Should I pull the trigger?

25 Replies

Full disclosure: My partner and I are complete newbies to wholesaling and commercial real estate. We had no intention of getting into commercial, but in the process of looking for residential properties to wholesale we came across a FSBO commercial deal. It's a 2,000SF former bank branch on an acre lot. Solid construction on a corner lot with plenty of parking. The owner (he was using it as a small church) took a liking to me and my partner, saying, "I like you. How can we make this work?"

I did a crash course in evaluating commercial property, and here are the numbers based on the nearest comps (in terms of potential lease/SF): Most recent tax appraisal: $240,000. Asking price: $230,000. He chose not to list with a realtor who wanted to price it at $260,000. No major rehab that I can tell -- I'm estimating $10k for cosmetics. EGI ~ $32,000 (based on triple net); NOI ~ $20,000; Cash on Return ~ 8.7%; Cap Rate ~ 7.8%; DSCR: 1.5. Zoning says it can be used as restaurant or recreation or retail with a site plan review.

There aren't many comps, so the numbers are rough. I have an attorney who can hold my hand through the process. I'm thinking I make an offer (below asking?) and then market hard to find my cash buyer. But this is my first time around the block AND IT'S SCARY to contemplate pulling the trigger! Any words of wisdom or encouragement out there? Heeeeeeeelp....

@David Ronka

I manage really estate for a bank and can tell you that from experience $10k to make it market ready for retail or restaurant seems awfully low, unless you're just demo'ing teller counters, coupon booths, partitions, etc.

Doesn't sound like there's a vault but if there was that could easily cost up to $100k to remove.

Going from a bank layout to traditional retail/restaurant (or vice versa) - if not evaluated prudently - can be cost prohibitive in your deal.

I'd look at highest and best use then revisit your rehab budget more closely.

Would also be good to know how long the space sat vacant and why there hasn't been much corporate interest.

The owner wants $230k but doesn't want to list with a realtor for $260k?  I wonder why.

Be that as it may, if the prospect of pulling the trigger scares you then that should be telling you something.  I suggest discussing with your partner what could go wrong and why that scares you.  An itemized list could be helpful.  In this way, you are identifying specific risks related to the investment.

With these risks identified, you can consider ways to mitigate these risks, or even transfer them to another party willing to assume the risks.

Options were created as a means of mitigating/transferring risk and have been around for hundreds (if not thousands) of years.

Executing an option agreement with the property owner may be an alternative worth considering.

Thank you, @Alex Mao . You're right -- $10k wouldn't cover conversion. As I've looked around at similar properties in the area, build-out for commercial use seems to be covered by the tenant. There is indeed a vault, and I was planning on that being incorporated into the use (e.g. storage). The previous layout was a church -- pretty empty at this point.

Would you recommend getting a contractor or two into the space to give me bids for rehab (not knowing the ultimate use, rehab would be to get it to neutral?)? I'd need to do that prior to putting it under contract, obviously.

The pastor is retiring, and I believe has some looming health issues. It's been on the market  for about 3 weeks now (i.e. sign outside the building without any other advertising that I'm aware of). He's had interest from people who want to use it for a restaurant, but they're not purchasers (they want to lease the space). The location is a small town in New England -- 2 or 3 other businesses in the "downtown" with a strip mall about a mile away. But it's about 15 minutes from a few very popular and "booming" towns.

I was thinking of calling banks to see if I could get in and present the deal to the commercial loan officer to what s/he says about financing it (although I'd be looking for cash buyers). At this point in my real estate journey, I don't know what I don't know, so I'm looking for ways to get further into my learning curve. Thank you again for your response!

Thank you, @Alan Johnson . Good question. I mentioned some factors in my post to @Alex Mao . Our read on the owner is that he's highly principled and mission-driven. We got the feeling that he doesn't want/need to maximize profit, but he wants it to go "to the right people." The deed is in the name of the church, so it's a non-profit. I'm not sure what that means for any profit that's made on the deal. It looks like he's got a $150,000 mortgage on it, and we think he wants to recover costs for some of the upgrades he's made along the way (septic, fencing, addition).

