Advice on buying Commercial Bldg, without broker, owner to occupy

Commercial Real Estate Investing
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Advice on buying Commercial Bldg, without broker, owner to occupy

Kirsten Ostby
Rental Property Investor · West End, NC · Member since 2016 · 98 posts · 32 votes

Looking for some advice on how to handle a commercial real estate transaction with out the involvement of a broker. I'm looking at a few different buildings, and talking directly with the owners about purchasing. The main building I'm interested in has two spaces, one of which my future business would occupy, and the other space has a tenant in place with 4 yr lease remaining. 

I've started the process on a few things: 

financing: working on getting bank financing for the loan above my down payment, 

zoning: started the process of making sure my business would be allowed in the space. 

Lawyers: meeting with two lawyers next week. I'm wondering if having a lawyer to write up/review the real estate contract is one of the more important steps if I don't hire a broker? 

Building Inspector: I haven't started looking for one yet. Any tips on how to find a good one?

Request Lease for review: anything specific that I should be looking for with the current tenant's lease? 

Negotiating purchase price: The current tenant is paying $3200/month rent. Any tips on how I calculate what a fair offer range would be? The owner has started by asking $700k, and I'm thinking closer to 500k. 

What else am I missing? 

I'm familiar with the process of buying and selling Single family homes, but this will be my first commercial bldg transaction. Does anyone here locally have professional contacts you would recommend? 

Thanks!

Tags: Moore County, Southern Pines, Pinehurst, West End, Aberdeen, Raeford, Fayetteville, NC, Hoke County, Cumberland County, 

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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
8y

Kirsten if the seller is SO FOCUSED on not paying a buyers broker commission for say 700k at 3% = 21,000 then WHY would they sell a property for 200k less than asking pricing? Just sayin....... : )

If your business occupies 50% of the space then some look at SBA loans.

Your situation has a lot of negatives to it for a broker anyways. Lot's of heavy lifting and low fees with headache and big use of time.

21,000 in commercial space is tiny. Your transaction has many layers of components to it that must be overcome. The commercial attorneys usually make 200's to 300's per hour so this is not the residential space. Plan on spending probably close to 10k on lawyer fees and maybe tens of thousands depending on how complex the transaction gets.

Good luck. No legal advice given.   

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  • Priyanshu Adathakkar
    Realtor · Columbus, OH · Member since 2017 · 313 posts · 245 votes
    8y

    Hi Kristen,

    As a buyer, you do not pay the broker anything if you are not even aware of how to calculate a fair price, in my opinion, you are way over your head! Buying - selling commercial real estate is very different from residential transactions. Goodluck.

    Pri 

    2Reply
  • Kirsten Ostby
    OP
    Rental Property Investor · West End, NC · Member since 2016 · 98 posts · 32 votes
    8y

    @Priyanshu Adathakkar The seller is not willing to pay a buyers agent commission, so I would pay it myself if I have a broker. Some brokers offer great help and are worth a lot. However in my current situation, I'm not seeing that value in the broker I've been casually working with. 

    0Reply
  • Priyanshu Adathakkar
    Realtor · Columbus, OH · Member since 2017 · 313 posts · 245 votes
    8y

    @Kirsten Ostby there is a big difference between a residential Realtor and a Commercial Realtor, if you are working with a residential person you are better off on your own as you are likely to make the same mistakes but without having to pay a commission. A commercial person can help you build in the commission in the offer price and make it part of the closing costs.

    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    8y

    Kirsten if the seller is SO FOCUSED on not paying a buyers broker commission for say 700k at 3% = 21,000 then WHY would they sell a property for 200k less than asking pricing? Just sayin....... : )

    If your business occupies 50% of the space then some look at SBA loans.

    Your situation has a lot of negatives to it for a broker anyways. Lot's of heavy lifting and low fees with headache and big use of time.

    21,000 in commercial space is tiny. Your transaction has many layers of components to it that must be overcome. The commercial attorneys usually make 200's to 300's per hour so this is not the residential space. Plan on spending probably close to 10k on lawyer fees and maybe tens of thousands depending on how complex the transaction gets.

    Good luck. No legal advice given.   

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  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    8y

    Interesting thread, but I would talk to your attorney and advisors your trust.

    Yes, you should be able to price your own commercial properties--doesn't have to be accepted, but if you don't want a broker to price it for you, who will?

