A Tough Nut To Crack, There's Got To Be A Way

Commercial Real Estate Investing
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A Tough Nut To Crack, There's Got To Be A Way

Mark B
Investor · Albuquerque, NM · Member since 2009 · 118 posts · 43 votes

I've been working on a difficult deal, but I just know that it should be doable. However, up to now, the seller and I can not come to terms on the price.

I think the experienced BP pros (such as yourself) could maybe help me structure the deal in another way.

Background: The seller has a 3200 sf office/retail building that she would like to sell with owner financing. She owns it outright (paid it off in 2001). She bought it with owner financing in '94 for $125k, 9% interest.

My plan is to buy the building, move my office into half and convert the other half to a microbrew tap room. (I'm an architect and have already done the zoning/ liquor license verification.)

Seller is asking $275k. The comps don't justify this. The building is also in rough shape. She hasn't done any maintenance or upgrades in the 18 years she's owned it. I see no justification for doubling her money (the neighborhood has not changed either.)

She wants to close shop (it's practically empty and she has already retired for all intents and purposes.) She wants to hit the road in her RV and get a regular income from the payments.

She is so focused on price that we have not been able to talk terms too much. I gave her a formal offer in writing (in person) of $176.5k with 10k down and 5% interest. I thought this was going to be a starting point of negotiation, and that we'd negotiate toward 200k. Her agent called mine to say "no thanks".

I think the key is to frame the offer differently; talk income per month or some other angle. There is no other interest in the building. It has been on the market one year now. What do you think?

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

Get your agent to ask her agent to give comps that support the 275,000 value.

You want to see how they are arriving at their price in their head.

10k down isn't even 10% of your offer.It wouldn't even cover foreclosure costs most likely if you defaulted.

First figure out how much the seller is wanting down.The sellers plans might hinge on having XX numbers of dollars to live off of while traveling and then getting payments.

When I look to buy a restaurant sometimes the sellers are retiring and need at least half down to live off of and replace that business income.

Ask your agent if it's the amount down,the interest rate,or the purchase price they object too.Could be all but you are trying to nail down what is more important to the seller out of the three.

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  • Mark B
    OP
    Investor · Albuquerque, NM · Member since 2009 · 118 posts · 43 votes
    15y

    I know photos make these kind of questions more real. Here's an album of pictures if you are curious:
    http://archibot.imgur.com/commercial_prospect#N7RxD

    Thanks, Mark

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

    Get your agent to ask her agent to give comps that support the 275,000 value.

    You want to see how they are arriving at their price in their head.

    10k down isn't even 10% of your offer.It wouldn't even cover foreclosure costs most likely if you defaulted.

    First figure out how much the seller is wanting down.The sellers plans might hinge on having XX numbers of dollars to live off of while traveling and then getting payments.

    When I look to buy a restaurant sometimes the sellers are retiring and need at least half down to live off of and replace that business income.

    Ask your agent if it's the amount down,the interest rate,or the purchase price they object too.Could be all but you are trying to nail down what is more important to the seller out of the three.

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

    Which building is it in the pics??

    That area and the building doesn't look that bad actually. I have seen much ,much worse.

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  • Rich Weese
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    15y

    I voted for Joel reply. It was good, imo.

    Mark- you need to remember that you're asking the seller to do you a favor by carrying the financing. You have to provide something extra to get seller to do the favor. I don't see any sugar being offered. Joel mentioned the 10K not covering possible foreclosure. Heck, it doesn't even cover commission and closing costs. The interest rate is sfr owner occupied rate! You're offering nearly FORTY % less than asking price! I probably wouldn't have countered either.
    Were you asking for 30 year amort and no balloon also? My guess is yes. Owner financing is tough to find, but your offer made it impossible, imo. Rich

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  • Mark B
    OP
    Investor · Albuquerque, NM · Member since 2009 · 118 posts · 43 votes
    15y

    @Joel, the building is the one with the block screen wall. I show the other buildings and Route 66 for context.
    I think you make great points. Seller financing usually accounts for a greater sales price, but not this extreme. My agent pulled comps and they didn't even want to look at them. It was as if the number was pulled from the hat.

    I agree with you and Rich that my downpayment was too low too, but again, I thought we could negotiate. I think she thinks she can rent it for 10$ psf but the comps in the 'hood are $6.50 (asking). Another problem is that her agent owns the building next door, and has overestimated the value and pumped up her expectations. She just fired this agent by the way, and they took the for sale sign down.

