Help with construction of an offer...

Commercial Real Estate Investing
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Help with construction of an offer...

James Starks
Stockbridge, GA · Member since 2012 · 5 posts · 0 votes

Hello everyone. I am a new member and this is my first post.

I am considering making an offer on a self service car wash property in my local market. The property was originally listed at $595K and has been dropped a couple of times to $295K. The listing agent informed me that the bank has taken possession of the property within the last week.

The NOI is approximately $30K; includes a lease of one bay to an emmissions facility. I believe the value of the property to be $225-$300 less $25-$50 in repairs, maintenance,and updates. I realize these are wide ranges. As a first time investor, I am hoping to get some help in constructing a deal.

I want to offer $225K with $50K cash out at closing; netting the bank $175K. However, I don't want to go in so low that the bank doesn't even counter if they chose not to accept.

The offer would be subject to current bank approval of financing with no money down.

Should I wait and see if the bank reprices the listing?

I figure the property has been on the market for quite some time and no bank wants to be in the business of keeping up a cash wash.

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14y

Have you tried actually speaking with the bank about the property? A quick discussion would give you an idea of where you stand.

Its extremely unlikely you are going to get into this deal with nothing out of pocket. Plan on 30% of your purchase price for a down payment and then whatever it costs to fix the place up out of pocket. If that's a non-starter for you, then you probably aren't going to do this deal. Getting any sort of commercial loan is very difficult right now. Banks are going to be very conservative in their valuations and will want to see you have some real skin in the game. I'm in on a mini-storage deal we've been trying to refi for some time. Even with a solid operating history, this is very difficult. And it appears its going to be a cash-in refi at best.

The selling bank may not even want to lend against this property. They may have had enough pain from it and want to move on. Or, they may be out of the business of doing loans like this at all. Give them a call and discuss the property with them.

The price part of your proposal isn't outlandish. The loan part is.

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  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    14y

    If I understand this correctly... you want the bank to hand you $50,000 cash... and possession of the carwash... in exchange for a note of $225,000 for something of unknown value.

    Generally a bank will loan 70% or purchase price. Lets assume you could find one that would loan on ARV. You don't seem to know that, you give a 30% range, that's HUGE! 70% of $225k would be a loan of $150k. You're asking them to go 50% higher AND give you cash. What value are you adding?

    You're offering just over half the listing price with no skin in the game. I don't see it happening.

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  • James Starks
    OP
    Stockbridge, GA · Member since 2012 · 5 posts · 0 votes
    14y

    Nathan, thanks for the response.

    I guess I should have clarified that my suggested offer is a 'pie in the sky' starting point.

    The property has been on the market close to 2 years and the NOI is not verifiable. All they have are quickbooks reports from 2011. No prior years, no tax returns, etc.

    To me, the value is not $300K. I believe the max value I would pay for it would be $225K if it were a cash purchase. Knowing that it needs repais and updates.

    My value proposition would be basically that the bank would have a note for $X versus a deteriorating property with no active management.

    I want a loan based on the property's cash flow, and am willing to do a personal guaranty.

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  • Andy Chu
    Involved In Real Estate · Las Vegas, NV · Member since 2010 · 341 posts · 86 votes
    14y

    When the lender takes the property back, days on market starts over for the most part. Also what is being proposed unfortunately is fraud. You are requesting for a high appraisal and asking them to pay you back to a supposed realistic price.

    A home builder was charged with giving an inflated appraisal and giving the home owner a credit card with 100k loaded on it

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  • James Starks
    OP
    Stockbridge, GA · Member since 2012 · 5 posts · 0 votes
    14y

    Andy,

    I'm not asking for an inflated or fraudulent appraisal. I'm asking for them to finance the repairs to bring property's condition in line with the value in order to maintain or increase the NOI.

    If $30K is the NOI (as represented by the bank), 10% cap rate would be a $300K value. I prefer a higher cap rate, thus a lower value on the property, and am asking them to finance repairs.

    I don't think my proposal is outlandish; and it certianly isn't fraudulent.

    I came here looking for someone that could help me come to an initial offer that is not so low as to be ignored, while not being so high as to be overpaying. I thought that would be the goal of any offer on investment property?

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    Have you tried actually speaking with the bank about the property? A quick discussion would give you an idea of where you stand.

    Its extremely unlikely you are going to get into this deal with nothing out of pocket. Plan on 30% of your purchase price for a down payment and then whatever it costs to fix the place up out of pocket. If that's a non-starter for you, then you probably aren't going to do this deal. Getting any sort of commercial loan is very difficult right now. Banks are going to be very conservative in their valuations and will want to see you have some real skin in the game. I'm in on a mini-storage deal we've been trying to refi for some time. Even with a solid operating history, this is very difficult. And it appears its going to be a cash-in refi at best.

