Commercial Zoning?

Question

Hello BP!

So, my last deal fell through, but a new one came across my desk.  It's a 4plex of townhouses, but for some reason it's zoned Commercial.  It's located between the back end of an apartment complex and a cul-de-sac of duplex's in Warner Robins.  The broker sent me the rent roll's, an old appraisal and a few other documents to look through.

So, for all of my commercial folks out there.  What would be my options on this type of property?  It's listed for $186,000 (I'd like to be closer to $150-160k).  4 units - 2x3/2 and 2x2/2, total square footage is around 5400sqft.  Rents are $660 and $600 respectively.  If anyone needs some more information to help me asses this, I'd be more than happy to accomodate.

Thanks in advance!

Anthony

Tom Paul · Answer

As for the zoned commercial tag leave it alone if that is what the city has it as.  If you ever want to convert to office or if there is an opportunity to add more units then you will have less issues when it comes to having to rezone the building to fit the new use.

Anthony Martin · Answer

@Matthew Paul

I spoke with the gentleman who listed the property to clear up some of this confusion.  He was unaware that it was zoned commercial.

Basically, this guy and his parents bought the entire complex and it's essentially just him managing a total of 22 units while his parents live out of state.  So to bring back Bill Gulley  I also asked him how much of his inventory he was looking to let go of.  Turns out he's only trying to lighten his load of 9 total units (three buildings)  Which, to me, seems quite a bit more manageable.  As soon as he e-mails me the numbers and some more information, I can start calling around to some local lenders to see what kind of financing I can acquire.  I think 9 units would be tremendous challenge for me to get started into multi family!  Although, he said his bank would likely not release the properties from his possession unless he could get near market value.  I'm not trying to sound completely ignorant, but is this a true statement? Or should I try to build some wiggle room into a possible offer (Market tax value right now is averaging $47k/unit)  Again, any input is very much appreciated, gentlemen!

Anthony

Bill Gulley · Answer

A draw back to blanket loans is that a release fee is often more than the LTV that would be made on that property if made as a single loan. This brings down the balance and risk to more satisfactory levels overall. So yes, the price may be higher, an excuse in negotiation, motivation diminishes if the bank gets everything he gets. If these are the better properties of the portfolio the bank will want to hedge the collateral position of the remaining properties.

Makes me ask what the motivation is, you might ask, if the note payment is not reduced, probably not, and they only get a sliver of the sale proceeds all they are doing is reducing debt which may open their ability to borrow for other purposes, then why sell?

They may have a balloon requirement or a pay down they can't meet, forced to sell to meet the obligation.  Since the listing agent brought up the bank as a price point, this may likely be the underlying issue, they have an obligation to meet.

Owning a cluster of properties, it would not make sense selling off a few in that cluster saying you're trying to make life easier, IMO. If that really is a valid issue, that's what a PM is for, that may open a door to another more creative offer to provide management and purchase under an installment arrangement. You could also work out cash sales (financed) over a period of time, picking off units on a scheduled arrangement.

I suggest you find the real motivation. A listing agent usually won't go there, you might ask to see the properties, see the seller's supporting docs and meet with the seller, then you can probe the seller as to motivation.

Don't get excited or fall in love with the thought of getting in at a multi-unit portfolio, the Seller's problems don't justify a higher price. Establish the value and your needs first as any other buyer will or should do, it is what it is.

You might go to the bank, Seller's lender, telling them you're making an offer and you'd like to speak to the same loan officer to inquire about a loan. In such discussions, the loan officer may tell you what amounts might be available to assume with a new loan. :)

Matthew Paul · Answer

In your original post you say they are zoned commercial

If so there may be a better and higher use

Bill Gulley · Answer

In bulk purchases, consider each property as a separate sale initially. Evaluate the property as if you were just buying it. It does mean more due diligence, it will also mean more expense, each property must be appraised, inspected and title search needs to be done on each one.

The trick is in making your offer, obtaining a discount by taking all the properties. That can be significant in light of the seller's motivation. In bankruptcy or estates, time is of the essence, due to time requirements, administrative costs, holding costs, outstanding liens complicating sales there will be a motivation to sell all in one settlement.

A lender will look at each property meeting loan requirements but may fund the entire purchase providing a blanket loan, or they may want separate loans in any combination. Search "blanket loans".

Your sale contract will have an offer as a total amount. The contract needs to state that the offer is for all properties and that no price allocated to any one property is an offer for any single property. You should then break down the total offer price and allocate a price for each property. Additionally, buying investment properties you should break down that allocation per property as to an amount for land and improvements as that determines you costs basis for taxation. You also need to list all properties, you could use addendums to attach legal descriptions required, number you properties for reference, Property 1. Property 2. etc, this will make further dealings, negotiations and admin aspects easier.

Settlement should be cheaper than buying individually as it is one settlement, but understand there will be costs per property. It's also more work to close multiple properties but there are some duplications that are eliminated. Need to ask you title/closing agent what they will do to cut costs. :)

Anthony Martin · Answer

@Bill Gulley

I actually haven't considered asking about the other units.  I do know that, according to the tax assessor site, that the rest of the du/triplexs in the cul-de-sac are all zoned residential.

I'm quite intimidated by such larger purchases as I'm really not sure how to go about approaching them.  But to my knowledge right now, I don't have any experience with such an adventure.  Can you or anyone else point me in the right direction as to what I need to start learning?  I'm going to call the broker today and ask about the other properties; how many are for sale; what they're asking, etc. Any other questions I should be asking the broker?

Thanks in advance all!!

Anthony

Bill Gulley · Answer

Can you swing buying them all? Is it an estate or bankruptcy, a forced sale liquidation matter?

I'm all for changing use of a property, if it's possible. Really depends on your building regs department. Changing residential to commercial use can be a full gut rehab! :)

Anthony Martin · Answer

@Matthew Paul

They are all residential.  It looks like the company that owns all the duplexs/triplexs and quads are going to be put up for sale.

Matthew Paul · Answer

Depending on the location and type of zoning , they could be office suites .

Bill Gulley · Answer

Sounds good to be. Financing save yourself some time and money, go commercial. The zoning makes it harder on the secondary and comps may not be there, so just take it to the bank. Good luck. :)

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