    @Rich, I'm sure I upset her with the offer amount despite the fact that it matches the comps. I did have a contractor visit the building and give me a bid to make the necessary repairs (roof, all floors, elec., ceilings) and his bid was $70k. By the way, I used a 20 yr amortization and a 10 yr call. My accountant thought that 5% would be attractive to them since they would prob. not do a 1031 and the banks aren't paying but 1% interest. This may have been a misstep too.

    My next plan is to meet with her face to face, one on one and see what she wants in terms of monthly income. I think I can up my downpayment to about $25k. What do you suggest in this case where her asking price does not match the comps? And her rent expectation is totally unrealistic without major improvements?

    Thanks,
    M

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  • Ross Verbiyan
    Residential Real Estate Agent · Boston, MA · Member since 2011 · 36 posts · 3 votes
    15y

    As a real estate agent, I would send her comps for the neighborhood and recently sold properties. Then I would send an excel spreadsheet outlining how much rent/interest the owner will receive.

    Another idea could be is to make her a partner in the Microbrewery. You supply the skills and hardware, she supplied the building and makes the improvement. This way you both profit and don't have to worry as much about funds and liability

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  • Mark B
    OP
    Investor · Albuquerque, NM · Member since 2009 · 118 posts · 43 votes
    15y

    Thanks Ross, I think that is a good idea about comps. I'm taking my comps over and a couple examples of rental rates in the area. I don't want to involve her in the business; I'd really like to invest in the building.

    Just to clarify for Rich, the seller financing is her preference. I can also do a SBA loan and get a very good rate (not 5%, but I can negotiate up here.) She wants seller financing because it pays WAAYYYY better than a 1% CD right now. So I was not looking at this being a favor from her too much. The low down would allow me to put another $20k into repairs immediately (floors and roof.) So, she would be protected a bit if I defaulted. I think we could write those improvements into the deal, right?

    Thanks for you insight,
    M

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  • Kevin Yeats
    Lender · Fort Pierce, FL · Member since 2009 · 825 posts · 486 votes
    15y

    Mark, unless this is the last *nut* in the neighborhood, why are you trying to crack the hardest one?

    If the current owner believes it is one value ($275) and has reinforcement from the realtor next door, as Rich pointed out, your offer is 40% lower than her mindset.

    Your offer still may be at market value but she is not selling at that price.

    The easiest answer is "Next" ... that is find an easier nut to crack.

    PS ... Interesting flooring

    1Reply
  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    15y

    It sounds like income for her is the issue. One other option might be to offer your price but come in at a higher interest rate so her payments are where she's looking for.

    Then, you could refi later on with a bank and have the cash flow you want.

    176k and 5% interest for a house listed at 275k and one she's going to owner finance all but 10k seems like a quick way to get rejected.

    You gotta give her something. Either the price, the rate, or getting your own financing so she has no risk and gets paid in full.
    But it seems like you're trying to win on everything.

    btw: I'd do more than just show her comps. I'd get an estimate on all work that needs to be done so you can show her how much you're going to need to pay for rehab after you buy it.

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  • Mark B
    OP
    Investor · Albuquerque, NM · Member since 2009 · 118 posts · 43 votes
    15y

    @ Mike, thanks for the idea about refi-ing. That could work. Looks like you didn't read my response two up from here. I did get an estimate.. check it out.

    The owner financing is her idea. I followed my agent's advice a bit here - he thought since she had no offers in a year, in a dead market, that she would be ready to negotiate. I guess I was too aggressive - but the building isn't worth anything close to her asking price.

    I would love to just move on, but this is the only building suitable for my needs in this very small neighborhood. I need to expand my boundaries, or wait, or have a breakthru - I'm looking for the breakthru.

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  • Chris Stutte
    Developer · Corona, CA · Member since 2011 · 9 posts · 3 votes
    15y

    Mark, you are missing a key piece of info the owner has let out of the bag: she wants to get out in her RV! When you meet face to face with her that is what you you want to focus on. Play to her needs. "I would love to see you get on the road and fulfill you dreams this summer, and I think we are close to making that happen. I can offer you....."

    I once had a hold out on a project I was working. One retired lady would not sell her house and I had already purchased all the houses around her. She let it slip that she wanted to live in the house until she died because she was only 2 hours from her grandchildren in Florida. Next meeting, I had brochures for every type of senior housing development in Florida, an expedia print out of air fare prices, and gas price listing (in the high 4's at the time). I told her she could see her grandkids everyday, stop buying airline tickets, and wasting her money on gas. AND I would pay for her move. We closed 5 days later.

    Sometimes acronyms, financing strategics, CAP rates, blah blah blah mean nothing to people. Facilitate their wants, and you will have a deal.

    Good luck. Love the micor brew idea.

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