    1Reply
  • David Miller
    Attorney · Durham, NC · Member since 2016 · 224 posts · 126 votes
    8y
    Definitely retain a lawyer to draft the PSA (purchase and sale agreement) to acquire the property. That document should require the seller to deliver due diligence documents like the current lease, rent roll, security deposit info, past financials (ie 2-3 prior years operating expenses, trailing 12 months, etc) and other property related info. Joel Owens is correct on legal fees for a commercial real estate attorney worth their salt. Zoning is something you can probably answer before making an offer. Your purchase price is based on a lot of factors but at a minimum get an educated guess on the projected NOI and then apply the prevailing cap rate for that type of asset and see where you land on price. Even if you occupy part of the space, I presume you will setup a separate entity to own the real estate and then your business entity can pay rent to that entity, so factor that rent into the NOI calculation. As far as cap rates go and market terms for this type of acquisition, a broker would be helpful. On your debt financing, a community bank may be a good option. Reach out to multiple lenders to get a sense of what terms you can get.
    3Reply
  • Kirsten Ostby
    OP
    Rental Property Investor · West End, NC · Member since 2016 · 98 posts · 32 votes
    8y

    @David Miller Very helpful tips, thank you! 

    Yes, separate entity to own building and our other business occupying the space will pay it rent.

    Yes on community bank. I've spoken with a few local banks and found two that I'm working with in more depth. 

    Thank you for going into detail on the PSA and the due diligence documents the seller should provide. I will keep those things in mind going forward. 

    0Reply
  • Steve HodgdonPro Member
    Investor · Novato, CA · Member since 2015 · 434 posts · 321 votes
    8y
    How about seller financing? once stable them get an sba loan. did my first transaction this way. building was inspected during a drought. then came the rains. 26 buckets catching water for months. I paid sellers price because he gave me terms. 750,000 7 year balloon 15 year amortization. worked out great. Get an experienced commercial RE attorney and tax advice
    1Reply
  • Kirsten Ostby
    OP
    Rental Property Investor · West End, NC · Member since 2016 · 98 posts · 32 votes
    8y

    @Joel Owens If a buyer is working with a commercial broker, they will still be incurring close to 10k in lawyer fees, is that correct? Or does a broker help with some of the things a lawyer would otherwise handle?

    I agree with you that a 21k commission in commercial realm is small. 

    0Reply
  • Kirsten Ostby
    OP
    Rental Property Investor · West End, NC · Member since 2016 · 98 posts · 32 votes
    8y

    @Steve Hodgdon that may be an option. Seller said he can offer partial financing. 


    I'm meeting with an attorney tomorrow morning and another the following day. Any specific questions I should ask them?

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    8y

    10k attorney fees are smaller. 

    That is with a broker usually helping with some of the due diligence. If not the costs can run sometimes into the tens of thousands of dollars especially if title issues found.

    What most buyers do is put a non-binding LOI out to the seller to see if you both are in the same Universe on price and terms for doing a deal. If you are not close then no sense to rack up attorneys fees.

    Remember a lot of attorneys work on billable hours so some love to rack up fees. An example of knowing if you have a good attorney or not is if one is racking up 2,000 in attorney fees negotiating a 500 item in a contract. The excellent attorneys want you to have a successful transaction on only focus on items worth fighting for that make a high impact value to the deal.  

    No legal advice given.

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  • Kirsten Ostby
    OP
    Rental Property Investor · West End, NC · Member since 2016 · 98 posts · 32 votes
    8y

    Thanks for that clarification @Joel Owens. Makes a lot of sense.

    0Reply
  • Kirsten Ostby
    OP
    Rental Property Investor · West End, NC · Member since 2016 · 98 posts · 32 votes
    7y

    Figured I'd updated this thread....I was able to get the property under contract this summer, got the zoning change from HI to HI-C approved with the local government in October (what an ordeal that was!...), and closed on the property in November! Thanks for the input and suggestions when I was at the beginning of this process. 

    I'm betting a lot of you comment on threads that go no where and people who don't take action, so I wanted to share that this deal went through and I appreciated you all taking the time to give me help and suggestions 10 months ago. 

    @Joel Owens   @David Miller @Steve Hodgdon   @Ronald Rohde   @Priyanshu Adathakkar   

    3Reply
  • Vic Reddy
    Real Estate Agent · Dallas - Fort Worth, TX · Member since 2015 · 89 posts · 33 votes
    7y
    @Kirsten Ostby - Just curious - how much did u close for? Looks like u learned quite a few things along the way :) Good luck
    0Reply
  • Abraham SaldanaBusiness Member
    Investor · Southern Pines NC · Member since 2016 · 64 posts · 46 votes
    7y

    Hey Congrats!  Im actually just starting to do the same thing in Southern Pines. Would love to hear some of your advice and feedback!

    0Reply
  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    7y

    What were your closing costs? Attorney reasonable?

    0Reply
  • Ken Jernigan
    Wilmington, NC · Member since 2017 · 132 posts · 70 votes
    7y

    Just to update SBA options for something like this--if your business occupies 51% or more of the square footage, you may be eligible for 90% LTV loan for 25 years. But SBA will not loan for tenant finish out.

