Q: First, my background is in commercial real estate – I buy, rehab and rent commercial space. But, a peer recently talked to me about buying distressed assets as a lucrative secondary business. Since I have always shied away from properties in foreclosure, I’m leery to dip my feet into this venture. That being said, what questions should I be asking the seller, bank, etc? And, should I hire an attorney before making any kind of offer?
A: I think there is some important due diligence that you should conduct at the outset of your venture to buy a distressed asset. First, is the property in bankruptcy already? Many properties are sold out of bankruptcy. You don’t have to turn down a deal just because the property is in bankruptcy. You could possibly do very well on the price in a bankruptcy sale. If this is the case, I do recommend that you hire a bankruptcy lawyer with experience in bankruptcy asset sales to guide you through the process.
If the property is not in bankruptcy, then I would want to know whether it is pre-foreclosure and being sold by the owner or bank or whether a foreclosure is pending. If a foreclosure is pending, see if you can find out how far along the foreclosure process has progressed. Is it near the beginning? If so, this is a good time to bid. An attorney familiar with real estate transactions and foreclosure can help with this.
Also inquire as to how long the bank’s approval process is, as you can get hung up for a long time waiting to close.
Is it the case that the foreclosure process is near the end and a foreclosure sale will be held shortly. If so, you may want to wait and instead of offering to buy the property directly from the owner and bank, you can make a bid at the foreclosure sale. Sometimes the bank will be willing to let the property go at foreclosure sale for less than it would pre-foreclosure in a private sale.