Archive for commercial short sale
2 Commercial Short Sale Investing Strategies
Posted by:Here are 2 ways you can start profiting RIGHT NOW
from Commercial Short Sales -
Flip apartment foreclosures for short-term profit. You can
do this without buying the property because you’re actually
sandwiched between the buyers & the seller.
This is perfect for no money down deals. It’s also a
great strategy if you have bad credit.
Another way to profit from commercial foreclosures
is to acquire the distressed property for long-term growth.
This is also a way to create massive monthly income.
Apartment foreclosures are even easier to buy than residential
foreclosures, which is something very few realize.
Banks are beginning to get inundated with commercial property
that is in default and they want to get rid of it before they have
to take it back.
These means opportunity for savvy investors.
Stay tuned because I have a lot more to share with you soon!
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
What are Commercial Short Sales All About Anyway?
Real estate investors bought apartments with short-term debt when
the market was hot a few years ago. That’s simple enough…
Now those same short-term loans are coming due and investors
can’t refinance.
EVEN THOUGH RENTS ARE COMING IN and they have the money
to make the payments, they can’t qualify for new financing because
the value of the commercial real estate has gone done in value.
When real estate investors can’t qualify for a new loan, that often
creates apartment foreclosures…
Enter Commercial Short Sale Investing!
Stay tuned as I show you EXACTLY how YOU can cash in on what
many feel will be a tidal wave of killer discounts on commercial
real estate!
I’ll share more with you soon…
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Apartment Foreclosures on Horizon?
Posted by:Apartment Foreclosures on Horizon Despite Strong Operating Fundamentals
The residential foreclosure mess while terrible for those losing their homes, is wonderful for apartment investors. As many former homeowners migrate back into apartment living, occupancy levels and rents are being driven up.
On the other side of the supply/demand equation…because of constrained capital available for construction, very little new supply is coming online. So, in a nutshell, demand is up and supply is down… a perfect storm for apartment returns to soar!
However, many apartment buildings will head into foreclosure. Let me explain…
Two factors contribute to commercial property value.
1. Market forces (Cap rate)
2. Cash Flows (NOI)
Value = NOI/Cap Rate
The value of commercial property is derived by dividing the NOI by the market cap rate. While we can’t control cap rates anymore than we can control residential values and “comps”, we can control the NOI to a certain degree.
Rents – Expenses = NOI
By increasing income and/or decreasing expenses we can increase NOI. By increasing NOI, we drive the value of the property up having nothing to do with market forces. Therefore, we can control this component of the value equation regardless of what the market is doing.
Consider this:
NOI = $120,000
Cap Rate = 10
Value = $1,200,000
NOI = $190,000
Cap Rate = 10
Value = $1,900,000
Notice the market force (cap rate) stayed the same but only the cash flow changed. By increasing the cash flow, we can increase the value of the property regardless of market conditions.
Many apartments are performing wonderfully and their operating fundamentals are sound, yet experts are predicting a tidal wave of apartment foreclosures. Let me try to explain using a residential example.
Let’s say you bought a house for $1,200,000, put $200,000 down and took a $1,000,000 loan (83% LTV) on a short term loan so that $1,000,000 would be due in 5 years. Now let’s say that house was cash flowing $100,000 per year.
For 5 years, the same tenant lives there and pays rent like clockwork. You are thrilled and making money hand over fist. However, as the national economy goes into a tailspin and your neighbors lose their homes to foreclosures the value of your house is dragged down with them. Hey, but you don’t care because that house is cash flowing like crazy and you have no plans to sell. So who cares what it’s worth, right? You’ll just collect your rents and hang on until the market comes back even if it takes a few years.
But then you get a letter from your lender reminding you that your 5 year loan is coming due in a few months. So you decide to refinance only to find that the value of your house is now only $800,000 (a 33% decrease in value which is exactly the kinds of losses we’ve seen) and you still owe $950,000 on the note. Additionally, banks will only lend 70% LTV now so based on an $800,000 value and 70% LTV the bank will only refinance $560,000 of the remaining $950,000 on the note.
If you don’t come up with the $390,000 difference, you will lose that house to foreclosure even though it has tremendous cash flow. If you had taken long term debt you wouldn’t be in this situation but because the note is due, you’re in trouble!
That’s exactly what is happening to many apartment owners. The properties are performing well yet they are headed to an apartment foreclosure and commercial short sale because they took out short term debt which is coming due.
Experts track the numbers and can forecast how many of those notes are coming due and how many of them are “under water” wherein there is more owed than the value of the property. These experts predict a tidal wave of foreclosures.
There is a small window of opportunity to cash in on the opportunity to buy apartment foreclosures as these property types are rarely distressed. Additionally, interest rates are historically low making this opportunity even better.
