Your Ideas on Buying this commercial property in resort area?? ??

Question

I am being asked advice on something I have not done, so I am asking the BP community if they can help this couple.  Details:

1) The property is in a MAJOR tourist area, on a very busy main highway

2) The couple wants to run a beauty salon/spa/wellness center

3) The property is a 4BR 2.5BA house (zoned commercial - used to be a tanning salon).  Beautifully redone inside - perfect for this kind of business.

4) Couple wants to live in 2nd floor, so it can be financed as owner occupied, and first floor used for the business.

5) Asking price is $330K.  Zillow says $320K and Eppraisal says $220K.  Taxable value supposedly $190K.  Sold 10 years ago for $195K.

Thoughts?  Suggestions?  Things to look out for?  Ideas?

Ken Latchers · Answer

Thanks for the feedback so far, guys!

One problem, is that the asking price is likely considerably above the appraisal value.  There is not much available for sale in the area in the way of good commercial buildings.  I suggested they obtain a buyer's broker, as the commission will be the same - maybe the broker could get the price down without irritating the seller too much  :)

On the other hand, the mortgage payment will be far below asking prices for commercial spaces on this strip, which has a huge number of visitors (as I said, resort area).  And living in the building will keep their living costs much lower (rents are pricey in that area).

Karen Margrave · Answer

Ken Latchers In Orange County, and other areas of southern California, theres zoning for units called "live/work", allowing commerical use on the lower floor and residential on the upper. You may check to see if that is allowed in your area. If you don't have a zoning that will allow that you will end up with a non conforming property. As to the business idea, you'd probably be better served finding someone that specializes in business lisitngs to help.

Bill Gulley · Answer

If it's a home, not a commercial building, the zoning will not matter if it is to be  owner occupied and it is common for the area. This can go Fannie Mae, but the appraiser needs to make a comment concerning the zoning and that other residential properties are in the commercially zoned area.

I suggest they buy as a residence. After closing, if they desire to have a business on the property and it's permitted, so  be it.

There are thousands of beauty shops in converted garages and such home businesses,so long as permitted, do not violate the secondary market owner occupied status.

Just along hwy 71 in Branson, I put 4 such similar properties in the secondary. Single family dwellings can be insurance offices, accounting offices, beauty shops and light commercial activities.

The trick is to do the residence first and then open the business, however, I have also refinanced such properties, a bed and breakfast.

This is an underwriting issue as to what the lender will allow and while it can be done, it may be difficult as other may see concerns pointed out by Dion as more commercial than residential. DOes the tail wag the dog? Primary function and being common in the area is a subjective call. Good luck

Dion DePaoli · Answer

There are mixed use finance structures out there which are more residential in nature and even some eligible to be sold into the GSE's.  The particular one you have will not qualify, as it fails many of the tests.  This is a common misconception by the public where they think because the property looks residential in nature, especially in some small towns, will qualify for a residential type loan.  Some towns have residential type buildings which have been converted into restaurants, salon's and other types of businesses but that does not mean residential finance structures.  Mixed use is a unique property type and reviewed different than properties that are not hybrid residential/commercial.

The subject property here is already zoned commercial.  So the approved primary use of the building is commercial in nature.  Additionally, one of the tests is the business side of a mixed use does not alter the residential nature of the  property and generally speaking tanning salons fail that test.

All that said, they can still find finance.  A local or community bank would be the best bet to start.  The banker should be able to chat with them about structure and even review some of the business plan.  They might qualify for a SBA loan, which could help them acquire the assets they need to operate.  Tanning beds are not cheap and do not hold resale value well.  The cash layout from their side is still more than likely going to be pretty significant at the end of the day when everything is added up.  This could be a negative in the assessment of their reserves.

As for the business viability side, I think most of my initial thoughts were in my last post.  If they were my friends I would just try to logically walk through how they will make the business work.  Perhaps the area is saturated with high end similar business and they can benefit by being a low cost provider.  Etc, etc.  The bankers they talk to will give them an idea of what they think about it all as well.  If the bank is holding a couple notes on similar business types they might say "No Way" the other guys can't pay their bills or give some insight into the plan.

Hope it helps, good luck.

Ken Latchers · Answer

They are really good friends.  They knew I was a REI, so asked.  But I generally only deal with MFHs, so I did not really know what to say about living in a commercially zoned house and having a business (regarding financing, etc.)

Any additional thoughts appreciated.

Dion DePaoli · Answer

Not clear what your role is in the deal.  Are you being asked to be a lender or investor?

The plan for the business needs to be laid out.  That type of business has a wide brush of stuff that goes with it.  Tanning beds, inventory and massage chairs, etc.  All of that is going to cost money.  Does the business have a good plan and look like it is going to make money?  Just because your in a tourist town doesn't mean people will walk through the door.  It could even be the opposite as most resorts have similar much more expensive on site places that carry these goods ans services.

Comping the property out would not be like comping out a residential property as it is zoned commercial.  So you have to find similar commercial property not residential to use.  The on line AVM's like Zillow would not give you a good idea of value as it is treating the property like residential more than likely.

This type of financing is not what most folks think.  The loan is not CRE nor residential.  This is because the business owners wish to live on property and per post the property is zoned commercial.  This fall into a business loan with the property being pledged as collateral.  So hopefully, the owners don't think they can go get a conventional loan, it will not be.  This will require a higher down payment than a typical residential loan.  Additionally the borrowers will not benefit from residential loan oversight and foreclosure guidance from the state and fed government.  The owners will not have a personal mortgage for the residential piece of the property so that will also prevail on taxes.  Essentially, they are renting from the business.

The rental function of the owners also will affect value as sometimes the rental arrangement is less than prevailing market rent.  This may make underwriting in the future a little fuzzy.  Although these types of loans are very common.

If you provide some more detail of what you actually want to know or what your role is perhaps some additional insight can be given.

Steve Babiak · Answer

With a business on the lower level, this might not be eligible for "conventional" financing.  Even though it will be owner occupied on the upper level.  Whoever the lender will be should be queried as to how they would treat this.

As far as the tourist area goes, occasionally my wife and I will take excursions into areas in Lancaster County.  On days when there is lots of tourist traffic, the locals get hung up in that traffic as well.  I would be looking to avoid that sort of traffic myself for my normal everyday activity.