All Forum Posts by: Stephanie Z.

3% of 20,000 is $600, and that's before the agent's expenses (which are likely much higher than $600 per sale), before they split it with their office/broker . . . and they only get it if/when the sale goes through. If I were a RE agent, I wouldn't touch that with a 10 foot pole. Or a 10 mile pole. It's a loser any way you slice it. 

I think you'll need to go directly to the listing agent to get access/information/showing, and expect to handle on your own all the niceties that a realtor might be happy to handle for 3% of a 200k or 500k house. Honestly, even the listing agent is going to be making almost nothing (or actually nothing) on this low priced a sale. I think you better get used to DIY'ing the purchase process.  

I'm an outlier, I guess, but I don't like balloon payment loans, at all. 

I've had commercial RE since '04, and I have never had a balloon except for our very first commercial loan, which we refi'ed out of as soon as possible -- within 2 years -- into a fixed rate, fixed term loan with no balloon. We refi'ed it again a few years later for better terms, and, again, we refused to consider any options that included a balloon. Once I was out of the first balloon, I adamantly refused to consider any balloon loans, ever again. 

Our approach was/is that the only reason for accepting a balloon is if that's the only way to get the loan and we desperately want/need it. IIRC, our initial balloon was in 7 years, but I worked on refi'ing to get out of the ballon pretty much as soon as our business was sufficiently established to have a chance of convincing a bank to get us a better loan. And, once we were out of the ballon, I was never willing to consider one again, ever, period. 

Talk to folks who had balloons coming due during the 07/08 crisis . . . and you might be extra wary of balloons. A close family member of mine came close to losing a million+ commercial property (and its multimillion dollar business that resided on that property) with less than a third the value of the property in a mortgage because the timing was so bad for when her balloon came due during the crisis. She'd had that property for decades, and it was the cornerstone of her business . . . She managed to refi but was *totally* hosed on terms/fees -- like catastrophically hosed. It was incredibly scary.

My understanding is that commercial loans offer VERY few protections to the borrower. If the balloon comes due and you can't refi or pay it off in cash, you can be out of luck very quickly. That's just not comfortable for me . . . Besides, my goal is to gain net worth via paying off debts/mortgages, so I just aim for fixed term mortgages that can be paid off via rents . . . I don't want the endless cycle of balloon mortgages that seem designed to benefit banks, not borrowers. 

FWIW, I've found that I've (nearly) always been able to get non-balloon loans so long as I call around and refuse to consider balloons, period . . . Many banks won't do terms longer than 5-7 years on commercial loans, which is why (I think) there are so many balloons . . . But, I've had excellent, very low fixed rate commercial mortgages for up to 15 year terms. I do know that things got a lot tighter in the last 10 years in that regard, so I can't guarantee (good) fixed rate for that many years are still possible. The last time we refi'ed our commercial RE mortgage was around 4 years ago, and at that time, I think we were looking at about a 9-10 year time horizon on our payoff (and didn't change it, just reduced interest rate and/or took out cash). Then a couple years later, I recall other banks (and maybe even the original lending bank) looking at that mortgage with wide eyes and telling me they can not do fixed rate commercial mortgages for that long any more . . . Just can't do them and couldn't touch the deal we already had. So, anyway, it pays to shop around a LOT. (As is always the case with loans, in my experience.) 

Because I have a few real estate investments, and I like learning more about RE so that I can maximize our return on our more complicated RE holdings. Real estate has been very good to me, much of our net worth is tied up in it, and there is much more to learn about it. I don't see the RE vs stock/bond market issue as "either/or". I see it as "both/and".  

