As this is my first purchase in the commercial realm I am hoping to gain some skilled knowledge of what I am getting into. I am dealing with a seasoned seller who seems to be demanding a bit much for the property I would like to purchase. I say this based upon: The geographical location, the appraised value, and the laundry list of inspections I have paid to have done that have noted some upgrades that need to be done to meet code.
According to the P&Ls they are counting the maintenance done over the last 10 years as equity and would like to have that back on top of the claimed equity they feel the property is worth. Here is where it gets a bit sketchy for me (the new guy to this industry). The owner wants twice the appraised value for the property (approx 180k), but is willing to "float" the cash in the form of a personal loan against his other businesses and give us a year to start paying him. Honestly, doing the math based upon my didactic background in business finance, there is no way I can take over the notes he has on the place (his suggestion to avoid banks and inspectors), cover operational costs (variable and fixed), maintain the known issues and repair the (recently) discovered issues without being either behind every month on the loan or going belly up. The realtor says "This is a good deal", however the math is not adding up. After breaking it down to the realtor they are starting to see my perspective. Yes it is a turn key business, yes it has been operational since 1947, yes it has cash flow, but none of this stands a chance against the work that needs done to brings things up to code, repair the issues that the owner is denying (even after 4 building and code inspections) and keep everyone on payroll.
Honestly I could see paying close to the asking price if I didn't need approx 250k to get the place up to par, but as it is now I cannot.
Why the heck am I still interested? The place has been in our community for a long time and has a well established name. It has a great deal of size and parking for my next phase (a micro brew). The building itself is solid and just needs a lot of maintenance. Geographically it is a perfect location for my venture and the apartments keep the income steady.
I need help seeing past a seasoned seller (the bull crap) and how to see the truth. In the mean time I will keep watching and reading the information provided in this amazing website and what I have in my text books. Let's be honest they don't teach this type of skill in the class room.
Thank you all in advance
I'll be the first to chime in, if the numbers don't work then you need to ask yourself what is the upside that you are seeing that the current owners are missing and do you have the financial horsepower to get there by yourself or with your partners. I think a lot of sellers have unrealistic expectations as to what their property is worth (I.e maintenance as equity). It sounds like you are doing a great job attempting to educate them, maybe they will see the light. If they don't though be prepared to walk. You might have a vision for the place but there is nothing worse than owning a property, having a vision but not being able to execute it due to lack of capital or the need to deal with problem after problem of deferred maintenance. Good luck.
Thank you for the reply and the assurance that I am not completely off track. The more I research and become versed on codes and violations it would seem I will need to invest quite a bit to get the restaurant going. I am preparing a detailed offer explaining the current income from the properties and the restaurant and cross comparing it to the income of a one month shut down for the repairs.
I will be honest, my ability to present the code violations and costs to repair are not as strong as their ignorance and persistence. Unfortunately the violations have summoned the attention of the heath and fire inspectors. Although they are firm on their price, it looks like the restaurant end of things will be closed (if due process is followed in accordance to policy) until repairs are made. That is a cost (based upon estimates) I am sure they are not willing to take on as it is nearly 2/3 they overall asking price.
As I prepare my next proposal I am trying to make a far offer that gives them one last chance to accept my original offer before they are absorbed into a nightmare of fines and repairs while not having cash flow.
Thank you Mark for your input and I will continue to study, research and pursue my dream of habitable rental properties and a successful micro brew :)
Maybe you can wait them out until they're consumed by these repairs and fixes that you say are needed. If they can't stay afloat they'll be forced to accept a lower offer, better deal for you if you can swing it.
David that is exactly what I will do :) the realtor stated that their offer is final however they are willing to give me two years before making payments back to them on what they are requesting for equity. I said "no, the numbers do not add up and after the inspection I am reluctant to stand with my original offer." The realtor chewed me out a bit about my unfairness, but I have to think worse case. There are three issues, that anyone alone, will close the doors until taken care of. I am taking a risk while waiting for the health inspector and fire inspector to perform their walk through to check the last few issues, but from what I understand, this industry is full of calculated risks.
