Commercial Loans and Fun Blog

Commercial Foreclosures and Clearing the Market

Posted by George Blackburne on Fri, Mar 25, 2011

Commercial REO's Must be Deeply Discounted to Finally Sell

Take the very same commercial property. If you sell it retail - the normal kind of sale to another investor - the commercial property may sell for $1 million. Ahhh, but if the lender unwisely let's word slip out to the real estate brokers in town that the property is a foreclosure, the commercial lender will be lucky to fetch $600,000 for the exact same property. Why? As soon as the investing world learns that the property is an REO, every potential buyer wants a 40% discount.

sold commercial buildingThere is a price, however, at which every commercial property can be sold. It's the price where the commercial property finally clears the market. "Clearing the market" is a price so low that a buyer can finally be found.

Liquidation is a term that is very similar to clearing the market. Liquidation means taking an asset and reducing it to cash. For example, let's suppose a finance company repossesses a living room set sold on an installment sale (sold for 12 or 24 monthly payments). The finance company will then liquidate the used furniture; in other words, sell it, in order to pay off its unpaid debt.

Hard money commercial lenders are taking a terrible beating during the Great Recession because first commercial real estate fell by 40%. Then every potential buyer of the property wants an additional 40% discount off the already-discounted fair market value of the property because the property is an REO.

As the owner of a commercial hard money lender, Blackburne & Sons, I can tell you that it's maddening.


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Topics: commercial foreclosure, commercial REO, clearing the market, clear the market