Without benefiting from the misfortune of others
By Susan Finch
Homeowners aren’t the only ones who take a hit during waves of economic uncertainty. Business owners face commercial foreclosure as credit restrictions tighten and fewer investors enter the market to acquire new property. While foreclosures can mean closing up shop for some, others find opportunity in launching and expanding their business. But how can chiropractors benefit from foreclosures without taking advantage of others’ misfortunes?
It’s an unavoidable fact that most foreclosures are the result of a financial or personal misfortune. But as Gibby Thrift of Phoenix Atlanta Partners points out, “The buyer may feel bad for the previous owner or current distressed owner, but the reason for the foreclosure or short sale wasn’t caused by the buyer.” Expanding business too quickly or increasing overhead before turning a profit can lead to skyrocketing debt and bank repossession of both equipment and property. However, not all business owners closing their doors view foreclosure as a downfall or even feel its sting. While the loss of a business can mean the loss of a dream, it can also offer much needed relief from crippling debts and acute stress.
Business owners might also walk away from their office space as property values slide and depreciate past the point of remaining profitable. They might consider their loss and subsequent foreclosure as a sensible business strategy with a means to start fresh. Those finally untangled from a costly mortgage can look to more profitable business locations and reduce their expenses instead of being anchored to a dead-end location.
Not all foreclosures are the result of shutting down an individual business. Some investors exclusively purchase commercial properties to turn around and lease for profit. As the recession took hold, the U.S. office vacancy rate hit its highest level in 16 years in 2010 leaving many commercial property owners holding the bag on empty space. Investors without renters look to foreclosures to shed unprofitable properties and move on to more financially sound opportunities.
Benefiting From a Foreclosure
Getting out from under crushing debt, ridding yourself of an unprofitable property and business location and relaunching your practice are just some of the perks of foreclosures. But while business owners may feel relief from a foreclosure, existing property tenants could face eviction.
Leases generally fall under a rule of “first in time, first in right,” indicating the lease is null and void if the lender finalized the loan before a lease was ever signed. However, some leases include tenant clauses and protections for such situations. Chiropractors can benefit by diversifying their income and tapping into the rental market with existing tenants. Helping lessees avoid eviction can also ease the personal struggle one may feel in taking advantage of a foreclosure.
Picking up office space at a discount isn’t the only way to benefit from a foreclosure. Chiropractic equipment and office furniture are often funded through bank loans and third party lenders. When a business topples under financial pressure, loan financed goods are also up for grabs through auctions and other sales. Be sure to research used equipment to determine the going market price.
Foreclosures can also provide the ability to jump financial hurdles and open or expand a practice more quickly. But the shortcut past paying full price isn’t always an easy process. Potential property buyers should acquire a real estate agent experienced in foreclosures who can navigate the process and determine if the sale will actually yield a worthwhile discount. For those attending foreclosure auctions, do your homework in advance, as the properties are sold as-is and cash payment is usually necessary.
Don’t practice “out of sight, out of mind” with your financial health. Preparing for a financially stable future is the lifeblood of any good business, and a foreclosure can mean a hit to your credit and ability to secure future loans. Use a few key tips to stay above water and know what to do if you’re in danger of falling behind.
Leaning on loans to purchase new equipment and office space is a tempting and often necessary step. But cash reserves can mean the difference between struggling and closing down for good. Schedule a regular block of time each month to prepare your cash flow projections for the upcoming week, month and quarter. Knowing where your cash flow stands can alert chiropractors of upcoming financial danger and buy some time to put a recovery plan in place. David Cinealis of Harry Norman, Relators points out that “it can be years before a new business can turn a profit.”
Ensure Prompt Payment
Chiropractors have steadily drifted from cash payments to accepting insurance and third-party payers over the years. Ask cash-paying clients to make a deposit at the time they book an appointment or offer a discount for rapid payment. Weigh the financial benefits of hiring someone dedicated to billing, collections and coding to streamline the payment process and free up cash reserves faster.
Talk To Your Bank
Some banks are willing to talk with homeowners and business owners alike to avoid foreclosures. Ask about a loan modification, extending your loan over a long period of time or switching from an adjustable rate mortgage to a fixed-rate. But don’t be surprised if the bank is less than eager to throw out a life raft. In some cases, banks want to keep foreclosure debt off their books. But in others, a foreclosure may actually benefit the bank, which can then turn around and resell the property while keeping your investment. Banks may also find foreclosing and reselling less costly and time-consuming than negotiating on an existing mortgage.
Take On a Tenant
Pick up a tenant to help absorb the monthly expenses of your practice. If your property does not include more than one office, consider sharing your own space. Chiropractors who aren’t enthusiastic about splitting space with the competition can open their doors to massage and physical therapists, thus simultaneously expanding their menu of services to attract new clients. Hire a commercial property manager if you’re leery of donning the landlord hat yourself.
Buying during a peak real estate season followed by a dip in the economy may mean you’ll never recoup the value of your property. Or you may find your once thriving location has dried up as surrounding businesses close shop and leave the area deserted. Short sales can disregard the amount owed and attempt to sell the property at the current market value.
The lender must approve the short sale in advance, and this can involve a hurry-up-and-wait game for an answer. Properties with more than one mortgage with different banks will need to get the short sale approved by both lenders. The current owner may also be required to provide financial documentation that he can no longer make monthly payments. Short sales can be complicated, but are usually less so than a foreclosure or declaring bankruptcy.
Wait For Repossession
Loans on business-related equipment usually work similar to a car loan. A lender has the right to repossess the equipment if payment is not made. It’s often a last resort for business owners, and you won’t know when repossession may occur, thus disrupting your business. However, a lender is generally prohibited from entering a place of business without a court order.
Despite repossession being an extreme measure and a form of foreclosure, business owners may feel financial relief from their debt burdens and subsequently save their property from foreclosure. Of course, an existing financial plan is a necessary step to acquire new equipment. Those with adequate reserves or outside sources of income can now rent or purchase used equipment to lessen overhead costs. Check the terms of your loan in advance, as such options may not be legally feasible.
Declaring bankruptcy could save your business, but should only be considered after exhausting all other options. All creditors and lenders are required to cease collection activities during the bankruptcy process. Ultimately, you may be able to start fresh and continue your business without the burden of strangling debt. However, lenders will sometimes go to court to secure the right to proceed with a foreclosure if you’re behind on payments and delay the foreclosure for weeks or months.
The bankruptcy process may also involve control of your assets, a restructuring of outstanding bills, and enforced repayment on debts, like taxes, that cannot be dismissed. Foreclosure may ultimately make more financial sense in the long run than bankruptcy, and your financial burden may not offer enough relief if your debts are reconsolidated and still owed to lenders. Commercial bankruptcy is a complicated process and should be handled by an experienced attorney.
Remember that each state and lender has different rules for short sales, bankruptcy and foreclosure. It’s crucial to tap the resources of a seasoned expert to ensure all debts are ultimately vacated during the process. And it’s a far simpler process to work on a long-term financial plan to keep your business afloat than considering the alternatives. In some cases, foreclosure could offer the financial freedom to move on to the next phase of your business. Consult an experienced real estate agent or attorney to determine the best course of action for your business.