Foreclosing Lender: Understand the Condition of the Property

In a foreclosure, a workout, or a short sale a clear understanding of the condition of the building in question is typically more central to the transaction than in a normal real estate sale.

For the past fifteen years I have done Property Condition Assessments (PCA) on commercial real estate for lenders and buyers. In these transactions my mission was to find all of the property’s physical deficiencies and to project the capital improvement budget for the next 12 years. However, these transactions were typically a done deal by the time the principals hired me. Of course, every so often I would find a structural problem or a major water intrusion problem that might derail the deal, but in most instances my PCA report was used to justify the decision that was already made.

Foreclosures are different. First, foreclosure assets are far more likely to have significant deferred maintenance issues or even just out right waste. My clients have to deal with a lot of issues on the way into a transaction that my PCA illuminates. Lenders must mark to market and most agree that the cost of immediate repairs and necessary capital improvements must be accounted for. Also, lenders must immediately try to sell the asset, often for a loss. For a special assets officer to sell an asset for a loss he or she must justify the transaction internally and the condition of the asset is primary to that decision.

Finally, the pre-foreclosure PCA typically doubles as a pre-sale PCA once the lender takes the asset to market. Buyers of foreclosure will negotiate hard and try to get the asset for rock bottom prices. An accurate PCA protects a lender against an overly aggressive buyer, exaggerating the physical deficiencies.

Overall the foreclosure and eventual sale of an asset is a far more complicated set of transactions than a new loan and a clear understanding of the asset will pay.