The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
While many real estate transactions will be by contract purchase, it’s not your only option. You may decide to buy another person’s bad debt if they’ve defaulted on their loan and can’t refinance to save their investment. In these instances, you could get real estate at 75% or what the leverage was, or even less if you’re able to buy the debt at a discount.
Richard Wilson: What is the number one counterintuitive insight on commercial property investing that you could share with listeners?
Robert Borris: Well, there’s a couple. One is there are other ways to buy real estate other than by contract purchase. You can buy somebody’s bad debt. If you go to a bank, banks when things get bad I think there’s going to be some of that floating around in this period while we’re dealing with this covid situation, where you can buy bad debt. Debt that the borrower has defaulted, or they can’t get it refinanced, or whatever, you need to understand the reason why the debt is bad. First of all, if you’re buying bad debt, and the lender and the borrower is already in default, you’re basically buying the real estate at 75% or whatever the leverage was. That’s part one, and part two if you buy the debt at a discount, you’re even getting a better deal and sometimes all that’s needed is just a new basis. You can overpay, unfortunately, in the recession I had this problem. I didn’t overpay, but because values went down so much so quickly, in effect I did overpay. And that happens. Not every deal works.
Richard: Right, okay.