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There Is A Surge in Distress Sales of Real Estate

Canada’s commercial and industrial real estate market is evolving and not in a good way. One particularly striking trend catches my attention: the surge in distressed real estate sales. In the first half of 2024, a whopping $803 million in distressed commercial real estate sales were recorded. This figure is not just significant; it’s more than double the amount seen during the previous year’s period.

Allow me to share some insights on what’s driving this increase in the distress sale of commercial, industrial and development real estate, along with my experiences observing these changes first-hand.

What qualifies as Distressed Sale Transactions?

As a licensed insolvency trustee, I’ve seen a significant increase in distressed real estate sales in Canada. But what exactly is a distressed sale? In simple terms, a distressed sale is when a property is sold, often at a lower price than the appraised value, due to financial difficulties or other urgent circumstances.

When a property owner is struggling to make mortgage payments or is facing financial hardship, they might need to sell their property quickly to avoid a mortgage lender or other secured creditor enforcement action through a power of sale home or property action. Alternatively, the secured creditor may have appointed a receiver to sell the property. The market will recognize this as a distress sale.

Reasons for Distress Sales

There are various reasons for distress sales.

Homeowners may face financial challenges due to various factors, including job loss, medical emergencies, or divorce. Additionally, over-leveraging can occur when property owners incur excessive debt, making it difficult for them to fulfill their mortgage obligations and making it more likely to default under the mortgage agreement. Market fluctuations, particularly a sudden decline in property values, often exacerbate these issues, compelling owners to sell their properties in an unfavourable market.

As a licensed insolvency trustee, I have witnessed many of these common situations and the significant effects that financial difficulties can have on property owners. It is crucial for individuals experiencing such challenges to seek professional guidance. Whether considering a distressed sale or a traditional sale, I am here to provide the necessary support and advice.

Advantages of Buying Distress Sale Properties

Taking advantage of distressed property sales can lead to a good deal. But what are the benefits of buying a distressed property? Here are some of the advantages to consider:

1. Lower Purchase Price

The most obvious advantage of buying a distressed property is the lower purchase price. When a property is sold in a distress sale, the seller will accept a lower price to avoid further financial losses or to get out of a loan gone bad, especially when the lender takes into account the time value of money.

2. Opportunity to Improve and Flip

Distressed properties often need some work, which can be a great opportunity for investors who are looking to renovate and flip the property for a profit. With a lower purchase price, you can invest in renovations and still make a profit when you sell the property.

3. Potential for Higher Rental Income

If you’re looking to rent out the property, a distressed property can be a great opportunity. With a lower purchase price, you can offer a more competitive rent and attract more tenants. Plus, the property may need some work, which can be a great opportunity to increase the property’s value and rental income.

4. Less Competition

Under a distress sale, there could be less competition from other buyers. This can be a huge advantage, especially in a hot real estate market where multiple offers are common. With less competition, you may have a better chance of getting the property at a price that works for you.

5. Opportunity for Negotiation

In situations where a property is being sold under distress, there often exists a greater potential for price negotiation. This presents an advantageous opportunity for buyers to secure a more favourable deal on the property. As a buyer, you may be able to negotiate a reduced purchase price or potentially persuade the seller to include additional benefits, such as offering below-market-rate financing.

6. Potential for Long-Term Appreciation

Although the property may require some renovations, it presents a significant opportunity for long-term investment. With a lower acquisition cost, you can maintain ownership of the property over an extended period and benefit from its potential appreciation in value.

7. Opportunity to Generate Equity

Investing in a distressed property presents a unique opportunity to rapidly build equity through renovations that enhance the property’s value. This approach can serve as an effective strategy for wealth accumulation and contribute to long-term financial stability.

Risks Associated with Distress Sales

Acquiring a distressed property can present a valuable investment opportunity; however, it is crucial to remain cognizant of the potential risks involved in such transactions. As a licensed insolvency trustee, I have observed numerous individuals who were unprepared for the challenges that accompany the purchase of distressed properties. Below are several key risks to consider:

• Hidden Defects

When a property is sold in distress, it often arises out of a situation where the owner has financial problems. This can mean that they may not have had the time or resources to fix any defects or issues with the property. In a secured creditor enforcement action, the mortgagee or receiver may not even be aware of the hidden defects. As a buyer, you may be taking on the risk of hidden defects, such as structural problems, water damage, or pest infestations. So due diligence is very important whenever looking to be a buyer from a distress sale situation.