I know that some people here (sounds like including you) focus on RE for cash flow. However, I'm more of a long-term / building-equity investor. In fact, I structure mortgages such as to pay them down as quickly as the relevant cash flow / rent can comfortably do it. The sooner the properties are mortgage-free, the better, for me. The investment RE we have does "cash flow" (from rents) for us nicely, but that's a minor part of our income stream vs our regular jobs/business, and our purpose with those RE holdings is more intended buy-and-hold-and-build-equity-and-some-day-cash-out. I am happy to minimize interest expenses and build our nest egg via rapid principal pay down. I also expect to someday cash out much or all of our investment/commercial RE so we can have a low-responsibility retirement. We stumbled into our RE investments for good reasons that have little to do with wanting to be RE professional investors, but as we're deep into RE, I'm trying to educate myself to maximize the long term value of our RE investments.

Well, my Vanguard portal tells me that my investments there have returned over 15% over the past 12 months. 3 and 5 year returns for me are at 13%, and even my 10 year returns, covering the bear market of 2007-8 is over 10%. (All in Index funds, some in Target2035, some in Total Stock Market, some in 500 Index -- so nothing exotic, and nothing that I have to think more than a few minutes about.) 

And, my IRAs don't call me about broken toilets. And I don't have to find renters for them. And, if I get sick (or want to go on a year long trip off the grid), and I can't handle the managing of the IRAs . . . then, uh, nothing happens, the money just sits there and keeps growing. Try that with rental RE (or any RE, lol), and I'd likely lose a pretty penny by the time I came back to normal life . . . And when I want to cash anything in, I just click a few buttons and money magically appears in my checking account within a day or two. Cash out of RE -- that means a sale or at least a mortgage, which both require a lot more than 2 clicks and 2 days. 

If your friend's 401k returns haven't been good in recent years (while the market has been booming), then he's probably in the wrong funds (poor returns and/or high fees) and/or managed by the wrong company (high fees). 

It's not RE vs stock/bond market for me. It's a nice mix of all of it. Balance and all that. I expect to move away from RE as I get closer to retirement, though. For the reasons mentioned above, lol.

@Anna Watkins, I'm so sorry I didn't see this until today. It's probably too late, but if not . . .

We decided to go with individual leases. This is an easy way to set a variable price, which I did end up doing a bit, as you are right, some rooms are nicer than others. It also permits me more control over specific roommates, which could be handy if my child were in the house, and I wanted to evict a single roommate (obviously not mine!). . . For the actual lease, we got a copy of the state's "model lease" and then I just modified it to my specifications. It was pretty easy to do. 

We've been very fortunate thus far, with great roommates, so haven't had to worry about that much. 

We did not include utilities in the rent, but had the tenants figure out how to share the bills. This keeps my end much simpler, as all I have to worry about is making sure my mortgage is on auto-pay. When I was paying the utilities before the tenants moved in, it was a hassle tracking all the bills, especially the city water/sewer/trash bill that would arrive days before its due date. Now, I don't worry about them. Also, I didn't want to stress about the kids running the AC with the windows open or setting up a backyard pool with city water, lol. People are more frugal when they have some immediate (at least monthly) feedback on how much their "heat at night and AC in the day" habits cost them. Especially with the many options (and hassles! and contracts!) of cable/internet bills, I really didn't want to be involved in that! Also, if I were "on" the cable bill, then the tenants would likely need to contact *me* if their internet went down . . . but since I have nothing to do with it, they can (and do) handle those sorts of issues independently. The tenants divvy up the utilities amongst themselves and handle squaring them up. I'm *very* glad I'm not responsible for the monthly utility bills or maintaining services/etc. I wanted this to be as simple for me as possible, and thus far, it's been pretty smooth sailing. 

Oh, one other tip -- having a competent and trustworthy local handyman is really helpful, especially the first year while you are working out the bugs/making minor improvements/etc. We have a great one, and it's been a HUGE help. 

Sorry for the late reply. I hope it's helpful to you or others . . . Did you end up moving forward with a purchase of a "college crib"?

Oh, also, the land is already in 4 tracts (or maybe 3). I don't pay much attention except when we sign the property tax bills, lol. The business's building and parking are carved out on one of the tracts. The remaining land is split up somewhat haphazardly into other tracts. That was done (for tax purposes, I think), right before we bought it a dozen years ago. I'm sure we could nudge the tracts around if needed. Our county/state is pretty loosey-goosey about those sorts of things, lol.