That's an interesting idea about and options agreement. We'll talk to our attorney about it.

I think the major source of nerves is first-time jitters. It's also due to the fact that we don't know what we don't know. And as newbies, that can be dangerous. As I understand wholesaling, there is very little risk to the wholesaler if the P&S is written properly. But we don't want to risk my relationship with cash investors by presenting a deal that's not well thought-out and viable.

Thus this thread -- seeing what more we can learn from this awesome BP community.

I would not persue a wholesale based on your description of the seller as highly principled, not wanting to list and wanting the property to go to the right people. If you have no plan to actually close on the property I think he would no doubt be upset especially if you just assign a contract to someone he does not approve of which apparently is why he is not listing. You are essentially doing what a realtor does. This can hurt your reputation in a small town.

IF you do decide to move forward you should offer complete disclosure and transparency. Let them know you plan to find an end user and sell your contract. 

I don't see much mentioned on what the demand for the USER of this building is in that particular area.  It's all great to make numbers work on paper, but it's a whole different story in reality.  I think a critical part of your due diligence has to be determining what the chances are of it becoming occupied again.  That is true whether you are going to hold it or flip it.  Once you own it, it becomes your problem, not his.

You mentioned waiting for your "cash buyer", so it sounds like your intent is to flip it.  Know your numbers and don't paint yourself into a corner.  You also mentioned that the property is 15 minutes from a town that is happening.  In commercial and particularly retail (which this sounds like), 15 minutes from a happening place doesn't carry much/any weight.  It's kind of like saying you are 15 minutes from a great location (remember location, location, location - which is even more important in retail).  Not a great selling point, in my opinion.

My suggestion is to use this as a chance to learn, but be very hesitant to commit to this deal.  My gut is telling me that you are trying to make something out of nothing, which can be good...or could be very bad.  If you can't negotiate the deal to the point that there is no way you can lose, move on to the next one.

@David Ronka Commercial is a different beast all together. Your comps here would be the square footage price on how much you would ask for NNN leases. What if you buy and the place remain empty for a while, which is very possible for specialized commercial spaces. You would need a leasing agent to be able to market the space to their lists. I would be hesitant to jump into it without consulting with a local broker.

Thank you @Greg Dickerson , @Adam Johnson , and @Henri Meli .

Greg - I appreciate your perspective about the seller's principles. That got me thinking, and I do think I want to do complete disclosure and transparency.

Adam - Very good point about location and also about using this as a chance to learn. It's certainly already been that!

Henri - We've only got one comp for that immediate area for $/SF and NNN.

Clearly there are a lot of unknowns here. What we really want is some help evaluating the property. Any ideas for who we might bring in to give a more professional valuation? And can we even bring someone on-site before making an offer and getting under contract? It feels a little like an unsolvable conundrum -- we need to bring someone on-site to help us determine the value, but we can't really have that kind of access until we put it under contract (for which we need to know the value). Thoughts?

With unique one off deals like this your value is going to be determined by looking at three things.

comparable properties 

replacement cost 

CAP rate

That being said it all boils down to location and demand. The property is worth what someone is willing to pay so the key is either finding the right buyer or getting a really compelling price well below replacement cost.

I have a simple rule that has kept me out of trouble on every deal I used it on.

Always have a buyer who will pay more than you did for the property.

The only exception to that would be if I had someone like McDonalds that told me they wanted to lease the building from me.

I have seen a lot of investors come and go with a strategy to buy and pray that someone will pay more sometime in the future. 

I have never believed in the buy and pray strategy.

I would start looking for a buyer or someone to lease the building and after I had that lined up then I would try to buy it, 

but first I would ask myself why am I messing with this deal, it sounds like the the seller wants market value for it and has little motivation to sell. 

I would look for someone much more motivated, after I found a few people who were interested in buying or leasing the property I was looking at.