• Unpaid Taxes and Liens

When a property owner is struggling to make payments, they may not have paid their property taxes or other bills on time. This can result in unpaid taxes and liens on the property, which can be a major headache for the buyer. As a buyer, you may be responsible for paying off these debts, which can add up quickly. Legal due diligence is necessary to identify such additional costs before making your offer to purchase the distress sale property

• Unreliable Seller

When a property owner is selling in distress, they may not be in the best position to provide accurate information about the property. As a buyer, you may not be able to rely on the seller’s representations about the property’s condition, and certainly not any warranties they may give. You must do your due diligence to uncover any potential issues.

• Increased Maintenance Expenditures

Distressed properties frequently require significant repairs and renovations, which can prove to be both costly and time-intensive. As a prospective buyer, it is essential to allocate a budget for these potential expenses, as they can accumulate rapidly. It is advisable to factor these costs into your purchasing analysis.

• Considerations Regarding Environmental Hazards

Properties constructed before modern safety regulations may present various environmental hazards, including asbestos, lead-based paint, and mold. The remediation of these issues can be expensive and complex. As a potential buyer, it is essential to recognize that assuming ownership of such properties may involve significant risks that could affect both your health and the overall value of the property. Conducting thorough environmental due diligence is imperative to fully assess any potential exposure associated with acquiring a property that may be environmentally compromised.

Overview of Sales Statistics in Canada

The meteoric rise in distressed asset sales reflects a growing concern among developers and investors alike. According to recent reports from Colliers International, there were 137 construction and real estate receiverships in the first half of 2024 alone—an average of 23 per month! It’s evident that the landscape isn’t just shifting; it’s undergoing a fundamental transformation, largely influenced by soaring borrowing costs and mounting pressure on real estate companies to meet their financial obligations.

This significant uptick highlights a market in distress, which often paves the path for investors looking to capitalize on these properties. However, the challenge remains: buyers are often deterred by what they perceive as inflated asking prices. There seems to be a notable mismatch currently between what sellers believe their assets are worth and what buyers are willing to pay, making negotiations tough.

Factors Contributing to Increased Distressed Property Listings

Several factors can be pointed out as contributors to this rising trend in distressed property listings:

• Bankruptcy and Receiverships: A growing number of developers are filing for bankruptcy protection, which has led financial institutions to ultimately assert more control over projects, often pushing them into receivership.
• High Borrowing Costs: Properties that once seemed financially viable are becoming liabilities as interest rates climb. Many builders and owners are simply unable to keep up with their loan repayments.
• Market Sentiment: Certain observers note that buyers are continuously looking for opportunities, akin to ‘smelling blood in the water.’ There’s a hunger for good deals, but sellers remain reluctant to accept prices that align with current market realities.

This captures the essence of the predicament. Sellers, often stuck in bygone appraisals, are left with unrealistic price expectations that serve as barriers to successful transactions.

Distress Sale Anecdotes

I am involved in distress sales of real estate acting as both a licensed insolvency trustee and in estate trustee assignments. Building defects, increasing vacancies and abandoned developments are all part of the distressed property package. Property management signs and bailiff notices dot the landscape more these days.

My conversations with industry insiders bring to light the escalating frequency of lenders reaching out for guidance amid this turmoil. Mike Czestochowski of CBRE Group, mentioned that inquiries about distressed properties have surged. This points to a market that’s rapidly changing and creating a growing demand for seasoned expertise.

Regrettably, a significant majority of these distressed properties are difficult to position or market effectively due to the previously mentioned pricing disconnect. For instance, I learned from a broker that one distressed project in Toronto was circulated among 6,217 potential buyers, yet only one formal offer materialized, drastically lower than the expected price.

The Overall Distress Sale Market Landscape

Brokers are feeling the heat as they work harder to connect with potential buyers, canvassing multiple avenues to drive interest in distressed assets. The reality is that while the market is presenting a myriad of buying opportunities, many properties fail to meet the essential criteria that savvy investors seek.