I want to thank you guys for your input and confirmation on my current strategy. I will keep you posted.
Update: I recently discovered that in the 4 years it has been on the market they have had 3 people actually look at the property and one person make an offer, me. Does this really say anything? Their realtor stated that commercial properties are common to be on the market for 4-5years with not much interest. I can see them not selling as fast as residential, but is 4-5 years the norm for commercial?
@Jesse Levi Kelley - Yes, it is common for these type of commercial properties to sit for many years. I own two bars with two partners. The first fell in our laps in 2010. The owner was losing $10k a month and was no longer interested in running a bar as a hobby. All of us had done business with the owner and 2 of us had previously profitably managed the property. One look at the recent p&ls told us that the expenses were out of whack and by switching vendors and rooting out theft, the place would immediately be in the black. This was a unique opportunity to get in by buying the liquor license and FFE, very little cash up front. After year of making incremental operational changes, we bootstrapped an inexpensive renovation, added a kitchen, and rebranded. A year later, it was very profitable and we were ready to buy another.
It took us 4 years of constant searching to find another deal we liked. FOUR YEARS. And they were distressed because they were real estate investors who got in a dispute with the tenant and found themselves in the uncomfortable situation of being accidental restauranteurs. In my experience looking at hundreds of these commercial properties, small business owners constantly overestimate the value of their businesses, paid too much for fit out and are in debt for way more than the property is worth, or simply think they can confuse you with creative financing tactics like those you described. The biggest mistake I constantly see knowing many bar owners through the years, is they overpay on the front end with either buying too high or sinking too much money in high end finishes. These debts can never be overcome with the small margins in a bar/restaurant. You need to nail down your pro forma, not just cogs and payroll, but think pest control, maintenance, capex, linen rental, menu printing, advertising, cleaning, dish washer rental, Hvac repairs, soda and draft line cleaning, utilities, POS system, security system, etc. Once you understand the expenses of the operation, you will know what you can reasonably afford for a mortgage or triple net lease payment. Be diligent. Let the numbers for the business tell you if it is a good deal.
Your wisdom is GREATLY appreciated! I needed to read just what you typed. The owners, in-fact, overpaid for the building on 2006 and I think we all know what happened in 2008. They sank a lot of money into important things, but still overpaid in the beginning. We are in a similar situation after reviewing the P&Ls as you were. Theft and a little work on the broker end and quality can be improved while reducing overall cost.
As the business has literally 'patched' all necessary repairs thus far a lot of work needs to be done (*Need being what the state building, health and fire inspector states to meet code). I have gathered quotes on the areas you specifically stated and again the numbers just do not quantify the current asking price, or half of it if we want to get specific. I hired a consultant who is seasoned in the restaurant and bar industry and shared with them what I was looking at. It took all of four minutes for them to see the restaurant was so far out of wack the only thing keeping the business afloat was the rental properties. There are 8, 2 of which are not livable and 2 are vacant and no one wants to live in the current conditions. So I am also looking at rental renovation on top of the restaurant issues. The more I type the more I am questioning the sanity of the current owner in their asking price, but it is their business, not mine and not my place to question their reasoning.
I was informed that their recent offer (original asking price) is final and we are to take it or leave it. I will be playing the waiting game for now and continuing my research on this topic.
Update: Four the last four months of negotiation we were informed by the current owners that the mortgages were assumable. It was advertised as such as well. One of the owners presented us with documentation stating they contacted the bank and the bank was prepared to sign over the loans when the time came. After the realtor contacted the bank regarding the "payoff amount on the assumable mortgages" we quickly discovered that they do not have "assumable mortgages". We asked the owners when they were going to share this information with us. Still awaiting a reply.
Just no. This is not a person to do business with. They bought wrong, have not maintained the property, have misrepresented themselves to you over and over. Other issues will surely arise. Don't let their mistakes become your problem. There are other properties, I promise you.
