it’s a physical location in a brick and mortar structure, so you might think a foreclosed commercial property or structure is a possibility to save a lot of money. That gives your potential business a much stronger chance of success in the long run. You can find probate real estate leads here.

Is There Profit Potential?

Since this is all about commercial foreclosures, then commerce is the deciding factor in whether or not buying such a building is a smart move. You’re not looking for a place to live and call home. You’re looking to make money, whether it’s through a flip and sale, rental/lease income, or a place to put your own business. As such, every potential property has to be evaluated through those filters.

One thing holds consistent in every case though. You need to try and find out why the previous owner wound up foreclosing on the building. In most cases, it’s because they weren’t generating enough profit and revenue to maintain their financial obligations. However, was this due to bad business location or something else?

Quite a few other possibilities might exist that would cause a previous owner to wind up foreclosing on their property. If the business has bad leadership who make unwise choices, that can doom an enterprise over time. Furthermore, a particular business might just be in an industry or sector that is in decline nationally, regardless of local growth or economic activity. Remember, it wasn’t that long ago there was a Blockbuster on nearly every corner of your community.

The only situation you really need to be worried about though is if the community or neighborhood the foreclosed commercial property is in is going through its own turbulence or decline. If it is, you’re not likely going to find strong demand among buyers who might purchase your flip, nor will you easily find commercial tenants to lease from you. Furthermore, if your business will be open to the public, foot traffic and spending money among local consumers could be issues.

On the other hand, a distressed or depressed community might represent a bargain for your business if you’re looking for a closed-door location that does something decentralized, such as manufacturing and warehousing, a call center, or operations behind an online enterprise.

Manage The Risks

If you do find a foreclosed commercial property that does look like it could wind up being profitable for you along any of these angles, don’t leap right into it. Unlike residential properties, commercial foreclosures are not as likely to be sold off in an auction setting. Since you’re going to be probably dealing with a bank, you should have a chance to get the building professionally inspected before you buy it. That’s smart to do because owners that can’t keep up with their payments often don’t keep up with building maintenance either, so while you’ll save some money, you’ll have to spend some just bring the property back up to standards. Also make sure there are no liens, lawsuits, or certification issues you’d inherit as the new owner.

Once you’ve done all this, you can crunch the numbers and see if the likely expenses are outweighed by the profit potential you’re looking to generate. Interestingly, if you’re looking for rental income, some foreclosed commercial properties were previously owned by property owners but not the actual tenants, so it is sometimes possible to buy a foreclosed commercial property that already has tenants and rental income from day one!