To add context, many developers, including Minto Group, are cautious about their acquisitions. They are inundated with pitches for distress sale of properties but tend to pass because they prioritize quality and clear project approvals over taking control of someone else’s incomplete vision. Options like unfinished condo projects or properties deep in the throes of receivership aren’t what they want in their pipeline unless the opportunity is extraordinarily favourable.

The current pivot in market dynamics emphasizes a need for alignment between buyer and seller expectations. With owners and lenders slow to reduce prices, many may risk letting valuable assets languish on the market as they hold out for higher valuations, further stalling transactions. The first half of 2024 has showcased the pitfalls of an out-of-sync market where both sides must adapt to traverse these choppy waters effectively.

As I continue to observe this evolving market, it’s clear the distress sale portion of the real estate market represents both a challenge and an opportunity. Whether this trend will lead to new heights or further declines remains to be seen, but it certainly sets the stage for an intriguing chapter ahead in Canada’s commercial real estate landscape.

Distress Sale: Disconnect Between Buyer and Seller Expectations

In the volatile world of real estate, I’ve personally observed a troubling trend that seems to plague negotiations: the stark disconnect between what buyers believe what current fair market value is and what sellers expect to receive for their properties. This mismatch often leads to frustration on both sides and does not allow for a true market price to be established, especially in a market that is continuously shifting.

Many buyers today are on the hunt for deep discounts. It’s almost as if they’re wearing superhero capes, eager to swoop in on properties marketed as distressed. On the flip side, asset owner sellers are often clinging to outdated evaluations of their properties, relying heavily on appraisals that may be anywhere from one to three years old – an eternity in a rapidly changing market. This disconnect can result in properties languishing unsold for extended periods, as buyers and sellers talk past each other while sitting at the negotiation table.

Reflecting on my own experiences in property negotiations during challenging market conditions drives home just how significant this disconnect can be. There was a time when I was involved in a tough sale where the owner invested significantly in a commercial property.

Despite the evident market shifts, they, and the 2nd and 3rd mortgagees who ranked after my 1st mortgagee client, were resolutely convinced that the valuation from their last appraisal two years prior was still valid.

Meanwhile, only one potential buyer surfaced, who was desperate to squeeze every dollar, and was offering an amount drastically below the asking price representing two-thirds of our appraised value 6 months earlier! It was like two trains on different tracks that weren’t going to meet anytime soon.

Thankfully, we were a court-appointed receiver. We presented our evidence as to the lengthy and well-advertised sales process we undertook and the only party who was willing to purchase the property. The 1st mortgagee supported the sale, even though it was going to suffer a shortfall.

The 2nd and 3rd mortgagees opposed, but had no evidence to offer that their position was correct. They also were not prepared to purchase the property or otherwise pay out the 1st mortgage. The court approved our application and we completed the sale of the property.

Distress Sale: The Statistics Speak Volumes

Data from reputable sources paints a clear picture of this disconnect. For instance, statistics reveal that in the first 6 months of 2024, there is an alarming average of 22 real estate receiverships each month across Canada, showcasing the number of projects being forced into financial distress due to market pressures.

Month	Number of Receiverships
January	22
February	20
March	24
April	25
May	23
June	19

What does this mean for buyers? It suggests a competitive landscape where buyers need to act quickly—but it also reveals a passive attitude from sellers who are not adapting to current realities. The bruising truth is that many of these listings may never find a buyer if the asset owner sellers maintain their lofty ideals. In some cases, it the reality of today’s real estate market may mean that the real current market value will mean owners are selling at loss, which they are trying desperately not to do.

“Sellers are still clinging on to these appraisals from five years ago with unrealistic valuations of their property.” – Jeremiah Shamess, Colliers Private Capital Investment Group

Distress Sale: Real Stories and Real Struggles

In an anecdote that stays with me, I am aware of a party who owned a struggling retail space. After investing considerably in its renovation, they insisted on a selling price from an appraisal on a post-renovation basis. Since the market had shifted, buyers were more cautious.

The property lingered on the market while potential buyers flitted away, citing inflated pricing as their reason for walking. After a few months, reality hit—the price had to drop, and a stark realization set in – without compromise, the owner would lose the opportunity to sell the property.

This disconnect doesn’t just stop at the financial implications; it also has emotional repercussions. Buyers often feel a sense of despair finding properties that pique their interest only to discover the asking price is out of reach and out of touch with today’s reality. Conversely, sellers face anxiety over their investments, fearing they must let go of something they believe is worth more. It’s a painful dance where no one wants to take the first step toward compromise.

