What Happened To Commercial Real Estate (and How You Can Profit)

So, Why Commercial Short Sales?

So, Why Commercial Short Sales?

A sensible first question to ask about the benefits of making commercial short sales: why commercial short sales, as opposed to residential short sales? Wasn't the current crisis tipped off primarily through the residential real estate market? More residential properties are distressed and therefore available for the short selling process that can make you money.

Differences Between Residential and Commercial Short Sale

Well, in a sense, it's because commercial real estate is better off than the residential market that it's better to get into. Much of the residential market is a fixer-upper job, with many houses in a state of disrepair thanks to their owners' overall struggling financial situation. As a result, it takes a great deal of work to turn profits on these houses, and there is no certainty that you will be able to sell them.

Commercial Properties Undistressed? How Can this Be?

On the other hand, many commercial properties are underwater despite them being relatively un-distressed as they were before the real estate bust. This is because while the recession itself was precipitated by a crash in residential real estate, it dealt a severe blow to overall real estate prices and the credit market. Commercial property owners incurred large amounts of debt during boom times using their property value as collateral. The idea was to take a delayed-payment debt, only paying interest until those debts came due. The rent from these commercial properties would easily pay for interest and upkeep, netting the owner a tidy profit. Then they could extend the loan at the end by borrowing again on the property values to prevent foreclosure. However, two things happened. Firstly, property values dropped across the board thanks to the big crash. Second, the credit market tightened and it became much harder to get a loan under the same conditions, or even find a commercial loan refinance. Between the two of these factors, properties are in commercial pre foreclosure even though they are still productive!

More Differences in the Commercial Sector

In addition, the primary uncontrollable factor in residential real estate prices is consumer confidence and consumer tastes. After the big crash, it could be that housing prices may never reach their boom. On the other hand, the commercial real estate market is closely connected to the economy itself. The demand for commercial real estate depends on the overall number of businesses and how much they can afford to pay, so as the economy recovers commercial real estate will recover first.

Now Go Out and Make Money in Real Estate

Remember that more opportunities to buy does not always mean more money making opportunities. The key is to figure out which money making opportunities are good ones. This is a good lesson for when you dip into short sales yourself, as not all commercial properties are created equal.

Copyright (c) 2010 Jack Bosch

by: Jack Bosch

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