Thanks so much, everyone, for helping me try to figure out this situation! You've already been so helpful!

I will try to answer your queries. Please forgive me if I miss some, and please bring it to my attention, and I will do my best to provide the needed details.

Let me try to clarify . . . I've tried to avoid disclosing my actual location due to the necessity to keep the potential business sale and my "real" identity as confidential as feasible . . . We are in WV in a college town. We are in a moderately good commercial location (good for light industrial, office spaces and such, not really "retail" per se at this time.  Retail -- restaurants/shops/groceries/gas/car dealerships/banks/etc are more like 1/4 mile away in either direction on adjoining roads -- not sure if that would ever grow to include OUR road, but it's certainly possible, as our road is a major connector, and those other roads are building up quickly. We have zero zoning/restrictions on use on OUR road at the moment, as we are in an island of the unregulated "county" that is surrounded by the more regulated "town") in a thriving college town. The town and county are growing, as is the immediate area we are in. Best use for our specific area is likely small office/condo sorts of things, for professional/dental/office sort of space. Across the road are some 3 story office condo sorts of spaces. 

So far as the selling price of the business . . . Our business type is one that traditionally, individuals have purchased other individual's businesses . . . via a specialized industry specific broker . . . That is what *we* did about a dozen years ago when we bought the RE and the business. However, there are now larger corporations that are buying up multitudes of our little local businesses. These self-financed corporations are paying substantially more than individuals can/will because banks simply will NOT lend enough for individuals to pay what the corporations are (and clearly the corporations have some efficiencies of scale/etc that allow them to make bigger profits off the same revenues). A corporation approached us about buying our business, and we went through their simple assessment process, and got an offer. We know it is *much* higher than we could get on the "regular" market, and also, we would not be paying broker commissions, either. So, no, we haven't used a broker for our industry. I know for absolutely certain (I'm well versed in our industry's business side, as that's pretty much my job) that an industry broker couldn't get us anywhere near what we've been offered. It's this surprisingly high valuation on our business that has triggered us to consider cashing out today instead of 5-15 years from now. . . We could shop around with other corporations, but for various reasons I don't think that is worthwhile at the moment (and wouldn't expect a substantially higher number anyway), at least not now. If we don't sell NOW, we may shop around in future years, as it appears that at least for the time being, the corporate consolidators are happy enough to wait on us and refresh/revise their offer yearly for as long as it takes.

Also, individual purchasers (if they are savvy) would nearly always want to buy the RE along with the business (as we did). Whereas the corporations actually do NOT want the RE, just the business. This is a pro and a con, but all in all, it's probably good for us long term, as having a long term lease with reliable tenants, and a mortgage that would be full paid off in under 6 years anyway . . . and frankly could be zeroed out by selling off part of the undeveloped land if we so chose . . . that seems like it's certainly an option worth considering. 

OK, so the business is such that the sale of the business itself would be about 700k (no debts, but plenty of taxes will be due), so a value somewhat more but on par with than of the real estate itself (which is likely valued at about 600k --  5 1/2 years of a very low interest fixed rate mortgage left, somewhere around 200k IIRC). The business requires a relatively convenient/good physical location, *no* potential for going online, and would *remain* in it's current building indefinitely (which is why they want the 20 year mortgage). 

The new owners would lease the 3000sf building the business uses along with parking (about 10 spaces in front and another 10 in back). Beyond that, there's about 1.5-2 acres of flat developable land close to the main road, and another couple acres sort of "behind" the current building structure. 

Our motivation for considering the sale is locking in our value in the business and freeing us to do something different/ live somewhere different in coming years if desired. Due to some quirks in our industry and maybe just weird luck/timing, the business is worth more now than we'd expected/planned to be able to cash out of it 15-20 years from now at retirement (admittedly, I've been very conservative in valuing the business and commercial RE, as I didn't/don't want to overly rely on it to fund our retirement, which is hard to avoid, as it represents the large majority of our net worth). It's not enough to retire *now*, but it sure would go a long way towards our nest egg. So, it's just tempting to cash out. 

