Investor · Spring, TX · Member since 2012 · 121 posts · 26 votes
I have an owner of a auto shop who wants to sell the building. I have now experience in commercial property so I need help in doing my due diligence before a make an offer. I would want to wholesale this property. The owner gave me a number of 860K. I need help in evaluating this deal. Where do I start? What do I need to ask the seller?
For a quick back of the envelope figure out the NOI from proposed lease and expenses then divide by prevailing cap rate for comparable properties. You can call a broker or appraiser to find out or just estimate it at somewhere between 10-15%.
This at least gives you a ballpark range and let's you know of his asking price is anywhere near reasonable.
If he already has lease, get a copy or talk with him about what he will pay you. Most typical would be to create a NNN ("triple net") lease where he would still be responsible for all maintenance, taxes, insurance, ect. Make sure to read up on NNN leases and have an experiences attorney help draft one. You can get approximate rental rates from a broker or appraiser.
Also you'll want to get an idea of the financial stability of him and his business. If he goes under in a year then it might be tough to release the speciality building.
I have owned one for many years but got it @ auction with all the equipment but no where near the price you're looking at. Mine runs about 2500sq ft plus an office, a cement paved lot & storage shed. I wanted a 18% p.a. return & a NNN lease, so t's been a goldmine.
My NNN tenant is always busy & in <4 years was able to quit his full-time (12 hr shift) job @ the 'stealership' to run it with one other employee. He now wants to do a CFD.
Insurance coverage is tough to get & premiums can be high. I make sure the NNN tenant has a lot of it to complement what I need (including my $5mill umbrella). He has to have mine in place before he gets his as it's required to keep his licensing etc. The city fire dept & an EPA guy will drop by unannounced to do an audit & I think he only got fined once for expired fire extinguishes.
I am looking at another, also complete with all the equipment, but the numbers are not there, YET. That county has much higher (ever increasing) commercial property taxes.
Around here it's tough to get financing on them so the return would only be 10-11% on a cash buy.
P.s. The guy I have in place had already been in business @ another rented location that was shut down by code enforcement. But he did allow me to see BOTH sets of books to ensure he was viable & could afford my NNN.
@Ronnie Sparrow there are two kinds of due diligence you need to do
Financial due diligence
Physical Due Diligence
The first one is to determine if this is a good deal. You need to know, are you going to be able to count on the rental income from the current tenant? Or will you need to find a new tenant and what will that tenant pay? Also is there a higher and better use of this property? Could it be worth more by tearing it down and putting up a skyscraper? Highest and best use can be a pretty sophisticated analysis for a new investor.
You also need to do Physical due diligence. Some of this will be handled by your attorney and or title company. As @Mathew Paul said an environmental inspection is key. You will need at least a "Phase 1" environmental check. Underground tanks and tire disposal are both considered risks. Both are common for auto facilities. You will need a survey, building inspection, zoning check, appraisal and many other items. Many of the due diligence items will be required by the lender.
A word about title companies, real estate brokers and attorneys. You need to deal with ones that handle these types of commercial deals. Do not use a generic contract for this deal. Typically significant commercial deals have contacts drawn up for that specific deal.
Commercial deals have a lot of moving parts. Make sure you have top professionals guiding you. Good luck - Ned
Thank you guys for all your replies. I am going to start with a Commercial broker or appraiser who can get me a ballpark value of the property. It is located on a very busy street and on a big lot. It is on a lease for 5 years, not on a triple net lease. It is a home which is tied into some large garages and used as an auto shop. I just want to get a general idea of what the market value is. Just looking for a quick free ballpark figure.