We teach our students and clients all across this nation how to find commercial property owners quickly, and then we show them how to talk to them, how to find the seller's motivation, and, lastly, how to structure deals around those motivations. As you go out there and you generate leads and run into owners of commercial real estate, you're going to run into owners who are doing okay, and some owners who are not doing okay. We're going to focus today', on those who are not doing okay, and have some level of distress on their property or in their lives causing them to be potential motivated sellers.
Understanding the nature of distressed sellers and how they think and act is critically important when convincing them to sell their property to you. Distressed sellers are no different from you and I in that they are in the midst of the trials of life, and need resolute solutions. Don't you agree?
Three Most Common Types of Distressed Sellers
1. The Out of State Owner.
2. The Local Owner
3. The Life Issue Owner
Distressed Out of State Owner
What does that person look like? Well, these owners tend to have a mindset that their property is out of sight and out of mind. Their property is in disrepair, either knowingly or unknowingly. They may have vacancies that are over ninety days old. That's a great sign that there's something wrong there. They may have poor records or no records of the financial positioning of their property. There could be negative cash flow for a long time. They're not in denial of their property issues. But, I tell you what, they have put in their own money to support their property. Those are tell-tale signs of a distressed out of state owner. There's plenty of those out there.
Another thing about the distressed out of state owner is most of them do keep their mortgage, insurance and tax payments current. Most of them do, right? Let me tell you this. They, also, originally bought their property for cash flow, but they have little to no training on how to run their property profitably. That's a big sign of them, and that's a big problem. A few of them bought their property sight unseen, which I highly, highly do not recommend you do. Nearly all of them regret buying their property.
The key thing is they are motivated to sell.
That's the bottom line. They are motivated to get out of their negative cash flowing position. That's who the distressed out of state owners are.
Distressed Local Owner
These owners are local. They're physically there near the property, but mentally checked out. They may admit that there's property cash flow, but there really isn't. Most have small or manageable loans on their property, which allows them to financially afford being negative cash flow, but they still are distressed. In fact, they've been distressed for years, and they have no clue what to do. We run into these owners more often than you think.
Another sign is the landscaping around their property is very poor, not kept up. Interestingly, most of them do their own property management, and they do it because they have many failed attempts at hiring good management themselves, mainly because they didn't know how to manage the management. That's something that we teach here.
Next, there are management skills. Their "self-managing" methods have failed to improve their property over time, and this is a huge issue. In my opinion, fifty percent of local owners are motivated, and the other half are not motivated, and they are in denial.
These first two types, the distressed out of state owner and the local owner, there are so many out there. You're going to run into them. I can guarantee it. If you do a good job of finding commercial property owners that we teach, you're going to find a lot of these owners.
The Distressed Life Issue Owner
These owners have personal life circumstances that dictated or caused their property distress to occur, such as an illness in the family, a divorce, death in the family, partnership dispute, an unplanned relocation, all the above. These are life issues out of their control, and this has caused them and their property to be distressed.
Their property may or may not be in poor condition, but I'll tell you what, selling the property will remove a burden from their lives. For these guys, creative financing may not work for the reasons above. They need a quick sale and something concrete.
I want you to be aware that these sellers are motivated, but, also, are prone to disappear for periods of time handling their life issues. They're not the most stable people, and because of that, you need to move fast, because they're likely to make rash and emotional decisions to sell to someone else, so you really need to recognize who the distressed life owner is and be concrete.
In my opinion, the first priority, the first guys to focus on and the guys that are most distressed is the distressed life issue owner. They are the most motivated, but they're, also, the most volatile.
Secondly most motivated is the distressed out of state owner. Be prepared for misdirection, sometimes lies. They don't know a lot of things, and be prepared for the lack of information on their property, so get good commercial training so you can pick up these things.
On the third level of motivation is the distressed local owner. They're likely to be the most difficult negotiator of the three
How to Deal with Them
The Distressed Out of State Owner
Wholesaling works well, because they don't care who buys their property, as long as it sells. If you can structure a good deal, you have a buyer lying in wait, you can wholesale and make big dollars working with a distressed out of state owner, because, remember, they're not only out of state, they're out of touch with their property and their mindset is far from being attached to this property.
Also, creative financing fits here because of their motivation to stop the cash flow bleeding. Remember what I said, you want to gather as many motivations as you can, and structure the deal around their motivations. I have several trainings on how to do creative financing, so go check out those.
You may want to start off with a master lease agreement. Many of you know that's one of my favorite techniques, so start off with a master lease agreement with a low down payment. Give them terms and give yourself enough time to fix the property. That's how you deal with the distressed owner. You can look at wholesaling, creative financing, and with that creative financing, it could be a master lease, because these guys are motivated.
