If a public company fails, anyone who has a stake in that company such as a shareholder, an investor in the bonds of the company, a supplier, or an employee— will face the possibility of being wiped out. But investors specializing in distressed assets, corporate bankruptcies, house foreclosures, and other major issues can be catalysts for massive profit. In this blog, we discuss distressed assets and the pros and cons of purchasing them.
What Are Distressed Assets?
A distressed asset is an asset put on sale, usually at a low price because the owner is being forced to sell. There may be many different reasons for the sale, including bankruptcy, excessive debt, and regulatory constraints. An asset becomes distressed when the person or business needs immediate cash and wants to sell the asset below its value. There are three basic categories of distressed assets: personal property, equity ownership in a business (which is a form of personal property), and real property.
The prices of these distressed assets reflect pessimism about the prospects for a full recovery, and when the odds seem stacked against a particular company, these assets are often traded at pennies on the dollar.
Pros and Cons of Buying Distressed Assets
The primary attraction of buying a distressed asset is its reduced value. In other words, the buyer believes the asset’s true value is higher than the asking price. However, you need to determine whether the value is high enough to justify the trouble and cost associated with buying it.
So how do you make that determination? The answer comes in a method called the D.O.V. method (pronounced “Dove”), meaning Debt, Ownership, and Value. Before you buy, the D.O.V. method allows you to differentiate between hidden headaches and true gems.
The first step of the D.O.V. method is debt, which means you have to figure out what debt the asset currently has. For example, is the individual asset affected by a bank loan or IRS lien, or is the company or person owning the asset generally affected by an overriding debt or lien? If this determination is not carefully considered, the creditor who owns the debt may very well have superior asset rights.
The second step in the D.O.V. method is ownership, which means you have to check that the party you are dealing with actually owns the asset. If they don’t, it could be a scam to defraud the asset from the true owner.
Value involves determining the actual value of the asset you purchase. Steps 1 and 2 above will help determine if there are others out there that have better rights to the asset, but if the value of the asset isn’t what you thought or if there are underlying issues with the equipment, business, or real estate you’re buying, it’s better to leave it unbought.
Contact an Attorney
If you’re planning to purchase distressed assets, it’s a good idea to get the help of competent lawyers. Let the Law Office of Jack R. Sturgill assist you. Contact us today and set up a free consultation.