Putting an offer in on my first commercial property. Help needed!

Commercial Real Estate Investing
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Putting an offer in on my first commercial property. Help needed!

Terry Smith
Seguin, TX · Member since 2016 · 7 posts · 1 vote

I need help analyzing this deal and figure out if it’s a good long-term investment, buy and hold. It’s been on the market since May so it’s not a great deal or one of yall would have scooped it up by now haha. I have not gotten all the numbers from the seller yet but here are the basics. It’s a commercial building with offices on the bottom and 3 loft apartments on the second floor. All spaces are rented out with long term tenets.

Asking Price: $615,000

Rents: Over $6,000

My bank with do a 15 year loan at 4.85% with 20% down. I plan on putting 200K down but even then the cash flow is not what it needs to be for me. The end goal is to pay down hard on the building and pay it off in 7-10 years. I do not need the cash flow right now but could use it moving forward in other investments and paying this place of early. I asked the realtor if the owner would consider owner financing and they said yes but at a higher interest rate. I was thinking I should look around for other loan options to make sure im getting the best out there but for now I started with my local credit union I have been using my whole life. I could use some advice going forward with this deal, creative financing strategies or how to go about making an offer that works in my favor but isn’t a slap in the face to the owner. I would like to offer somewhere around the 500k range because the numbers look much better when I run them using the bigger pockets calculator. Maybe I could do a 7 years balloon option. The floor is open….. what other options should I consider?

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Andrew Johnson
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y

@Terry Smith Good feedback!  I think you and I are on the opposite side of the spectrum.  I like later builds where I don't have to worry about lead based paint, asbestos, etc.  Then again I invest in out-of-state properties so buying a fixer when you're thousands of miles away is a scenario fraught with challenges.  One thing we do agree on is that you should buy what you like.  Or, at the very least, buy what you want to own.  If you like it checking on it, touching base with a property manager, etc. doesn't have to feel like such a chore.  The risk is you overpay because you buy with your eyes and not your pro-forma.  Best bet, establish your cap-rate requirements and then find properties that you like that meet your threshold.  Keep it objective.

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  • Luke H.
    Real Estate Investor · Dallas, TX · Member since 2013 · 388 posts · 174 votes
    9y

    suggestion: if owner will finance it, i would get the lowest down payment, lowest rate, and LONGEST period of time. Keep your money in your account, and if the terms give you a positive cash flow, then you're set. Then focus on paying him off while you look for your next deal. 

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  • Ross Ayesh
    Real Estate Broker · Coppell, TX · Member since 2016 · 9 posts · 3 votes
    9y

    Terry,

    Well, I would try to quantify if there is much deferred maintenance.  Your Due Diligence is really important here to double check your assumptions in financial analysis. 

    Take all numbers at face value.  In other words, trust but verify.

    If you have to get creative for this deal to make sense, then that is a warning sign.  However, I like owner financing if there is not much deferred maintenance on the deal.

    How many units is this property?  When was it built?

    If you wish to talk in more detail, I will be happy to help via PM.

    Ross

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  • Terry Smith
    OP
    Seguin, TX · Member since 2016 · 7 posts · 1 vote
    9y

    @Luke H. Thanks for the advise. I have thought about that since i do not need the cash flow right now. Something i always think about is all the interest i would be paying over the term of the loan. No matter what i have to pay the interest to someone, the bank, or the seller. If i pay the seller he wins big time in the deal. I can see why people often consider doing owner financing on a property. If I go the owner finance route should I make a much lower offer since i know he will make a larger return when accounting for the interest? 

    @Ross Ayesh I apprciate the response Ross and would enjoy talking in more detail with you. Its a historical building with commercial offices on the bottom floor, mostly lawyers, and 3 loft apartments on the second floor. It has been well maintained and recently renovated. I wouldn't have to do much maintenance upfront. The building will be able to pay for its self and should have positive cash flow. I was hoping to get creative with the deal and increase cash flow to invest in future deals. 

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  • Luke H.
    Real Estate Investor · Dallas, TX · Member since 2013 · 388 posts · 174 votes
    9y

    Unless you have the cash or someone willing to lend without interest, then you're gonna be paying.  I SUGGEST, you not worry about what the other person is making.  I know, I know, it's hard..(I would think, man, that interest could be paying for my new car!)... then back to reality.  Think of the end goal here.  If you fork over very little or none of your money and you get a house/equity/positive cash flow, then you're golden in my book.

    of course you want to get it for the lowest price possible, but if it truly is a good long term deal, then don't focus on that. sharing the wealth should be a good thing.

    1) make sure there is no penalty for paying it off early, so you could pay it off as fast as possible and not have to pay all the interest.