We had a student client named John, and we taught him how to find apartment owners, and he became really good at it. John ended up finding the Chins. The Chins lived in Southern California, and they purchased a seventy-five unit apartment building several years ago. They did not hire a third party property management company, because they thought they could save on the six percent management fee, which is about twenty-three hundred dollars a month, and they wanted to do the management themselves. You can already see where this is going. This is mistake number one.
But soon, the Chins realized that they were not good managers from afar. They were absentee owners, out of state owners, and they were suffering from high turnover, meaning that there was lots of people moving in, moving out, moving in, moving out, and because of that, they were barely breaking even. The husband decided to spend one week per month down in Texas. At least, that's what he told John. I doubt it, because John toured the property and learned from the onsite janitor, or the person cleaning the grounds, that the Chins were doing much worse than what appeared or shared by the Chins. That's what John found out.
John and I got together. We gathered all the facts. We looked at all the motivations, and looked at the financials, and we made an offer on the property with a sizable cash back at closing to handle the needed repairs and deferred maintenance. The offer was accepted after maybe a week or so of negotiations, but during due diligence, John found out that the rents were under market by forty-five to fifty dollars per unit. There was, also, an opportunity to bill back the tenants for water utility costs, because the rest of the neighborhood, the competition were doing this as well, so why not us. That's additional savings right there.
With the combination of the rent increases and the water reimbursement, we've projected that the property would have a fifty-four thousand dollar increase of NOI per year. Now, NOI cap, that fifty-four thousand meant a six hundred and seventy-five thousand dollar upside in value. John was in no position cash wise to buy this property, so he contacted a local buyer who is very busy and buying property in this area, and John ended up wholesaling this deal for forty thousand dollars. This was how to deal with a distressed out of state owner, and it worked. We found the motivations. We understood where the seller was. We understood what he wanted to do, and we made an offer around all those things.
What Can We Learn From John's Deal?
We can learn that the Chins should have hired a reputable property management firm, right? John, also, put together an attractive deal for his buyer that included cash back at closing, upside in the rents, and an upside in water reimbursement. You have to look for these little upside things. Also, the Chins didn't take advantage of either the upside in rents, because there were too busy playing property manager and doing a poor job. Unfortunately, the bottom line is the Chins, as inexperienced self-managers, are pretty common place in commercial. You are going to run into these type of folks. How do you deal with them? I just shared with you how to deal with them.
The Distressed Local Owner
This guy is local, but he's kind of checked out. Here's how you deal with a distressed local owner. What I want you to do is beat them up on price first, so before you introduce creative financing, I need you to beat them up on the price first to soften them up a little. This may take awhile, some finesse, but beat them up on price first. Remember, they are motivated.
Then, next, I need you to get a fresh perspective on the property and the market from another local property manager. Many of you are beginners. Don't make conclusions on the property without consulting an expert, a market expert like a property manager. A property manager can tell you what the vacancies are, what the rents are, the plan you want to do to improve the property. You need someone with experience to come in agreement with you as to how and if this can work. If you don't have a coach, a mentor, the next best thing is to get a property manager. A property manager can't help you structure deals like a mentor could, but they could help you look at the market trends, which are very important when dealing with distressed local owners. Beat them up first, soften them up a little, and then get a fresh perspective from a local expert, how the property can really perform.
The Life Issue Owner
Remember, these guys have personal circumstances going in life. This property is not a priority for them. Here's how you deal with those guys. You may have one or two shots to make the sale, so do your homework as best you can when making offers.
Be prepared to write the offer. Be prepared to write the sales contract immediately after the first phone call if necessary. Letters of intent are useless with these guys. We need to get the property under contract now.
Lastly, promise to them to make the sales process as smooth as possible. You know why? So they can focus on their life issue. You see the mindset here? It's not about you. You're putting the focus onto them to get what you want.
Three Seller Situations That You Should Avoid
1. If you come across a seller who is far under water, meaning high debt, high mortgage and low property value, stay away from these guys. It may take too long to recapture the loss equity or build it up. It may take so long that by the time your creative financing expires years from now, there still may be no equity there, so avoid sellers that are far under water with high debt and low property value.
2. As a beginner, I want you to avoid seller's properties that are fully vacant, and that's because properties that are a hundred percent fully vacant most likely need an extensive amount of work, and money, and skill to get it in workable shape for tenants to occupy it. I don't recommend this if you are a beginner. There's too many moving pieces, too much at risk here. If you want to do a vacant property, start with something very, very, very small, and have lots of cash available for when things go wrong. Not IF things go wrong, WHEN they go wrong. It's just the nature of the business. You need to scale.
3. The third seller situation I want you to avoid is if the seller's court proceedings for foreclosure have begun, because, by the time a property has entered court proceedings, this gets too risky, because a seller has lost too much control of the property, and this puts you in too much of a shaky ownership position, so I would pass on this seller.