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Avoid failing in a falling market: tips for acquiring distressed apartment properties.

WHILE CREDIT MARKET DISARRAY has inhibited apartment communities acquisition nationally, opportunities to acquire distressed multifamily housing communities abound. Prospective buyers should take protective measures to guard against pitfalls inherent in these purchases. Following are five principles to consider:

1. Start Now. A targeted apartment property currently generating negative cash flow is likely to worsen with time, making its rehabilitation more challenging. An expedited deal timeline will decrease the likelihood of complications from neglect by the existing owner.

2. Contact the Lender. The existing owner's lender is an essential party in the acquisition of a distressed property. Lenders, of course, are not in the business of operating properties and may be willing to negotiate a payoff, payable out of the purchase price, which is less than the outstanding debt to prevent an REO (real-estate owned) situation, in which the property goes back to the mortgage company.

3. Be Flexible. Although many multifamily housing owners are accustomed to owning and managing properties through wholly owned subsidiaries, the changing economic climate necessitates consideration of alternate ownership arrangements. A joint venture with another interested purchaser can be a sensible solution. Those reluctant to buy an apartment community because of price might consider buying the distressed debt itself to get an interest in that particular asset.

4. Be Thorough. It is essential that the agreement of sale obligate the seller to deliver the title free of all liens, as a distressed property owner's failure to pay contractors and suppliers may result in mechanics liens on the property. The buyer should contact his or her own contractors prior to closing to ensure the adequacy of repair budgets.

5. Protect Post-Closing Rights. It always is important for a buyer to ensure that the seller will be able to pay damages for any breach of representations and warranties discovered post-closing, but even more so when the seller is in financial straits. Bear in mind that many states have statutory mechanisms for recovering against dissolved entities.

Obviously, steps taken in acquiring distressed properties or debt are fact-dependent and vary from deal to deal. Competent legal, tax and engineering guidance should be obtained by any prospective buyer of a distressed multifamily housing community.

Source: Andrew Maguire. McCausland, Keen & Buckman,
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Title Annotation:Management Insider
Date:Dec 1, 2008
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