The Bigger Distress Sale Picture

When I turn my attention to the broader landscape, I see a trend where defaults are expected to increase, leading to even more troubled properties hitting the market. The environment is ripe for change, yet if buyers seek deals while sellers persist with unrealistic expectations, we may continue to see more properties fall into this “no man’s land.”

From my perspective, the only way to foster meaningful negotiations in this climate is to cultivate a greater willingness on both sides to communicate openly about their expectations. While buyers need to come to terms with market realities, sellers must also reevaluate their prices based on current valuations rather than past appraisals.

In a nutshell, both parties must strive to meet somewhere in the middle, creating a healthier negotiating environment that acknowledges the shifting market dynamics. From personal experience, I can assert that these discussions, though challenging, often lead to more fruitful outcomes when both parties approach the table with a willingness to adjust and accommodate.

Looking Ahead: Trends and Predictions for Distress Sale Properties

As I look at the current landscape of distressed properties, it’s hard to ignore the shifting tides in the real estate market. With an increasing number of distressed commercial properties available and a rise in defaults, especially in Canada, potential buyers might be feeling a mix of excitement and uncertainty. The conversation surrounding the future trends of distressed property sales feels even more relevant now as we head into the latter half of 2024 and beyond.

During the first half of 2024 alone, sales of distressed commercial properties reached an impressive $803 million, doubling the figures from the previous year. This surge perhaps signifies that more sellers are willing to part with their troubled assets as borrowing conditions tighten and financial pressures rise. I can’t help but feel there’s an underlying opportunity here for savvy investors.

The divergence in buyer and seller expectations could lead to stagnation in transactions unless both parties converge on a mutual understanding of the property’s value. I’ve seen this play out in countless situations.

For instance, I know of one project that was marketed to over 6,000 potential buyers, but despite interest, only one valid offer materialized, significantly below the lender’s expected price. This scenario exemplifies the challenges that buyers face in securing such assets at prices that reflect current market realities.

Understanding Potential Distress Sale Opportunities

I suspect there will be an uptick in real estate receiverships as lenders increasingly lose confidence and may push projects into receivership as they tighten their grip on risk. I can only imagine how tough this transition must be for developers who suddenly find their projects in jeopardy.

What fascinates me about this situation is the potential for opportunity amidst what seems like chaos. With the number of distressed properties likely to increase, those with a keen eye for undervalued assets may find hidden gems.

I envision a hypothetical investor who sees value where others see risk. They purchase a property, perhaps a distressed condo or an unfinished building, and invest the time and resources to revitalize it. This savvy move could pay off tremendously down the line.

Keys to Success in Distressed Property Investment

For those interested in venturing into the world of distressed properties, adopting a well-informed investment strategy is crucial. Here are some elements I believe could serve as essential guidelines:

1. Research Extensively: Understanding current market conditions and trends is vital. Knowledge about the region’s economic health can inform decisions on whether to invest in a particular property type.
2. Engage with Experts: Networking with real estate professionals and restructuring experts can offer insights into what to expect as the market evolves.
3. Be Flexible: The ability to adapt your strategy in response to changing conditions could make a significant difference in your success.
4. Value Evaluation: Develop a clear understanding of realistic valuations. Investing in properties at reasonable prices, even if they require renovation or revitalization, can mitigate risk.

As the market adjusts, those willing to research, strategize, and maintain a clear vision may find themselves on the winning side. It’s an exhilarating time in the real estate world, filled with potential opportunities, if one knows where to look.

In summary, the future of distressed property sales appears robust yet challenging. Increased receiverships and shifting market dynamics promise a highly variable landscape. As a prospective investor, understanding these trends and thoughtfully navigating the market can lead to rewarding opportunities.

Distress Sale Conclusion

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The information provided in this Brandon’s Blog is intended for educational purposes only. It is not intended to constitute legal, financial, or professional advice. Readers are encouraged to seek professional advice regarding their specific situations. The content of this Brandon’s Blog should not be relied upon as a substitute for professional guidance or consultation. The author, Ira Smith Trustee & Receiver Inc. as well as any contributors to this Brandon’s Blog, do not assume any liability for any loss or damage resulting from reliance on the information provided herein.