Posted by ray@lcorn on October 20, 2003 at 15:02:09:
You didn’t mention whether the buildiong is occupied. Since it is going into foreclosure I assume that the income is not sufficient to pay debt service.
If so, then one approach is to value the improvements on a replacement cost basis, based on square footage and type of construction, then adjusted for deferred maintenance, age and obsolescence. The land value can be appraised using comparable sales in the market and added to the residual building value. The total is the approximate value as it exists today based only on cost.
That does not take into account the market factors for the property type. If the area has significant vacancies, then a risk premium should also be deducted to provide for the holding period and improvements necessary to make the property competitive and carried through the lease up period.
I would also compare any value derived from the above calculations to recent comparable sales of similar properties in the area just as a reality check. If the numbers still make sense then I would proceed with your plan of buying the discounted second and reinstating the first. However, I would caution you that typically there is no right to reinstate a commercial loan as there is with residential. The lender may determined to get out of the deal, and that would make it necessary to secure new financing. If so, then the first may also be bought at a discount.