Holding Costs In The Current Commercial Market

Investors often under estimate the true cost of holding non productive real estate in their portfolio. This is especially true in a downward cycle when true value is quickly slipping away over time despite any effort the investor may be taking to preserve value. Like the other numbers we deal with everyday in our lives; our daily caloric intake, cholesterol level or the true gas mileage of our vehicles; we tend to discount negative indicators. Real Estate investors are often optimistic, independent thinkers who believe that they will overcome any loss of value with the next turn of the market. The truth is often just the opposite. The longer you hold a non or under performing property the more it will cost, therefore the more value one stands to lose over a short period of time.

Besides the usual debt service, taxes & insurance costs, the overhead of a building, general maintenance as well as the physical deterioration of systems, roofing etc., must be considered in any holding cost analysis. Those costs, while considered the cost of doing business prior to any decision to sell, can quickly become onerous and fiscally destructive once the property lingers on the market for any length of time.
This is especially true of properties that have been closely held over a significant period of time or may be in an estate or trust. Equity can quickly deteriorate under the pressure of holding costs over an extended marketing period and these costs are rarely recovered through sale, especially in a soft market.

Extended time on market and the resulting holding costs are especially destructive to investors with properties already in distress and lenders holding properties in REO portfolios that are often overvalued. These properties are likely hemorrhaging equity. In addition, it cannot be ignored that these holding costs are also a lost investment opportunity. The value of these lost opportunities if invested elsewhere far out weighs any recovery in value over the short term. They become the cost “to not sell.”

Aggressive, auction marketing over a time defined period will deliver true market value to a property within its market demand, while drastically reducing this ever accruing “cost to not sell”. Rather than paying the extended cost to hold, investing in a comprehensive marketing campaign to bring property to market in a firm and time defined manner offers the opportunity to put both equity and costs back on an earning status in the shortest period of time, when time is not on your side.

Omar P Bounds III A.A.R.E., C.E.S., G.P.P.A.
The Bounds Auction Company