Potential (Small) Hotel & Restaurant Deal - Acquisition Insight Needed
Hello BP Community, I´d love to pick your collective brains on a potential deal I might be putting together with my best friend. As of now we have not spoken with the seller or their agent, but my friend visits the property on a regular basis (it is currently open) and lives nearby. We are exploring this idea because my friend is already in the process of opening a brewery in the area, and when I found this property we thought to combine our respective expertise. For clarification, we're asking for input on how to break the barrier of entry, not proof-of-concept (in this particular case, the entry is the hard part).
The Property:
- Located in a very rural, small California town
- Over 100 years old
- 16 hotel rooms
- Onsite restaurant and separate bar (full commercial kitchen)
- Attached owner´s apartment (not clear on size or configuration)
- Additional structure on the lot, configured as a metal shop
- Asking $395,000
Our Assumptions and Estimates:
- The owner is retiring (her husband died in 2010, she is of advanced age, and they have owned the property since 1996).
- The mortgage remaining on the property is $222,000 (according to LoopNet - can anybody tell me whether this information is typically reliable from there?).
- Estimated repairs and development (note, without an inspection): $60,000
- Our estimate of market value: $340,000 (based on a recent sale of a similar property, and comparative listings in nearby, similar towns).
- The listing is relatively new - 16 days as of now - but we believe that the prospective buyer pool for a property like this in this location is going to be extremely small, so we are assuming that (given some time) this seller may be very motivated.
What We're Wondering:
- How do get the conversation started with the seller or agent on this? I've never purchased a commercial property before, and would not know the right path towards analyzing their books (I assume this might be after an accepted offer?).
- Any ideas on creative financing solutions here? Neither my friend nor I have the significant cash on-hand for a 20% down on a conventional loan (even assuming the seller accepted an offer at the lower price). My first thought was proposing seller financing, but given that there may be an existing mortgage I understand that that needs to be settled. Perhaps a 1st from the bank to cash out the existing mortgage and provide for renovations, and proposing a 2nd from the seller for the balance? Any tips on that route, or it's prospective viability?
I look forward to any of your thoughts, and I appreciate the feedback.
There's no one way to do this. For most commercial properties, it's expected for you to get some financials before making an offer. However, this may not be the full financials that you need. If you believe there are competitors for the property, then you may have to make an offer before understand the full financials, which you will complete during your due diligence process. If you believe there's little to no competition, then you can wait for the full financials before making an offer. There's no standard way to do things. For instance, as a broker, I would advise the seller to have the potential buyer sign a non disclosure agreement and also submit some proof of funds to show they are a serious buyer.
Call the broker to get more information, including whether the owner is interested in seller financing. Commercial loans do not have a standard 80% LTV like residential. Whether or not you can qualify for financing depends on multiple variables but most importantly the financials on the property. If that property does not have good cash flow already, it is difficult to get financing on the property.
Thanks for your input here - I figured that it made sense to have the financials before making an offer, so I appreciate that confirmation. In this case, I don´t expect there to be much competition for the property, and I´m hoping that that makes our case a bit stronger for negotiation with the seller. Still haven´t talked with the broker yet, but I think that´ll be our next step and we´ll go from there.
