How to buy distressed commercial property for less than is owed.

[David Gore]

Hello,
I just successfully purchased a 13,000sf office building in October of 2018 using owner financing with only 10% down. The property was positive cash flowing since the day I bought it. I've made some renovations and have the property fully leased out for the next 3 years.

Now, I have my eyes on another nearby property. It is also a commercial property, but this one has been vacant for at least a year and has been partially damaged by fire. The property is not listed for sale and is not in foreclosure, but I contacted the out-of-state owners, and they are motivated to sell. However, they owe the bank approximately 4 or 5 times what the property is currently worth. Also, from a public records search, I can see that the bank has filed a law suit against the owners for nonpayment of their debt.

My questions are:

1. What is the best way to approach this deal? Should I submit a purchase agreement to the owners for what I feel is a fair price, even if it is much lower than what they owe the bank?
2. How likely is the bank to agree to the deal?
3. How concerned should I be about the pending law suit?
4. I don't have enough cash to buy this property outright, and the distressed state of the property rules out conventional financing. I'm hoping I can refinance the office building that I just purchased through a conventional lender and cash out enough to purchase this other property. However, I've only had the property for a couple months, so there isn't a long financial track record. How likely am I to get a refi on this property? I purchased it for $450k with $45k down. I currently owe $395k and would need to refinance approximately $500k. The estimated NOI and cap rate value the property at around $750k.
5. Are there any other creative financing strategies that I could employ to acquire this property? 

Thank you for your advice!
-David

[Nii Okai]

@David Gore

Yes David, I see 2 approaches -

1st scenario. Try and locate the owner of the property. Yes, get the owner to sign the PSA at the as is value, approach the bank as the potential buyer and would want the bank to finance the works - (you will need to get a full estimate of works to be done, comparables, and income projections etc.) They may be relieved to see something going on and probably will be happy to work with you. You never know until you ask.

2nd scenario - As of now, before the bank can do anything with you on this property, the bank must first of all foreclose on the property to take over ownership - it is only then that they can talk with you - when this is done, it will be a little more expensive because of the attorney fees which will be added. Then as an REO, the likelywood that they will sell it to you without any serious money out of pocket may be a challenge. Who knows, maybe the bank will be willing to sell it off very cheap, The only way to know will be to go and talk to somebody at the bank to know what their plans are.