mold on commercial property – should it break the deal?

Question

History:

In 2014 the building had a fire and since then the entire inside was renovated and is now like new. However, the outside was not repaired, and today you can see black all over the backside of the building (what appears to be mold).

I put an offer on the building for 599K and they accepted but later that night my realtor called me and asked me to waive my right to negotiate a lower price after the building is inspected if the inspector finds problems with the roof and building. Again, the inside is like new and I've already had contractors inspect the inside finding no problems. The cap rate on the building is 7% and it's fully rented out, so that's all good.

Is this black all over the place and potentially the building needing a new roof within 3 years a deal-breaker? I've offered; if it needs a new roof and the cost of the roof is 40K I will pay half of that if they pay the other half, but they did not want to take me up on that offer and said the price of 599 already takes the potential of it needing a new roof in 3 years into consideration and that no matter what is found at inspection the 599 price is staying at 599, but my offer was not assuming it needed a new roof (I found that out after my offer).

Alex Olson · Answer

@Paul Paquin similar to what @Sarah Brown says, I would never waive my right to inspect and back out after inspection. If you get an inspeciton, you can see if it is in fact mold and does in fact have a bad roof. Get an estimate. Build those costs into your model and if it still makes sense to do it, you can pull the trigger. If not, you tell the seller that you will not complete the transaction due to the issue and you negotiate the cost down if they are willing. The key is you want to maintain that you want to get a deal done but at the end of the day you need to determine if it financially makes sense.

Seth Borman · Answer

That can be cleaned off in a couple of hours by a guy with a brush, a ladder or scissor lift, and some acid and water.I don't think that's a big deal.I wouldn't waive anything until after the inspection, however.

Sarah Brown · Answer

Side note you can have that stuff tested for mold if you are really concerned.  Bring in your professionals and get their input on risks and expenses

Sarah Brown · Answer

So, are you more concerned about the black "mold" or the roof? You start with mold but end with roof.  2 things.

1. That black stuff just looks like soot to me.  It doesn't look like mold.  I am unsure if exterior mold is common in NY, but might be worth it to just have it pressure washed and see what happens.  You'd be amazed at what a good pressure wash can do to a property.

2. Analyze the deal to determine if it is still worth while.  I am not sure what cap rates are in your area, but here 7% is pretty decent.  Is there room to raise the rents, or are they already at market?  Do you simply not have the cash and need to find a way to to creatively get it added?  Then you can find a way to negotiate it in there.  The roof is 6% of the cost, so really not that much, and it's a cost of doing business. I wouldn't necessarily call it a deal breaker.