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  • Terry Smith
    OP
    Seguin, TX · Member since 2016 · 7 posts · 1 vote
    9y
    Luke H. I like the way you think. I guess I shouldn't worry about who's getting the interest payments. Maybe it will help sweeten the deal with the seller if they offer good terms on owner financing. I am going to look at the building on Sunday and walk through it, when I asked for the income and expenses for the last 2 years the realtor told me I would have to submit a formal offer first. Is this normal? On other properties I have considered they had no issues with giving me this information. The property was purchased about 6 months ago for somewhere around 550k and now is being sold again for 615k. Is this a red flag or a value play from the seller who purchased low and locked in higher leases or renovated the property to demand more money in a quick flip? I appreciate the help in letting me see things from a different perspective. Sometimes we get so excited about a deal that we want it to make sense hahaha.
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  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y
    Terry Smith You said the numbers look better at $500K than $615K. Of course they do, they'd look even better at $400K. My petty comments aside, what you could do (once you get all of the numbers) is figure out what your hurdle rate is (cap rate, cash-on-cash, etc.) and construct your offer price from that. Relay that your offer is at (hypothetically) $517K because that's what meets your minimum cap-rate requirement. If the owner passes they pass on it but at least you know you made an objective unemotional offer. If there are other investors that will take a deal below your threshold, so be it.
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  • Terry Smith
    OP
    Seguin, TX · Member since 2016 · 7 posts · 1 vote
    9y
    Andrew Johnson I agree with your advise. It is important to figure out what numbers I'm comfortable with and stick to them. It's not every day we come across opportunities we are interested in so its hard not to get overly enthusiastic about them. I know there are probably better places to invest but I always heard you should buy or invest in things you like, for me that is historical properties in small towns. I'm always open to other opportunities as well but I like the charm of old buildings, classic cars, antiques and other old junk I guess hahaha. Thanks for your advise!
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  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    @Terry Smith Good feedback!  I think you and I are on the opposite side of the spectrum.  I like later builds where I don't have to worry about lead based paint, asbestos, etc.  Then again I invest in out-of-state properties so buying a fixer when you're thousands of miles away is a scenario fraught with challenges.  One thing we do agree on is that you should buy what you like.  Or, at the very least, buy what you want to own.  If you like it checking on it, touching base with a property manager, etc. doesn't have to feel like such a chore.  The risk is you overpay because you buy with your eyes and not your pro-forma.  Best bet, establish your cap-rate requirements and then find properties that you like that meet your threshold.  Keep it objective.

    1Reply
  • Tim Bishman
    Commercial Real Estate Broker · Akron, OH · Member since 2017 · 12 posts · 2 votes
    9y

    @Terry Smith you mentioned it is a historic building. Is the building registered with your state historic society? Might want to check into that. If it is, the historic society (or what ever your state equivalent is) might dictate what you can and can't do with the building. I am currently involved with a major redevelopment of a large project here in Ohio. The building is a registered state historical building. There are many restrictions on what future tenants can and cant do. There were many costly corrections the developer had to do before we could move forward on leasing. A lot of money was spent on things that they wont see any ROI on. Just a thought. Good luck.

    - Tim

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  • Terry Smith
    OP
    Seguin, TX · Member since 2016 · 7 posts · 1 vote
    9y
    Tim Bishman wow that sucks if they will not see a ROI!!! The building I'm looking into is not registered as a historical marker at this time even though it was built in the 1890's. It has already been renovated and brought up to code and is being used as commercial office space on the first floor and loft apartments on the second. My plan would be to keep the tenets in place right now. The offices are leased to lawyers and CPA's who have been there for a long time. I'm guessing the deal isn't good enough for most investors since it is still on the market but I it might be a good long term investment 10-15 years from now for a buy and hold investor like myself. From your experience in working with historical properties, are there any major things I should look for when I go see the building? Things that are often overlooked. Thanks for the advise and sharing your wisdom with me Tim.
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  • Luke H.
    Real Estate Investor · Dallas, TX · Member since 2013 · 388 posts · 174 votes
    9y

    @Terry Smith, 1st-if you haven't already please vote my posts. It lets me know I'm helping.

    2nd- you're welcome and I'm glad I gave you a different perspective.

    3rd-formal offer, is probably to cut out all the 'fake interest. u can put down $10.00?

    4- sounds like a value play, but also give you tons of room to negotiate before you get the owner financing. mental strategy- ask him why he did it, and ask him the same question several times, in different ways.

    5-yes, we do get excited about the deal. it is part of the fun. geez, lord knows I think about my house on the lake, my personal helicopter, and yacht parked out front daily. LMAO!

    Good luck and keep me posted. 

    1Reply
  • Tim Bishman
    Commercial Real Estate Broker · Akron, OH · Member since 2017 · 12 posts · 2 votes
    9y

    @Terry Smith The older the building the more likely you will find building defects or the more likely you will experience them sooner than later.   On buildings like this its important to do your due diligence on the building condition and inspections.   Ask the owner to hand over all info on all repairs and updates they have done since owning it.  Have them fill out a detailed property report.  Make sure to review the current leases of all tenants.  Lawyers and CPA's are typically great tenants.   When considering buying a commercial investment property like this with existing tenants always request estoppels as part of your due diligence.  If you are not happy with the number of years remaining on the leases, you can make your purchase contract contingent on tenants extending their leases.   Always a good idea to have a personal guarantee as part of the lease.   After all of this and the numbers add up to your liking....  Pull the trigger.  Hope this helps.