(Alternative plan is to hold steady, carry on with our business, and reassess in the future. This is still a highly likely plan. We're trying to do our due diligence on the offer . . . both for current consideration and to put any insights we gain into our future-planning-tool-box.) 

Yes, we'd be selling the business, but the "landlord" aspect would be only a small "extra" part of our livelihood. My spouse would continue to work (very easily employable, pretty much anywhere in the English speaking world) for a good salary and, importantly, for health insurance for our family, which should support us adequately. We have other "landlord" income as well (a "college crib" and a residential mobile home that is on this same commercial property), but those are just sort of side-investments . . . Honestly, we've just sort of stumbled into our commercial RE holdings . . . I knew it was a good idea long term to own our RE for our business, and so we did that . . . and now we're just approaching the "cashing out" part of that endeavor.   BUYING the various holdings was clearly a good idea in each case . . . so just now trying to figure out most intelligent ways to cash out of this commercial RE holding . . . over the midterm, long term, or whatever!

The business sale contract would require my spouse to work for the business for a fair salary (in his current capacity) for 2 years, and he could continue after that if mutually desired (in general, the new owners would want him there as long as they could get him). After 2 years, we'd be free to move jobs and/or home towns if we so chose. 

Alrighty, I'm going to close this here. I'm generally a *very* organized person and all I wrote above seems so chaotic and confusing to me, that I figure I better call it good enough and then just come back and answer more queries as you guys who know more can pull together my crazy thoughts into some sort of logical sequence. I sinc

Some clear, specific questions:

1) Is 2% annual rent increase for 20 years as low as it sounds to me? What is a more fair number? I'm thinking 3% would be fairly reasonable. How do lease terms impact the future sale of the related RE?

2) Exactly what sort of professional(s) should we consult to negotiate lease terms, assess best use/sale potential for the OTHER 4 acres of commercial RE, etc? Or regular RE/business lawyer? I've googled for "commercial RE brokers" in my area, and I'm coming up pretty blank short of the "commercial wing" of a regular residential broker. Should I just ask our lawyer? 

Thanks so much for trying to help me!

Background:

My husband and I own a 5 acre parcel of commercial land. It houses our business, but that building & parking, etc. only take up maybe half an acre to one acre total. 

The rest is pretty much just sitting there. It's in a fairly good commercial location, and would be reasonable to develop more intensely into some sort of commercial use someday. (There is also a mobile home on part of the acreage that we rent out . . . not the most profitable use of the commercial land, of course, but it was already there when we bought it, and it's better than nothing. We can/would get rid of the mobile home if/when we come up with a better way to use the land.)

We have a corporation that is interested in buying our business, and then leasing the building and just the necessary part of the land for the parking/etc for business, so the parking lot (so less than an acre). I have no idea if we're actually going to proceed with the sale of our business, but I do want to get whatever numbers I can so we can make an intelligent decision. 

We'd be free to sell and/or develop the remaining land (so about 4 acres) immediately . . . or later . . . 

We're pretty much complete newbies at this sort of negotiations, and I need to understand our options with the real estate before responding to the sale of the business. I'm hoping y'all can help me figure out at least how to begin this evaluation. Any isights/suggestions you can offer to help me know where to start and how assess things would be awesome. 

Basics: 

*All* of the commercial RE, along with the modest but functional building that houses our business, is valued at somewhere around 600k total. Most of that value is the land itself, which is at about 100k per acre. So, we'd have about 4 acres, or about 400k in land-only value, to use/develop immediately if desired, and we could do that right away, or we can let it sit. Value is probably going to continue to increase over the coming years, as our town has a strong economy and our location is pretty good.