    0Reply
  • Kirsten Ostby
    OP
    Rental Property Investor · West End, NC · Member since 2016 · 98 posts · 32 votes
    7y

    @Vic Reddy low 500s. Seller originally wanted $700k. We negotiated for 6 months and I was willing to walk away from the property. I helped the seller with a few of his other real estate projects, and he eventually accepted my final offer. 

    @Ronald Rohde total closing costs $8,600. to include 12 months prepaid INS. Lender charged about $2,500. Attorney was only $1800. And her office has a good local reputation for commercial real estate. I wrote the purchase agreement with a little help from a friend using the standard North Carolina commercial purchase agreement form, and my attorney reviewed the Lease attached with the current tenant in the property. It's a pretty good lease with NNN, so we decided to keep it in place and not write a new lease until this current one comes close to ending.

    0Reply
  • Kirsten Ostby
    OP
    Rental Property Investor · West End, NC · Member since 2016 · 98 posts · 32 votes
    7y

    @Ken Jernigan good point about SBA. We are occupying a little over 50% and were pursuing a partial SBA loan. We were almost fully accepted on the SBA side with a 15% down pmt, but the bank backing the other portion of the loan denied us. It caught me off guard because the banker I was communicating with said we should be good to go, but I guess someone higher up made the final call to say NO after the SBA was approving us. *We are considered a startup, and could not qualify for the lower 10% down. 
    We ended up going with another local bank, 20% down and a percentage higher interest rate, but ammortized out over 25 years. I wanted a lower rate, but at that point I was just happy to get our financing and close!

    0Reply
  • Kirsten Ostby
    OP
    Rental Property Investor · West End, NC · Member since 2016 · 98 posts · 32 votes
    7y

    @Abraham Saldana welcome to the Moore county area, and best of luck! 

    1Reply
  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    7y
    Originally posted by @Kirsten Ostby:

    @Vic Reddy low 500s. Seller originally wanted $700k. We negotiated for 6 months and I was willing to walk away from the property. I helped the seller with a few of his other real estate projects, and he eventually accepted my final offer. 

    @Ronald Rohde total closing costs $8,600. to include 12 months prepaid INS. Lender charged about $2,500. Attorney was only $1800. And her office has a good local reputation for commercial real estate. I wrote the purchase agreement with a little help from a friend using the standard North Carolina commercial purchase agreement form, and my attorney reviewed the Lease attached with the current tenant in the property. It's a pretty good lease with NNN, so we decided to keep it in place and not write a new lease until this current one comes close to ending.

     Thats just a single doc review fee then. Didn't review title, loan docs, or any existing contracts, I imagine.

    1Reply
  • Account Closed
    Real Estate Broker · Phoenix, AZ · Member since 2018 · 83 posts · 28 votes
    7y

    I am glad this worked for you, but don't underestimate the value of a good Commercial Broker (and yes, that's part of the negotiation the seller will pay if structured right and they are reasonable) and an attorney on these deals.  There's no way that low amount of fees got you full protection, but hopefully, you will continue not to have larger issues.

    1Reply
  • Stanley Bronstein
    Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes
    7y

    @Account Closed is spot on. I agree with her completely. Glad it worked out for you.

    1Reply
  • Kirsten Ostby
    OP
    Rental Property Investor · West End, NC · Member since 2016 · 98 posts · 32 votes
    7y

    @Ronald Rohde yes, my attorney did a title search back to 1950 and i have a title insurance policy on this property. I forgot to mention that I had a state certified land survey done as well to show exact property boundaries, so that increased my title insurance coverage. As far as writing any contracts, no my attorney did not write any. She did not review my loan docs, but did review the existing tenant's lease. 

    0Reply
  • Kirsten Ostby
    OP
    Rental Property Investor · West End, NC · Member since 2016 · 98 posts · 32 votes
    7y
    Originally posted by @Account Closed:

    I am glad this worked for you, but don't underestimate the value of a good Commercial Broker (and yes, that's part of the negotiation the seller will pay if structured right and they are reasonable) and an attorney on these deals.  There's no way that low amount of fees got you full protection, but hopefully, you will continue not to have larger issues.

     That seems to be commonly stated Account Closed; the value a good Commercial Broker can bring. I live in a small area, and we only have a few options for commercial agents. I had a few red flags with the broker I was working with and after they let me negotiate their commission down to 2%, I decided I didn't want them representing me in a purchase negotiation. they also encouraged me to get the property under contract for the $700k the seller was asking. Hard pass...

    I may have made mistakes in this whole process not hiring all the professionals to guide each step, but I would bet on myself any day over a professional that is giving me reasons not to trust their credibility. After all, I care WAY more about this deal than any professional representing me would. For the record, My attorney did help me with the areas I needed guidance on. 

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