(lenders-- see separate foreclosure page for lenders)
Foreclosures. That's one of the hot buzzwords in the gas station industry today. This is the natural result of too many stations being built over the past three or four years by people who were new to the industry. There is a learning curve in not only developing a gas station property but also in operating and managing one. And it seems that every jurisdiction from Seattle to the smallest town on the Kitsap Peninsula has increased their requirements for the developer. Huge cost overruns are commonplace. Even with large amounts of up-front amortization money (see Terms of the Trade Page), many dealers made too many mistakes or the market conditions changed and the result was a gas station property in foreclosure.
While there have been several foreclosures in the past 2 years, I expect we will see a large increase in the next two years or so. Most lenders required that the borrower pledge his personal assets as well as the gas station property as collateral for the loan. Those dealers who had significant assets had a huge incentive to hang on as long as possible since losing the station also meant losing the rest of their assets. If the market conditions which led to most of the foreclosed properties don't turn around, and I don't expect them to in the next 24 months, many of these dealers will be forced either into bankruptcy or at least losing their station to foreclosure.
Traditionally, in a depressed real estate market, whether it's residential or commercial, property owners will approach their bank to negotiate a settlement rather than simply wait for the foreclosure process to take its course. The technical term for this is "giving a deed in lieu of foreclosure," or a "deed in lieu" for short. While it's not a particularly pleasant experience for either party, it's better than a foreclosure. Unfortunately, in the case of most gas stations, the "deed in lieu" is not an option. Most independent gas stations received money from an oil company. The oil company then placed a lien in the form of a deed of trust on the property that, in most cases, is junior to, meaning it was recorded after, the loan from the bank. We say that the oil company is "in second position." Being in second position entitles the oil company to either bring the first current when it is in default or being wiped out in the foreclosure process. It appears, at least in the direct markets, that oil companies are walking rather than investing more money by curing the underlying loans. Our company recently represented a bank that was selling foreclosed stations where Chevron's second lien meant walking away from over $400,000 of amortization money, which they had loaned the dealer a few years earlier.
Buying a foreclosed station sounds appealing to many gas station buyers. But it takes a unique buyer to be able to do so. Here's why:
1. The buyer must be able to make a decision within a few days. These stations are often priced aggressively since the banks don't really want to own them and managing a station opens doors to all sorts of logistical and liability problems for the bank. Long inspection periods don't exist. Some buyers don't feel confident enough or comfortable enough to make such a major decision in a few days.
2. There is very little information available on the past performance of the station. Typically, the dealer who lost the station is either long gone or not in a very cooperative mood to help the lender, therefore P&L's are not available. The lender usually will have access to pro forma data, which was used prior to granting the loan, and we usually can get the basic gallonnage history and store sales history. But the buyer (and his lender) needs to be able make a decision with only this information. Sometimes appraisals are available, but, these are not always reliable.
3. Taking over a troubled situation. There is likely to be more shrink at a station in foreclosure and more employee problems in general. We've seen missed shifts, running out of fuel, stolen equipment, and fights among the employees. One recent case required a call to the local sheriff to break up a fight between two employees! The buyer needs to be able to step in and clean house quickly. Some buyers are better than others at this. We had one case recently where an employee quit and walked off with several hundred dollars of equipment. Even though we knew who she was, it was difficult to get it back.
4. Financing contingencies don't always work. Nearly every buyer of a gas station property includes a standard financing contingency in their offer. With foreclosures, the bank that now owns the property is not usually interested in financing the property for a new buyer. If you don't already have a strong relationship with a bank and one which can go through the process quickly (they frequently promise, but seldom deliver), you may not be able to buy a foreclosed station. Some lenders will only fast track the loan process if the borrower already has proven history with the bank and with operating gas stations.
5. Increased competition. If the lender has taken our advice, and priced the property aggressively, there is frequently more competition than with a normal station for sale. We recently listed a foreclosed station and within six days presented four, bona fide, written offers all from well-qualified prospects. In many cases the speed in which the buyer can close is more important to the bank than the price. One recent buyer purchased one of our foreclosed listings and the key element of their offer was no financing contingency. This increased competition is uncomfortable for some buyers who feel they are being rushed into a deal. (Note: McCallen & Sons policy is keep all offers confidential. We will share with other buyers that there is an offer on a property, but we will not share what the price or terms of that offer is)
6. No whiners. It is not uncommon for buyers of gas stations to be fussy, picky, whiners who want to argue over the little things. In a foreclosure sale, that's not allowed. If some of the candy bars are out of date, or if the decals are coming off of the MPD's, or if the popcorn machine is broken, you just have to accept that as part of a foreclosure sale. The low price (theoretically) is designed to cover the unforeseen blemishes.
7. Foreclosures not on stations for sale list. Our experience is that due to the speed with which the properly priced foreclosure property sells and because it takes such a unique buyer to actually purchase a foreclosure, we don't add these stations to our inventory list (see "Stations for Sale" on navigation bar on the left side of this page). We keep a special database of prospective foreclosure buyers who have the experience, financial ability and personality to successfully close one of these stations. If you would like to register and be considered for our foreclosure listings, please fill in the data below and hit the "submit" bar.