Find Today's Hottest Back Door Into Commercial Real Estate

Although many data sources may indicate that commercial real estate transactional velocities are down, the truth in the market is a little different

. Properties are changing hands, but they are changing hands in non-traditional fashions. One of the most popular ways to acquire investment property today is through note sales.

Note sales do not show up as real estate transactions because they do not involve the transfer of title. They occur when an investor purchases the promissory note on the property from the lender. This way, they get the right to the monthly payment stream on the loan coupled with any balloon coming. The real estate play, though, comes from the fact that the purchaser of the note also gains the lender's security interest in the property.

As the media keeps reporting, more and more commercial properties are in some form of distress. If a borrower is behind on loan payments or has defaulted by not refinancing a balloon, the lender has the right to foreclose and take ownership of the property. Foreclosure, though, is a time consuming, complicated and expensive process. As if this was not bad enough, it also ends up in the lender owning the property. To avoid this problem, many financial institutions will simply sell the promissory note to an investor.

Once an investor owns the note, they have a number of options. Working with the borrower to restructure the financing can provide a cashflow stream with a future exit strategy. The more popular option, though, is to foreclose on the note and end up as an owner of the property. This route is what more and more real estate investors are taking.

The benefits of purchasing a note are significant. Because it saves the lender considerable heartache, large discounts are frequently available. For example, a property purchased in 2006 for $2 million may carry a loan of $1.5 million. Today, the loan may have a balance of $1.4 million, while the property is worth the same amount. Odds are that a savvy investor could purchase that note from the lender for $1 million, generating a 40 percent profit. These extreme profits are possible because notes are rarely exposed to a full marketing campaign, allowing buyers to corner the market.

Until the degree of distress in the commercial real estate market is reduced, note sale transactions will continue to be present. Sophisticated and well connected investors would do well to learn more about the process and look into it as a tool to acquire heavily discounted off-market deals.

by: Christine Harrell

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