Without going into too much obvious detail, the current state of the world is, well…. Unusual.
For commercial real estate investors looking to continue moving on transactions, the process of doing so will look much different as long as COVID-19 remains in the mix.
Generally, investing in a down market requires investors to get very creative in how they find and structure deals.
Here, we provide some light on how investment teams can uncover hidden opportunities off-market, and how they can structure deals to navigate tightened lending standards amidst coronavirus.
How to Find Commercial Investment Properties in a Downturn
Traditionally, you’d work with a brokerage, where extensive research has already been conducted, and an agent can formulate a market of opportunity for you.
In a downturn, however, the market that a broker would usually be able to create often disappears—or at the least, diminishes.
That doesn’t mean that the market itself, disappears, however. It just means that you’ll have to go about finding deals in a new way.
That often means finding deals off-market.
Many commercial teams rely heavily on off-market deal-making—whether the market is down or not—because it opens up their search to the entire supply of commercial real estate.
Finding Commercial Investment Properties Off-Market with Reonomy
The Reonomy platform grants access to full property intelligence on nearly every property in the United States that is not a single-family home.
Included, are the abilities to:
- Identify investments of any kind through search.
- Analyze properties, owners, and portfolios from home.
- Access owner contact details to reach out directly.
Identify investments of any kind.
First off, choose your market.
From country-wide, down to an individual street, you can define your geography.
Search within a designated state, city/MSA, or county, or look in more granular areas by entering street names and drawing custom shapes on the in-app map.
Next: Within your chosen geography, define your search by asset type(s) and sub-types.
Whether you’re looking to invest in a multifamily building, cold storage, mixed-use property, a warehouse, land, and so on, you’ll find it in the platform.
That includes the ability to clarify building and lot sizes, number of units, building age, zoning, and more for any asset type.
Now, digging a little deeper: What kind of standing do you want the property to be in?
If you’re looking for properties in distress, you have the ability to see if an asset is currently in pre-foreclosure.
- Quarantine tip: If you see that a property is, or could be in distress, and the owner is out-of-state, a recession could be a time to turn the situation into an opportunity. They’re less able to attend to the property, and likely more willing to part with the asset. This rings especially true amidst a country on near-full lockdown.
Leveraging Reonomy’s property intelligence, you can identify different distress cues, if properties are owner-occupied, who the business tenants are, if they’re in an Opportunity Zone, and more.
You are able to construct whatever niche market it is that you’re looking to buy into. No broker. Hell, maybe not even a researcher.
How can you tell if a property is likely to sell?
Option #1 is to use Reonomy’s Likely to Sell feature—a predictive filter based on immense troves of data that signals the likelihood that a property sells within two years.
Option #2 is to look at the date of a property’s last sale, when its mortgage comes to term, whether it’s in distress, and so on.
Analyzing investments from home.
So, one of the bigger pains with being locked down for quarantine is not being able to visit potential investment sites.
There’s still an abundance of research you can conduct from the comfort of your own home to understand the value and risk of a property.
Tip #1: Derive the fair market value of a property by looking at its past sales, recent tax assessments, and comparable properties.
Tip #2: If the property is at least partially non-residential, review the business tenants to assess credit risk.
Tip #3: By plugging an owner’s name into Reonomy’s platform, you can see all the properties they’re connected to (across any number of LLCs), to analyze their entire portfolio and learn more about them overall.
Connecting with decision makers.
You can use the platform to unlock contact information for owners, including the individual members of an LLC.
Another insight you can find on a property is the lender of the most recent mortgage.
This can be used to reach out to lenders if a property is in distress, or if you’d like to instead purchase a real estate note.
- Quarantine tip: If you notice a special servicer attached to a property by-way of lending or ownership, it’s likely worth it to at least reach out and inquire.
To understand a distressed asset, in particular, you really need to understand the narrative that lies behind the property.
Data shows you a lot, but cannot show you everything. Being able to connect with an owner and lender, if even to learn about the property, can be helpful in your approach to make an offer.
Commercial Real Estate Deal Structures in a Downturn
So you have a general idea of how you can actually find your next investment.
But, in a time where a global pandemic has lenders especially tight, how do you actually make a deal work? This is where you need to get creative.
Traditionally, you’d identify an asset, then work with an underwriting team to secure financing on the property. You might even find a lender while you’re sourcing an asset to invest in.
During an economic downturn, however, lenders tighten their underwriting standards quite a bit. Their focuses shift away from origination and go towards minimizing losses.
Here are some ways that you can get crafty to secure capital for a recession or bear market investment.
1. Buy commercial mortgage notes.
Whether a property is in distress or not, purchasing a commercial mortgage note allows investors a backdoor into CRE—it’s a way to create income without actually owning property.
- How can you find commercial notes to purchase? Reach out to banks and special servicers.
Most traditional lenders will sell notes for the right price, making them a good source for mortgage notes at the local and national-level.
Special servicers are brought in precisely to take over the servicing of non-performing and distressed assets.
In any case, you can purchase a performing or non-performing note.
Performing notes are healthy and stable. In this case, you could purchase the note from a lender simply to collect steady mortgage payments from the borrower as an extra stream of income.
Non-performing notes are mortgages that have not been paid for 90 or more days. This will result in less-steady cash flow. In being positioned as the lender, however, if you purchased the note, you have the ability to foreclose on the property, or at the least, collect the remaining balance from the borrower upon foreclosure.
2. Seller Financing
Another option is for the seller to serve as the lender in the transaction.
In any instance where a loan is hard to obtain from a traditional lender, seller financing could be of use.
Not only does this allow for a greater chance of obtaining a loan, it also introduces a lot more flexibility regarding down payments and terms.
Plainly said, if only you (the investor) and the seller are involved, you’re much more likely to have a pleasant experience, with an outcome that’s mutually satisfactory.
- In this case, your best bet is to connect with the owner of the property to start the discussion, see if they’re qualified to be a lender, and if they’re interested in doing so.
3. Sale Leaseback
With a sale leaseback, an investor can buy a property from an owner-occupying business, while agreeing to continue leasing the space to that business.
This transaction type often occurs with triple-net lease properties, and usually occurs when the property-owning business is in need of extra cash.
Consider our current crisis… Massive amounts of businesses are struggling to generate revenue amidst large scale non-essential business closures.
Businesses that own the property they operate out of can use a sale leaseback as a way to collect temporary cash and remain in their workspace during this time.
- Reach out to owner-occupied properties that are likely in-need of extra cash. Amidst COVID-19, for example, you could use Reonomy to source NNN retail, owner-occupied properties, and reach out directly to the owner.
Investing in Yourself Amidst a Downturn
In these very strange times, it’s crucial to invest in yourself, in your team, and most importantly, in your future.
Times of economic downturn, while troublesome for most, can actually be times of great opportunity for investors that are willing to work more proactively, attentively, and with proper caution.
In the end, it’s important back your team with the necessary data and tech to assure that all decisions are deeply informed, and to fuel your team’s ability to work with the utmost level of creativity.