It is not fun to eat the legal and inspection fees, but that is the cost of doing business. We were deep in negotiations several times with not inconsequential money and time invested, and simply could not come to terms for a variety of reasons. It will save you a lot of time and money to know when to cut your losses and move on.
Feel free to connect with me if you have more specific questions.
I agree the misrepresentation has put a bitter taste in my mouth. Coming from a small community there are not many opportunities available, but that is not to say we buy the first thing we come across. We did receive a reply from the owners today pertaining to our questions on the mortgages, them "forgetting" (until last week) about a 20k loan they took out on the restaurant that they cannot find record of, and "forgetting" about the issues discovered. They no longer want to work with us on the purchase unless we offer them the original asking price of 375k. The appraised value is 178k as of today. Mathematically there is no stretch of the imagination that makes sense here. Like none. Honestly Sandra, The P&Ls do not even make sense to me. Not in the sense that I do not understand how to interpret them, in the sense that the numbers on the equal side do not add up to what proceeds it. According to the P&Ls they should have the mortgages should be paid off, but they still exist?
I hate to see a place of 75yrs that has a solid foundation in this community fold up, but (unless I am not seeing something here) this may catch up with them sooner than later. Do you have any suggestions for when that times comes? Should I even wait it out, or just walk away and let it go. With the city counsel and our redevelopment committees are looking to promote and invest to help on the micro brew end I feel like I might have failed a bit here. It isn't over until it is sold or lost to the state for liquidation, I just do not know what to do from here. I cannot help but wonder if they are even flinching at the fact that they are asking a lot and I am the only offer that has been placed in 6years. This is its third listing. They just renewed again for another 2yr contract with the realtor. Sandra you nailed it when you said it sucks to loose the money, but the part that urks me the most is they have not budged on the original price and act like their price is some fantastic deal. This place deserves better, our community deserves a great place like this and it is just wasting away.
With you owning two of your own places, I would love the opportunity to talk about buying a place that would need totally remodeled into a restaurant/bar versus buying a place with it all there. Unfortunately this is the only business of its kind within 35 miles, so it is difficult to compare anything to it.
Thank you for your time everyone. I will keep you informed as things progress. From what I am informed of there will be an extensive inspection from all three entities (building, health and fire) at both local and state level stating next week. Honestly I am glad I am not the owner right now.
@David Carte @Sandra B. I wanted to take the time to thank you both for your advice. David I combined your method with a statement Sandra mentioned. They bought too high and didn't maintain. I took this and ran with it. I pulled the assessor report for the year they purchased the property and saw they over paid for it by 60k. I combined this with the data I collected on the property. I presented this and walked away. I walked away like I had no interest anymore. I received a call today from the realtor. The owners have come down 115,000.00 in price. It is not where I want the price to be, but it is moving in the right direction.
What would you guys do in this situation? I know what I am getting into repair wise. I will be revisiting my numbers to see how high I am willing and able to go. I need to develop a strategy to approach this the right way.
For that kind of money, why not build your own bar? You can do it without the restaurant (since they get expensive real fast). I agree with everything said, just move on from this terrible deal and be happy that you did your due diligence and can sleep comfortably at night.
Note: I own a small bar.
Just an update for all of you that have been helping me along. As mentioned earlier I have invested a bit of time and money into making sure I make a wise purchase at the right price. Among those things was pointing out some neglected issues in the restaurant, in which case I was informed of where to go and how to get there by the owners. Unfortunately, the particular issue that "insulted" them when I questioned it caught fire three nights ago, as I specified was a fire hazard. Although the damage was minimal, the entire hood vent system needs replaced and they do not want to do it. Restaurant was closed, bar is still open and 7 tenants still exist above.
There will be an auction in a month for the entire property. I am almost certain they will not get what they want (north of 260k) as the real property is only valued at 178k and the personal property is less than 25k. Adding in state and county code violations that need to be repaired to date so that it can even operate (approx 198k) and I am not seeing them making much at auction. Having a very thorough idea of what need to be done to turn this place around into a profitable rental property, restaurant and microbrew I am trying to get an idea of what these things typically go for at auction. Has anyone here purchased at auction?