    1Reply
  • Ross Ayesh
    Real Estate Broker · Coppell, TX · Member since 2016 · 9 posts · 3 votes
    9y

    Terry,

    Why would they buy it and put it back on the market in less than a year?  That's suspicious.  Not a deal killer but a "tell me what is going on here before I put an offer on this".

    Let me tell you what no one else is telling you here:  If you cannot service the debt on the note to the lien holder, they take back the property and you are out all of your down payment.  Owner financing is not a gift from heaven.  At least, the bank will underwrite the deal and back out if the deal is suspicious because the numbers don't make sense and they don't want to loan on a dud.

    Catch my drift?

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  • Darwin Crawford
    Rental Property Investor · Scottsdale, AZ · Member since 2016 · 296 posts · 243 votes
    9y

    So I just got a place here in AZ under contract.  Small, 8-unit building of office suites.  I'm a little concerned on your cap rates, 6k/month on a $615K price seems pretty steep to me, that would be tough to make cashflow.  

    Ditto on owner financing.  I'm in contract with some note buyers who snagged this place off a foreclosure last year, and aren't running it right.  

    They were more than willing to owner finance it to me at some steep rates and at a price that was favorable.  That deal stunk to high heaven.  I walked.  Then came back, hit them where I needed to be, and bam.  Signature.  

    So all I would offer is this - make sure the numbers work, plus a comfortable margin for safety, that will let you sleep at night, and then go for it!  If they won't take the deal where you need to be, then don't do it.  

    1Reply
  • Terry Smith
    OP
    Seguin, TX · Member since 2016 · 7 posts · 1 vote
    9y
    Ross Ayesh Darwin Crawford I want to thank you gentlemen for your response and advise. I was able to go by and walk the property. It is very clean and has a lot of potential to increase in value over the years. The owner has put 30k in upgrades into the 3 apartments up stairs and just started renting then out. So they have just started generating over 6k a month in income. They gave me a copy of the last 4 years of income and expenses: Total income: $189,650 Total expenses: $83,870 Net income: $105,779 Avg yearly: $26,444 Avg monthly: $1,750 After looking at the income and expense I can see how they have not been managing the property well and there is room to add value to the space. With the numbers the way they are even making over 6k a month there is no way I could ever pay $615k for the property. My bank will do a 15 year mortgage at 4.85% which would eat up all of my potential cash flow. How would you guys go about putting in an offer? Should I ask what their terms would be on owner financing first? I was thinking my offer will have to be around 400k which would give me a 10% COC return and close to an 8% cap. I feel this is an extremely low offer but let's face it if 600k was a deal it would have been sold 9 months ago. Thanks for looking over this deal for me and helping me see it from a seasoned investors point of view!
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  • Dan Genzel
    Real Estate Investor · Delafield, WI · Member since 2011 · 57 posts · 15 votes
    9y

    15 year amort seems low.  You dictate the seller financing terms.  Start with 30 year amort, interest only for 1 year (while you add the value) due in 10 year @ 4.5%.  Just be prepared to negotiate.  I would also pursue other banks.

    My advice to you is DO NOT let the fact seller will do financing impact your price too much.  Be dispassionate about the deal.  Its just a property!  There are other around the corner!

    Also have you looked at syndicating this deal?

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  • Darwin Crawford
    Rental Property Investor · Scottsdale, AZ · Member since 2016 · 296 posts · 243 votes
    9y

    @Terry Smith - happy to help, although I think "seasoned" is an overly generous adjective....

    What I am learning through this process is that the low-level commercial stuff (In my world, that's sub $1mm), is just not super complex.  The big boys on here deal with lots of money, lots of numbers, and have some pretty fancy data analysis tools for what they do.  I think its a function of having to cover a wider geographic range efficiently, for which big data is very useful.  

    That being said, for a deal in your backyard, that has pretty basic numbers, and a limited number of inputs, I feel comfortable saying that if it meets YOUR personal parameters of income, risk, management headaches (or kicks off enough cash to pay a PM), and you have truly done your homework, then go for it.  

    Part of being a successful property investor, in my book anyway, is the ability to accept that you are going to miss things, going to make mistakes, but that you can handle them, however that may be.  

    I personally come from a construction background, so "physical plant" issues don't bother me, and I consider it an advantage.  the same would play for a lawyer, or CPA, or banker, having a niche skillset that they bring to the table and can do better than the average bear.  

    And ditto what @Dan Genzel said - seller financing should not affect your price much. One tactic I used was to run the numbers, and let the sellers know that as their building sits, a banker would have to be stone drunk to even consider financing it. I backed it up with DSCR calcs, and operating statements. In other words, their only hope of a sale was someone like me who can be hands-on, and they had better help me out if they want this turd off their books.

    Also - pick up a copy of "Never Split the Difference" by chris voss

    Don't know if that will work for this sale, but it worked for me.  Good luck! 

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