Two years in, buying my first NN deals — what am I underestimating?

Question

I buy small-format retail in the Southeast, under $2.5M. Two things are in front of me right now and seller financing is on the table for both — which is exactly the condition under which I think newer buyers overpay. Want a reality check before I move on either.

Rough shape, no specifics:

Group one — single-tenant NN dollar-store boxes, low-to-mid 8 caps, early-2000s construction, rural and small-town. Landlord owns roof and structure. One has well under a year of term left.

Group two — a small multi-tenant strip, considerably older building, mostly leased with one vacant suite, all gross leases, short weighted average term. Seller will carry with a real down payment.

What I'd like from people who've actually owned this stuff:

• NN reserves. What do you really set aside per SF on an early-2000s single-tenant box when the roof and structure are yours? Published guidance says $0.15–0.25 and it feels light to me. What have your actual roof and HVAC bills been?
• Short term. How do you price a single-tenant deal with under a year to expiration, when the tenant won't signal renewal until a few months out? Wait for the notice and risk losing it, or pay for the risk?
• Dark value. Realistic residual on an 8,000–9,000 SF box in a small town if the tenant leaves?
• Gross leases on an old building. No pass-through, so every insurance and tax increase comes straight out of NOI. Do you just price it in, or push tenants to modified gross at renewal?
• Exit caps. What do older Class C strip centers in small Southeast markets actually trade at? That one number decides the whole deal for me.
• Estate carrybacks. Anyone bought on a seller note where the seller was an estate? Does probate complicate the structure, and how did you handle it?
• The down payment. I don't want to borrow it — I ran gap funding at 10–15% and it goes roughly break-even to negative. Is an equity partner the only clean answer on deals this small?

NN reserves. What do you really set aside per SF on an early-2000s single-tenant box when the roof and structure are yours? Published guidance says $0.15–0.25 and it feels light to me. What have your actual roof and HVAC bills been?

Short term. How do you price a single-tenant deal with under a year to expiration, when the tenant won't signal renewal until a few months out? Wait for the notice and risk losing it, or pay for the risk?

Dark value. Realistic residual on an 8,000–9,000 SF box in a small town if the tenant leaves?

Gross leases on an old building. No pass-through, so every insurance and tax increase comes straight out of NOI. Do you just price it in, or push tenants to modified gross at renewal?

Exit caps. What do older Class C strip centers in small Southeast markets actually trade at? That one number decides the whole deal for me.

Estate carrybacks. Anyone bought on a seller note where the seller was an estate? Does probate complicate the structure, and how did you handle it?

The down payment. I don't want to borrow it — I ran gap funding at 10–15% and it goes roughly break-even to negative. Is an equity partner the only clean answer on deals this small?

What I'm trying to avoid is talking myself into something because the terms are soft. Happy to go into more detail on specifics by DM.

Hossein Sharifi · Answer

@Rashid Covington I'll take the gross lease question, since it's mostly arithmetic. Say the strip does $150K of rent and taxes plus insurance run $35K. A 10% rise in those two is $3,500 off NOI. At an 8.5% exit cap that's about $41K of value gone each year it isn't fixed. So I'd do both: price today's leases assuming expenses keep climbing, and push to modified gross with an expense stop at every renewal. The short weighted term actually helps, because you reset leases sooner.

On gap funding, your math matches mine. If the asset yields 8.5% and the gap money costs 12%, every dollar of it pulls your return down. Partner or wait, but don't borrow the down payment.

G. Brian Davis · Answer

@Rashid Covington. Tackle the down payment first since it shapes everything else. On deals this size, an equity partner or a small group pooling capital is usually cleaner than gap debt, which you've already shown eats the return. That's essentially how our co-investing club works, each member puts in a smaller amount so nobody carries the whole check. On the estate carryback, I'd have a probate attorney confirm the executor can actually sign the note. And having spent years underwriting loans, you should run both deals as if the seller financing didn't exist. If they only work on soft terms, that's your answer.