    The selling bank may not even want to lend against this property. They may have had enough pain from it and want to move on. Or, they may be out of the business of doing loans like this at all. Give them a call and discuss the property with them.

    The price part of your proposal isn't outlandish. The loan part is.

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  • James Starks
    OP
    Stockbridge, GA · Member since 2012 · 5 posts · 0 votes
    14y

    Thanks Jon.

    I understand that the loan is definitely 'creative'. I have an appointment to speak with the realtor tomorrow. I have not had an opportunity to speak directly with the bank as of yet.

    I unfortunately don't have the cash reserves for more than about 5% down, which I'd prefer to hold on to for operations.

    Cash in and cash for repairs will be a definite non-starter for me. Especially given the lack of hard support for the NOI.

    I've always believed the worst they can do is say no.

    I understand that cash is king; and almost anyone can buy almost anything with 25% or more down payment. I'm obviously looking for something a little different; and I have no idea, as of yet, if the bank will be open to my offer or if, as suggested, they are willing to hold out for more cash.

    Anyone have any suggestions for my offer sheet other than adding cash?

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    "Cash is king" would be paying all cash for the deal. Putting 25% down on ANY investment property is about the minimum right now. Maybe 20% if you find a cooperative lender and have a strong position. Commercial deals are going to be even higher.

    Your best bet is to forget about this deal and try to find a frustrated, tired owner who will sell to you with owner financing. Or, who might do a lease/option that would let you get into the place, fix it up, get it operating then buy. Owner financing would be better because you get title so you would be doing a refi, not purchase. If you could do an owner carry for a few years, get a solid income statement then you might be able to refi without having to put in so much cash.

    You might see if the bank would be willing to lease you this place.

    Commercial properties are almost always purchased with notes with balloon payments. There is a general believe that there is a looming disaster in the commercial space. Many of these balloon notes are coming due over the next few years. Many of these properties have fallen in value. So, owners will go to refi and can't because they have to come up with a bunch of cash to get below the new lender's LTV requirement. Some will be able to, but some will not. Those properties will be foreclosed and will eventually come onto the market. Before a lender is going to be willing to make a new loan, they want to have a very solid position. Loaning $225K on a purchase price of $175K won't pass muster. If anything goes wrong, they know you're just walking away.

    Another option might be to find partner. Someone who's willing to kick in the cash for an equity stake. Now, you will give up a huge chunk of your ownership and the profit. But it might be a way to get into the property with only a little cash. If its profitable, you can find a way to buy the partner out over the course of some years.

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  • James Starks
    OP
    Stockbridge, GA · Member since 2012 · 5 posts · 0 votes
    14y

    Jon, Thanks for your honest advice. A lease with purchase option may not be a bad idea. I'm really just trying to make an offer that will open discussions and get them thinking creatively.

    I'm having a hard time understanding why everyone is caught up in the financing of repairs. If I were to get a loan at $225K and ARV is $300K; how is that different from the person that purchases a single family home at $50K with a $75K loan that includes $25K in repairs and has an ARV of $100K? All things equal, the latter loan seems much more high risk to me, yet these types of deals are happening all the time.

    Obviously, the net to the bank may not be worth it to them. I haven't spoken to them yet. Maybe I should consider less cash out for repairs and do some of the updates in stages paid for by the cashflow?

    These are the types of things I was hoping to get advice on here.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    Unless you're dealing with a small bank where you have a personal relationship with the person who approves loans, banks aren't into thinking creatively. I encourage you to give it a shot. But I'm in on two commercial deals and I've watched as the lending process has proceeded and there is no chance the bank is going to do what you want.

    Neither of these deals will happen, either. When you purchase, the bank looks at an appraisal and the price you're paying. The lower figure is the one they use for a "value". Then they apply their LTV limit to the value, and that's what they will lend you. For a bank, the "ARV" just doesn't matter.

    In the case of the SFR, there is a HUD rehab program where you might pull this off. But its limited in its applicability and certainly would not apply for a car wash.

    Banks will sometimes do "construction loans" where you can borrow money to do a project like this car wash. And they may include some rehab money. But you won't get 100% of purchase plus 100% of the rehab. That's a bad loan and it won't happen in today's lending environment.

    Another option is hard money. Sometimes called "mezzanine loans" in the commercial space. You borrow the $225K you need from a hard money lender. The rate will be outrageous - 15% plus or minus. You buy the property and fix it up. Then, you refinance. In your case, you would need to show a value around $325K in order to be able to pay off the $225K and stay under a 70% LTV limit. Probably higher still if you want to cover your refi costs. Since its an income property, income is what determines the value. And you have to have a track record with the property. At least three years, probably more like five. In five years you will have paid your mezzanine lender $169K in interest. That probably doesn't make your project very profitable.

    Deals like this require cash or they require a really desperate seller. The bank isn't all that desperate. But, again, I encourage you to talk to them. You never know.

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