Liquidation occurs when a person or a business cannot pay their bills on time. For example, if the owner of an apartment building repeatedly cannot pay monthly mortgage payments by the deadline, then that business may become insolvent and the owner will have to sell the property in order to pay toward the mortgage.
How Does Liquidation Work?
In this process, an appraisal happens to find the salvage price of the property. This salvage price is called the liquidation value, or the amount of money that can be collected from the sale. In real estate, the liquidation value is heavily determined by the market at the time. Sometimes, the person selling makes less money overall because they sell quickly to recoup their immediate losses, instead of waiting for the best time in the market.
The final assets earned from the sale of the property are distributed to secured creditors who have collateral loans on the business, unsecured creditors (including the government if property taxes are owed), and any of the owner’s employees for unpaid wages.
What is Disposition?
In commercial real estate investing, liquidation is often referred to as “disposition.” Disposition refers directly to the intended liquidation of a recently acquired asset as a way to bring in market profits.
First, an investor finds her target market within commercial real estate properties, such as retail shopping, office buildings or condominiums. She then finds property available for sale in that market, evaluates her options, and chooses which property she wants to acquire and makes an offer. Then, this investor — now a property owner — manages the property and, ideally, turns over a profit. During this phase, many owners hire a property management company to help maintain tenant relationships and overall upkeep.
Once the owner feels the timing is right or needs cash to move on to their next venture, they liquidate and dispose of the asset, meaning they sell the property at profit.