Rashid Covington · Answer

Thanks, this is really helpful. I’ll run both deals without the seller financing and have a probate attorney confirm the executor can sign the note.

On the down payment, finding capital partners is where I struggle most. Where have you had the best luck finding equity partners for deals this size? And how does your co-investing club work? I’d like to learn more about how members get involved and how deals are structured.

Gregory Acs · Answer

I’d be especially cautious with the single-tenant property that has less than a year remaining on the lease. A good cap rate can disappear quickly if the tenant leaves and the building takes months to re-lease.

I’d also stress-test both deals using higher maintenance reserves, realistic vacancy periods, and the full cost of seller financing. Favorable terms don’t necessarily make a property a good investment.

Have you compared the seller financing terms against conventional commercial financing, particularly the balloon payment and refinance requirements?

Aaron Zucker · Answer

Rashid, a few specifics from the buy side:

On reserves, the $0.15–0.25 guidance is too light when the roof and structure are yours. Price it from the actual components instead. A new roof on a 9,000 SF box can run $50k–$90k, and rooftop units are five figures each. Get a roofer's remaining-life opinion during diligence, divide replacement cost by years of life left, and that is your real annual reserve. On early-2000s boxes it usually lands well above the published range.

On the short-term box, do not just discount — structure it. Ask for a holdback or a note reduction that triggers if the tenant has not renewed by a set date. If the seller truly believes the tenant stays, they should be fine sharing that risk. If they refuse, that tells you what they actually think.

On the gross-lease strip, get your own insurance quote during diligence instead of using the seller's number. Policies get repriced at sale, and in the Southeast wind and storm coverage has jumped hard. With gross leases, all of that increase is yours, and it can erase the margin the seller's NOI shows.

And read the dollar-store lease for a go-dark clause. A tenant who can close the store but keep paying rent sounds safe, but it kills your refinance and resale value, and it usually means they leave at expiry. Dark value on these is basically land plus a shell that a second-generation user will only take at a steep discount — underwrite to a number you would be comfortable owning with no tenant at all, including a year or more of taxes, insurance, and maintenance with zero income.

Divin Kanyama · Answer

@Rashid Covington Your instinct is right: underwrite the real estate as if the seller financing didn’t exist, then treat the carryback as a bonus—not a reason to pay more.

For the NN boxes, use actual roof/HVAC inspections and a component-level capital plan rather than a generic reserve. With under a year left, price the dark scenario: downtime, TI/LC, carrying costs, and realistic alternate-use or land value. If it only works with a renewal, wait or demand a steep discount.

For the strip, normalize taxes, insurance, repairs, vacancy, and rollover because gross leases can overstate sustainable NOI. Move toward modified gross at renewal if the market permits, and stress-test a wider exit cap.

Have local counsel structure any estate note and confirm probate authority, lien position, servicing, and payoff terms. If 10–15% gap debt kills the return, use equity, negotiate more seller carry or a lower price, or pass. Soft terms should improve a good deal—not rescue a weak one.

Not investment or legal advice.

Jimmy Samaha · Answer

I'm mostly 1 to 4 family in NYC, so take this as a residential guy's view, but the short term one is the same problem I see on any building with a lease running out.

I'd price the box with under a year left as if it goes dark, and only pay up for the renewal once it's signed. Say it does 80k NOI at an 8 cap, that's 1 million. Now assume it sits empty 12 to 18 months while you carry the taxes, insurance and roof with zero income, then you pay TI and leasing commissions to get someone in at a lower rent. Run that and see what number still makes sense. The gap between that and the asking price is what you're betting on the renewal.

Seller financing is the tool for that. Ask for the price or the note to adjust if the tenant doesn't renew. If the seller really believes the tenant is staying, that shouldn't bother them. If they won't agree, that tells you what they think.

On the gross leases, I'd underwrite taxes and insurance going up every year and look at NOI in year three, not year one. For dark value and exit caps I'd lean on local brokers, those swing a lot from town to town.

Two years in, buying my first NN deals — what am I underestimating?

Two years in, buying my first NN deals — what am I underestimating?

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