Simulation: a fictional property for practice.

A small strip center at a trustee’s sale, with tenants

Four shops, three with tenants. The lender’s opening bid is $1.4 million. Do the leases come with it?

A fictional retail building at a foreclosure (trustee’s) sale. Lease rules depend on recorded documents and state law; have an attorney review them.

• Opening bid: $1,400,000, the lender’s credit bid
• Property: 4 shops; 3 leased, 1 empty
• Information: No inside access, no tenant confirmations of their leases
• Payment: Cashier’s checks, on the terms in the sale notice

Mission 1: What happens to the leases?

Which is closest to right?

• It depends. Leases that rank ahead of the loan, or that the lender agreed not to disturb, usually stay. Leases that rank behind it can be wiped out, and those tenants may leave or ask for new terms
• All leases always stay, so the rent is guaranteed
• All leases end, so you can raise every rent

In a normal purchase, tenants sign estoppel letters confirming their rent and terms. At a foreclosure sale you usually get none.

Mission 2: Which income do you count?

Pick the safe ways to value it.

• Count only leases you’ve confirmed from recorded documents and that are likely to stay
• Run the numbers with only 2 of 4 shops leased
• Use the rent roll from an old sale listing

Price a foreclosure on income you can verify, not on what the building once earned.

Mission 3: The numbers

• NOI if all 4 shops are leased: $150,000 a year
• Value at an 8% cap rate: $1,875,000
• NOI with only 2 shops leased: $70,000 a year
• Value at an 8% cap rate: $875,000
• The opening bid: $1,400,000

If two tenants leave, the building is worth far less than the opening bid, before leasing costs and your profit.

At a $1,400,000 opening bid, what do you do?

Buy, investigate or pass? Work through the drill to see what an experienced investor would weigh.