One of the big items in the business and investing section of the news has been distressed assets. Currently, MISC, a shipping company headquartered in Malaysia, announced that it is seeking distressed assets. Bloomberg reported that KKR, a private equity firm based in New York, was interested in distressed assets. If you are interested investing in this opportunity, learn more about what they are and how to determine if the asset is even worth your time.
What Is It?
An asset is something of value, thus, a distressed asset is one that has lost its value. For example, in commercial real estate, there might be a piece of land which has experienced financial trouble. The owner might be willing to sell at a greatly reduced price to cut their losses. The buyer has to determine if the value of an asset is worth the risk against the asking price. Many investors use a method called “D.O.V.” (pronounced like dove). It’s important to find all the problems with the asset before making that investment.
D is for Debt Searching
It’s crucial to verify all encumbrances on the asset before signing any paperwork. Buyers must be diligent about their investment. On distressed assets, one of the biggest problems is other creditors who have a claim to the property. Search for actual liens on the property or equipment. These types of debts are easy to find. Don’t stop there. Investors must also look into “debt affecting equity in a company.” Unsecured debt is often the most difficult to find, but it could affect the status of an asset of the business.
O is for Ownership
There are multiple stories in the news about renters and home buyers being swindled by people who don’t really own the property. The potential for this happening with commercial real estate may seem much lower, but it is possible. Investors must determine ownership of the property whether it’s a personally-owned asset or business-owned. This is most easily determined through a lien search or title search. Following that, check the tax records or get a bill of sale from the seller. Do not depend on the word of the seller that they have the right to handle the transaction.
V is for Value
Every asset has an intrinsic value, but generally, the value of something is the amount most people will pay for it. When there isn’t a market for a particular asset, it can be difficult to set a valuation. Distressed assets, especially those in commercial real estate, have the market, but it can be difficult to completely price a piece of property without understanding many different elements:
- Environmental issues
- Improvements to the property
- Relevant codes: local, state, and federal
- Restrictions on the location
- Use of the property
Other Investment Concerns
Once the property has been vetted, the sale of the distressed asset might still be held up if a third party decides to interfere with it because of fraud, bankruptcy, or another claim. This is why sellers must do their due diligence before making an investment.