What is Distressed Debt Investing?

Many people may ask what exactly is "distressed debt" investing? In its most basic level, it is a form of deep value investing. Basically non-performing debt thats current value is considerably less then what the borrower owes, or what it was valued at during the time of financing. The distressed debt I'm talking about here in particular is commercial real estate collateralized debt.

Similar to all other asset classes and investment strategies, purchasing distressed debt is a great idea when it can be done at prices that are below intrinsic value. Given the current economic climate and real estate market, it's very possible to access highly outstanding returns through bargain-basement purchases. Success with investing in distressed debt is a matter of opportunity and execution. Many people see the given opportunity, but very few know how to properly execute this investment strategy. There are a lot of things to consider when looking at distressed loans for sale.

• Are there any judgments on the property?
• Why is this property under water?
• What caused the real estate to be depressed?
• What is the maturity date of the loan?
• Who is the borrower(s), etc.
• What is the current status of the collateral, (leased out, cash flowing, vacant,)

A lot of due diligence goes into analyzing these loans. Just because you can pick up a loan at 33 cents on the dollar doesn't mean it's necessarily a wise investment. There are a supply of bargains out there, but you must know what you are doing before you dive into them and expect to make a quick fortune.

So where did all this distressed debt come from? Well basically it was created through unwise extension of credit and turned into actual supply when conditions deteriorated. Now banks have a surplus of non-performing notes on their books and they want to get rid of them. The New York Post pointed out that debt backed commercial real estate in the US has hit $3.5 trillion. About $1.4 trillion in real estate debt is set to mature over the next four years. Now more than ever there is more pressure to sell debt at a deeper discount rate.

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