Lawrence Yun, Chief Economist of the National Association of Realtors predicts a turnaround in the second half of 2009. This means there is a very small window to learn about apartments and apartment foreclosures. The tidal wave is coming! Will you ride the wave?
I look forward to sharing more commercial real estate investing tips soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
By understanding your loan from the lender’s perspective, you can maximize your chances of successful loan approval and funding.
Lenders want to minimize risk when they make a loan. There are two primary ways a lender manages their risk exposure when financing commercial real estate (CRE).
The first way is to be sure that the loan they make is at an amount that is less than the market value of a property if it should be forced to be sold. They want to be comfortable with the loan to value ratio LTV.
The second way the lender manages risk is to be certain that the Net Operating Income (NOI) of the property is greater than the amount of the annual payments the borrower is obligated to make on the loan, leaving the borrower with cash flow that is not committed to loan payments. They want to comfortable with the debt service coverage ratio DCR or DSCR.
NET OPERATING INCOME (NOI) The NOI is the most important number the lender looks at in the loan underwriting process. The NOI will be used to determine the value of the property and to determine the maximum amount of payments a borrower can commit to when signing the loan documents.
The NOI of a property is calculated by determining the property’s first year Gross Operating Income and then subtracting the Operating Expenses for the first year.
Gross Operating Income – Operating Expenses =Net Operating Income (NOI)
The Gross Operating Income of property is the total income a property can expect to receive from all sources over a one year period. The Operating Expenses are the expenditures needed to keep the property operating during the one year same period.
Sample Calculation: 400,000 Gross Operating Income
$300,000 Operating Expenses
$100,000 Net Operating Income
LOAN TO VALUE RATIO (LTV) Lenders use LTV to establish the maximum loan amount a property will qualify for so that the lender could sell the property quickly and recover their investment if necessary.
First, the lenders determine the value of the property by using a version of the Capitalization Rate (Cap Rate) formula as shown here:
NOI = Property Value/Cap Rate T
The value of CRE may be determined by applying the Cap Rate to the NOI as shown here.
Sample Calculation: $100,000 NOI= $1,000,000 Value/10% Cap
Once the value is established, the lender will determine how much of the value of the property the lender is willing to fund through mortgage financing.
If the lender feels the property type and location carries little risk the lender may finance 90% or more of the property.
Sample Calculation: $ 1,000,000 Value x 75% LTV $ 750,000 Loan Some property types and locations are seen as riskier to a lender and the LTV may be as low as 60%.
DEBT SERVICE COVERAGE RATIO (DCR) In addition to being sure that the lender has a safety cushion over and above the amount of financing they put on the property, the lender wants to be sure that the borrower has the ability to make the mortgage or Annual Debt Service (ADS) payments in the event that the financial projections are not being et. NOI = DCR/ADS
Sample Calculation: $100.000 NOI = 1.25 DCR $ 80,000 ADS
In all but the rarest instances the DCR is greater than 1. This means that the lender will make certain that the NOI is greater by some percentage than the ADS. In other words, the lender wants to be sure that there is a cushion.
The lender wants to make sure in this example that there is 25% more income produced by the property than is required to make the payments.
This way, if the property increases in vacancy for some reason and/or the NOI drops, the property owner can still make the payments without having to use his/her own resources. The property’s cash flow called NOI makes the payments.
Putting it together in an example Assume that the lender agrees that the NOI on a property is $100,000 and that the property has a $1,000,000 value based on a Cap Rate of 10%. The lender quotes a 75% LTV.
The lender would be willing to make a $750,000, assuming the property generates enough NOI to make the ADS the loan, which at the current interest rate and term is calculated as $80,000.
If the lender is quoting a 1.25 DCR the lender will allow $80,000 of the property’s $100,000 cash flow to qualify the property for the annual debt service (ADS).
In other words, if the ADS is more than $80,000, the property will not qualify for the loan. In this situation the lender is satisfied with both the LTV and the DCR and will make the loan.
However, using the same information, what if the lender stated that the DCR required is 1.33 and the amount allowed for ADS would only be $75,000? At the current interest rate and terms offered by the lender, $75,000 of ADS can only make the payments on a $700,000 loan.
As a result of underwriting the loan in the most conservative way, the lender will offer the borrower the $700,000 loan which results in an LTV of 70%.
Loan underwriting also works the other way.
Perhaps the lender is willing to make the $750,000 loan based on the 75% LTV. The lender quotes a DCR of 1.2, which would allow the borrower to make annual payments of $83,330.00.
At the current interest rate and term offered by the lender, $83,333 of ADS would make the payments on a loan that is larger than $750,000, but the lender cannot exceed the 75% LTV so the lender will offer the most conservative loan which will be the $750,000 loan.
When a borrower makes an application for a loan to finance CRE, the lender will underwrite the property based on its value and its income stream using both LTV and DCR to make the loan determined to have the least risk.
I look forward to sharing more commercial real estate investing tips soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