We've got a good lawyer who has handled our real estate and business stuff for many years. We've also got a nice and competent CPA. I can/will ask them specifics, and they'll represent us/advise us on any formal negotiations. However, I don't know that they are terribly savvy on THIS sort of thing. Who on earth does one consult for advice on a commercial RE negotiation?  Should I ask our lawyer for his insights and/or referral? 

Here are some more questions . . . please ask for clarifications/etc as needed, as I realize I'm totally a novice when it comes to this stuff. 

+ The corporation's initial offer requests a 20 year lease (5 year lease with three 5 year options to renew), with 2% annual rent increases. The rent they suggested is alright I think (could be higher, but not bad), but the 2% seems rather low to me. Everything is negotiable, and we've already broached 3% . . . or whatever. If we did sell the business and signed such a long lease with 2% increases, how im/possible is it going to be to actually SELL that part of the commercial real estate should we want to do that? What is the norm on these sorts of sales? Is 2% crazy low? How does one even find out what is the norm? Would that pretty much lock us into holding on to that part of the RE for 20 years? 

+ If we do sell our business and lease out the related RE, I'd think it'd likely make sense to liquidate/get value out of the OTHER land at some point in the next few years. How does one sell empty commercial RE like that? Who do I contact? Are there brokers or agents who specialize in commercial RE? Who should I ask for referrals? How do I get a value on the land? 

+ If we do sell the business (now or later!), is it generally better to just list the land for sale and liquidate it? Or to somehow partner with a developer/builder to develop it? Or just develop it ourselves? Pros/cons/options?

+ Where should we start? 

Oh my word, I'm feeling rather overwhelmed. Thanks so much for any insights or guidance y'all can offer. 

One consideration I'd suggest you consider is health insurance . . . 

If you've been used to having employer-paid health insurance, you might be unpleasantly shocked to see the real costs . . . 

We own a small business, so we see/pay the entirety of our premiums (through the business's small group plan) . . . We are about your age . . . and our insurance for a "silver" level plan is about $1150/mo for the two of us ($1850/mo including our 3 kids) . . . And that's a policy with a $2500 individual deductible and modest but not insignificant co-pays. We often burn through our deductibles, even with having a relatively very healthy family . . . I haven't added it up, but I'd guess that our health care expenses are at least several hundred per month, on average, beyond the insurance itself. 

That'd take a very big chunk out of your 2800/mo in living expenses . . . 

So, anyway, during your strategizing, just be sure you have considered the full cost (and availability!) of health insurance and any other employer provided (or employer subsidized) benefits you are accustomed to receiving. 

And, of course, just getting insurance without having a FT W-2 type job is likely to get very difficult again when the ACA is repealed/replaced/whatever. 

FWIW, My husband and I rented a little house sight-unseen when he was graduating from professional school about 16 years ago, and we were moving several states away for him to accept a job . . . We had two very small children, making travel very challenging, and it just wasn't practical for us to travel just to find a place to hang our hats for a year or two while we settled into our new location. We had friends in the area who kindly found us the place (this is back before internet photos/etc was a thing, so we completely relied on their assessment of the place), and we were good renters . . . 

A few years later, we bought a veterinary practice, associated real estate, including a home . . . and I never even bothered to visit it or see the place before we bought the whole dang thing . . . By that time we had 3 young kids, and traveling even the 200 miles from our then-home to the new home was too much trouble to be bothered with . . . Honestly, sometimes where you live just isn't that important to you, and in both those cases, the home itself wasn't important enough to us to bother much about. 

Gosh, we actually bought a SFH (why I am here at this forum) sight-unseen, 800 miles away, based on visits by our daughter, her roommate's parents, and various inspectors we hired. Again, life was complicated, time was tight, and seeing it in person just wasn't important to our decisions . . . We bought it, we own it, we saw it a few months after buying it, and it's working out just great for us a year later . . .

So, while I can see it not being a good rule in general to rent to folks who haven't seen a place, I would think it'd make sense to make exceptions for exceptional situations such as people moving from far away and those who have understandable reasons for being too tight on time to travel and/or just not that focused on the details of the house.