@David Ronka All great advice and don't know if I can add any value here. You stated that he is a non-profit, make sure you go down at the assessors office and get what the taxes will jump to for a new owner. Because if he is a true non-profit he hasn't paid taxes or is "tax-exempt" status with that property. 

I agree with the other on the not listing with broker, my guess is that he had a few brokers tell him what everybody here is telling you and now he is trying something else. It has been my experience that this may be the case.

I would look at the cost to scrap the land and then look into selling to gas stations, Walgreen, etc. But first find out if this property is the path of growth. When you state that this property is 15 minutes from the action - that is either really scary or that means that you are in the path of growth. My guess is that your not in the path of growth because banks, like retail stores have to have large numbers of people through their doors to make their numbers work. Especially banks have to open a number of new accounts per month/quarter to stay liquid and the only thing that drives that is population. 

Most important question is - Why is he selling? 

Good Luck

Thank you, @Pat G. , @Brent Shields , and @Greg Dickerson . All sound advice. What I'm hearing is that I should focus on getting a buyer before making an offer. I'm new to this business, but in my other business endeavors, when I work with the potential competition, we sign a partnering agreement. Does anyone know of such a thing in the real estate world? For example, if there's a wholesaler near me who's more established and works with commercial property, I could see bringing them in for a split of the wholesale fee. But I'd want to bring them in to look at the property prior to making an offer -- to help in the valuation. And therefore the desire for a partnering agreement.

Pat G - Thanks for the advice on taxes. I went to City Hall and looked them up.

Brent - I like your simple rule. 

Greg - You really got me thinking about location. It's a potentially up and coming town center, but right now it's pretty sleepy, and I think retail would have a hard time of it. All of the towns in the nearby area have taken off and significant growth is happening. But it's anyone's guess if this town is in the growth trajectory.

@David Ronka - I think you answered your own question with your last post "...but right now it's pretty sleepy...".  I think you are making a fundamental error here which both @Brent Shields and I have hinted at.  You are looking for a way FOR SOMEONE ELSE to tell you what you should be paying for this property!  Stop right now!  Please, for your own sake!

This rule applies to every piece of property or asset you will ever buy - what is it worth to YOU?  You mention that maybe this area will have something happen in the future.  How much is it worth to you to gamble on that happening?  Are you willing to spend $ 5,000/year for 15 years waiting for that to happen?  (I'm making up numbers here based on absolutely nothing, just using something to make my point).  If you answered "...yes, it is worth potentially laying out $ 75,000 in order to profit $ 75,000 over 15 years...", then move forward.

The fundamental questions you need to ask YOURSELF:

1)How much is it going to cost ME?

2)How much am I going to make?

3)How long will it take me to make it?

4)How likely is it that what I am predicting is actually going to happen?

The last question might be the most important.  It appears from your posts that you keep struggling with how to determine the offer price, with at least a partial basis being the ASKING price.  That's a mistake, in my opinion.  The real questions need to focus on determining what the risk is for you, then pricing that risk.

I will use a real deal that I closed on to demonstrate.  I will start by saying that I am not bragging.  My style has seen me thrown out of rooms when I present my offer at times. That's ok.  I am investing to win, not investing and hoping I win.

In my deal, commercial property, the asking price was $ 950,000. At my very first glance, it seemed worth a little time to dig into to see if it was worth pursuing. The more I dug, the more problems and the more risk I uncovered. As I did my analysis, it revealed a truly daunting project. BUT, at the same time, I also saw the potential, after a lot of effort on my part (read time and more money), for a respectable upside. I also could see that what it needed matched up fairly well with what I was capable of. In short, there was risk and reward, and I felt they were fairly well matched. However, my risk was still present as soon as I took title to the property and there was no guarantee that what I thought would happen, would actually happen. With all of that in mind, I came to an offer price that was based on what that particular property was worth at the time of acquisition. The offer turned out to be less than half of the asking price. That was what the property was worth to ME at that point in time. It had NO basis of what the seller was asking, it was worth I, as a ready willing and able buyer, was willing to pay. I eventually closed and still own the property today. It makes money for me and I have decent equity, but I also worked my tail off and took on a lot of risk. It could have gone the wrong way too and I tried to account for that with my original offer price. At that price, there was a chance that I could have sold it and at least broke even if things went south on me.

