bank owned commercial property question

6 Replies

Hi everyone. I'm new here and i'd like to get some opinions on a deal i'm looking at. 

it's in the Chicagoland area.

it's a commercial deal, mostly retail (3U) with one office unit on the second floor.

the deal comes with an empty buildable lot, and about 30 parking spaces in the rear.

building is reo, and has been bank managed for years. 

they were advertising it at a decent psf price, but they were promoting it as being almost twice the size it actually is.

they were asking about 425k for 10,000 sq ft

it is only 5200 sq ft of rentable space-3 storefronts and an office

the buildings are rented at 3600/mo modified gross with 2-5 year leases. 

taxes are 13,000

all commercial spaces rented, office has been vacant for several years. 

from my analysis, at 260k it gives me 8.3% cap at 1.36 dcr, and if i can get a tenant upstairs, i can add additional income to increase these numbers.

@ 260k, it is still more per foot then they were asking. 

@ 219k, i'd be at their asking price per foot. 

they seem to think upper 300's, low 400's are the magic number.

295k with 20% down seems to be the top number to squeeze in 1.2 dcr

I'd like to offer 210-235k 

my goal is income first, value add second- so if the numbers don't work on income-i'd rather not waste my time.

what would you offer, and where would you start negotiating? 

It is not uncommon for agents to misrepresent or misprint an REO property. Ask the listing agent to validate his numbers or flag for the MLS to review. That said, typically their property value assessments are semi-accurate. Commercial value in Chicago-land is by no means purely rent based. If you are interested in this property, 50% value offer is not going to warrant a response in today's market. You won't offend the bank with an offer (they will auto-reject) but you may aggravate your agent. You seem to be ignoring the value of the build-able lot and extra parking entirely.

If this is serviced by a national bank, they will lower the price several times before being able to negotiate anywhere near your offer range.

My suggestion, sit tight and wait for the price to drop a bit.  Work to understand the whole property and the value, not just the rental income.  I have a hunch that you are very low with your analysis.  Did you have comps pulled?  What does your agent think about this property?

Thanks for your reply Mitch, the property isn't on MLS. Comps show up in the 30-40$ per foot range with one unique building getting 65$ per foot. Its a C class property that has 75 year old storefronts and needs some updating. I think they were putting the value so high because the agent assumed it was 10k ft. he just multiplied that by the avg. sales price.

It's not a traditional REO, the bank acquired it 14 years ago as part of an acquisition of a smaller bank. That bank used some of the property as staff offices and for related insurance products. It's been on the market for at least a year or two and I'm the first person to look at it. It's not a national bank.

There are other build-able lots nearby that have been vacant-like this one-for many, many decades. If value comes from that end, it would be from me making it come. right now the lot is just a tax burden (2k per year) at this point and they wouldn't be able to sell it if it didn't come with this group of property. I'd actually prefer NOT to get the lot, but they want to sell it as a package-because it won't sell otherwise. And they don't want to hold a -$180 per month liability. Can't blame them for that.

After i showed the agent the true size he realized the price would have to be changed.

What i would prefer is to work with the bank to take the problem off their hands, manage the building efficiently, put the building to productive use, increase the curb appeal of the property and increase the value of the property to the neighborhood. 

Depends on what area of Chicago you are talking about.

Chicago is over-developed right now with vacancy rates at around 10% for commercial space. That said, the lot next door has little chance of being developed. That is one negotiable aspect of the deal.

You've ran the numbers - start there. They know what they have, and if they have held onto it for this long, than they are going to want to get rid of it. 

Hi Jeremy, That's pretty much my position on it. I'm willing to give them an out- I know they need a minimum 1.2 dcr so if the numbers don't work, then of course they can hold it indefinitely. I'm not trying to bail them out or steal it away, but if i'm going to be involved, it needs to be able to give me a fair return and it must be possible to maintain and manage it properly. The lot, to me, is a liability and i have some strategies to try to get at least the tax from the land, but for the foreseeable future it will be a -  drain on the cash-flow from the leases.

I think offering what is fair and will work is the best plan. i don't like the lowball strategy- i'd rather partner with everyone I work with and make every deal a win-win.

Wesley, I did just send you a PM.  Without knowing address I would talk you out of buying retail in Cook County and getting a smaller return with a lot of risk in a class c property.

 Thanks Brie

@Brie Schmidt  

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