Properties falling into distress are not new. Looking back to the 2008 recession, there were more than 3.1 million foreclosure filings in 2008, up 81% from 2007, and up 225% from 2006. While we don’t quite know where the current global pandemic and ensuing economic crisis will lead, the U.S. unemployment rate stands at 10.2% as of August 20, 2020. Until these unhealthy conditions improve, we can expect to see more stress on property owners.
What is a distressed property?
A property becomes distressed when its valuation falls below, or is at risk of falling below, current market value. This is usually caused by financial distress or unexpected market conditions. Properties can also become distressed when the owner fails to meet mortgage and/or tax obligations, and the lender decides to move ahead with a property foreclosure.
There are many reasons why a property may become distressed, including:
- Short sales – a situation when the owner wants to be relieved of mortgage obligations and the lender agrees to accept less than the amount owed on the property to settle the debt, often as a result of financial strain from a divorce, an estate sale, relocation or simply a shortage of funds
- Auction – again, as lenders are usually not in the real estate business, auctions are one way to find buyers for foreclosed properties quickly
- Neglect – if a property has fallen into disrepair, the property owner may prefer to sell it below market value, rather than make needed repairs
- Poor property management – in some cases, an incompetent property manager can cause a property to become distressed
Many real estate managers will be forced to deal with distressed property for the current owner, a lender due to foreclosure situations, as a receiver, or for investors seeking to buy distressed properties and turn them around for a profit when the economy rebounds. Managing distressed properties can be among the greatest management challenges that real estate managers will encounter. In most cases, the cause of distress is temporary and can be remedied.
The impact of recession on distressed properties
The real estate market was deeply impacted by the 2008 recession, as many Americans became unemployed or held mortgage payments greater than their incomes could sustain. COVID-19, however, paints a very different picture. Not only have many Americans suddenly lost their jobs, but the businesses that support vital urban areas have suffered. As many of those who remain employed continue to work remotely, what becomes of the commercial tenants in those buildings – restaurants, retailers, barbers, spas, salons, gyms and more? In addition, with the expiration of federal enhanced unemployment benefits, with no new program in place, the multi-family sector is bracing for a rental blow.
Property managers and distressed properties
Turning around a distressed asset requires a comprehensive understanding of how to evaluate and resolve key issues and challenges unique to each asset. There are as many variables in managing a distressed property as there are distressed properties. Property managers need to work with building owners to identify when a property is at risk of becoming distressed, and develop a plan to mitigate those risks. It’s important to continue to maximize the value of the property while managing operating and maintenance costs.
When the real estate market feels the pressure of any economic downturn, property managers skilled in managing distressed properties play an important role in the eventual outcome for owners, residents, tenants, vendors, and staff. To help develop a comprehensive understanding of each asset’s unique challenges, and how to resolve key issues, IREM offers a new certificate program in managing distressed properties.
Source: “Outlook for Distressed Properties Requires Property Management Expertise“