My point is, I don't buy anything based on what someone else tells me they think it's worth.  I buy based on what I think it's worth.  When I commented that this is a great way to learn, it really is.  You are now learning more about what it is that you need to learn more about.  Some of my best deals, and some of the ones that taught me the most, were ones that I never closed on.

@David Ronka as to your agreement to work with other people, I have found that if someone is a bad apple there is no document you can come up with that will cover all the things that can happen. What I do is trust people until they give me a reason not to trust them any more.

That applies to deals I am looking at or thinking about.

Once I am to the point of writing up an offer then I am all for writing things down to try and make everything clear so everyone can understand what the expectations are.

@David Ronka - it is one of the age-old challenges.  You can't gain confidence without experience, but it is tough to gain experience without confidence.  You are taking the right steps by asking questions, keep going with that.  I have been out of the buying mode for a couple of years, but I am jumping back in again.  I have intentionally been kicking the tires on properties that I already know that I likely won't like enough to write an offer.  My reasoning is that the due diligence steps are the same and I can use these "dud deals" as a way to refresh my thinking and get my head straight so that when a more solid deal comes along, my mind will be right.

Restaurant owner needs to put in over 120-180K to make it a restaurant. Retail shop can be lower. You need to review what prices were sold for a restaurant in your area and how long it took to sell if it was already a restaurant mate candidate.

I do not understand how you arrive at returns. I will go to city hall ask about restrictions …..

I dunno...flipping small, non prime location, kinda-weird-one-off commercial STNL sounds highly risky to me...unless you can get it for a song, and that ain’t the case here. “I like you guys” can be code words for “sucker born every minute” as this MAY NOT sell for anything close to $260k, or even $240k on the open market, and unless priced very attractively will not sell fast either. Therefore, you getting a buyer in quickly plus one that will pay you a premium sounds highly unlikely IMO. This is an Eastwood-esque “do you feel lucky” with 5 bullets in a 6 chamber revolver!

Just trying to prevent you from loosing you A$$ on your first deal ;)

I'm very grateful to all who have weighed in on this thread. My partner and I looked at the property again today with an architect and builder -- potential partners and investors. 

I think our next steps are these: We are going to make an offer and get under contract (assuming the owner accepts the offer). We'll work with our attorney to draft a P&S that has protection that will allow us to back out for any reason with return of earnest money (of course, the seller's attorney may advise against signing such a P&S, but I've seen templates for this). After we have it under contract, then we will continue in earnest to find cash investors. We'll also evaluate whether we want to put our own money in and develop the property, and if so, we'll establish a LLC for purchase (with possible partners). If not, and if we find a cash buyer, we'll wholesale the deal. If all fails, then we will pull out prior to closing with return of earnest money.

I think the only risk here (other than the risk that we would assume should we buy the property ourselves) is to reputation if the seller isn't aware of what our plans are. So, we would give full disclosure with the offer -- that we are looking for cash investment partners (or buyers) and do not plan to finance.

And in the process we'll learn, learn, learn.

So, what am I not seeing? Can you see any other risks?

I like shorter term leases with cash flow in place at higher cap rates.

I can own it and decide over time what I want to do with it.

If there is no income there then I need to get it really cheap to feel confident I can do something with the site. Big difference between Walgreens rent and Popeyes type rent for resale.

I have seen banks with vaults turned into bars, UPS type stores,etc. 

Just wanted to give an update to anyone who replied to this thread and is interested. We crunched the numbers and decided to make an offer. When we did, the seller was surprised that we were offering "$100,000 below asking." What?? It seems that he told us (on multiple occasions) the wrong asking price. It wasn't written down anywhere in his materials. We walked away. :)

We learned a ton in the process of evaluating the deal, especially from everyone who posted on this thread. Thank you all!