How can I buy the building I have my medical office in?

Question

I lease space in this multi-tenant fully occupied office building and have the first right of refusal whenever it is put up for sale. However, the original owner could not keep up with his loan payments and passed on the 'deed in lieu' to the bank. The bank in turn sold the note to a real estate investor recently. The new note holder plans to foreclose/auction the property soon and wants to know if I am interested to buy. I am interested but not sure what my options are to buy this property. I guess my questions are:

1. What are some creative financing methods to buy this property?

2. What are my negotiating options to get it at a good price?

3. At what stage of foreclosure/auction shall I put my bid in?

4. Can I get a loan against the building and its tenancy (one being my established practice+other lessee good for next three years)?

Any other ideas will be really helpful as well.

Thank you in advance!

Nicholas Vandervelde · Answer

As other commentators have suggested, the SBA 7a or 504 loan programs are great for businesses looking to purchase owner occupied real estate.  Generally, for existing businesses, the down payment requirement is only 10% but you must occupy at least 51% of the rental space to qualify.

Jeff A. · Answer

You guessed it right Joel. The bank sold it at almost half the value of what the note buyer is asking for. Are there any good negotiating strategies to bring the price lower? Also, will the conventional lenders like my business bank loan against the property? They have been my bank for last many years and fully familiar with the growth of the practice.

Thanks agian!

Duke Marquiss · Answer

Sounds like you have a good one.  I imagine the original note had an assignment of rents and when the owner had to reduce rents or had a vacancy, the bank exercised the assignment and the bank later sold the note to a note buyer, most likely for a discount.  The FEDs will make them write the loan down if it is not perorming to their level.  Many times it is substantial.  To give you an idea, we recently purchased a church note for less than $300,000 with a face value of $425,000 because the bank had written down to $270,000 so they then made a profit.  Borrower had never had a late payment, but the examiner did not like the way they made their income - Bingo rather than the normal giving of the members.  Makes no sense.

Contact whoever holds the note and tell them that you are interested in buying the building.  You most likely know the original owner and you can contact him about buying subject to the mortgage.  There is no "Due on Sale Jail" and then you can negotiate with the note holder directly.  You may be able to bring it current and continue on or negotiate a short payoff.  If you occupy over 50% of the building, you may qualify for an SBA loan - 10% down and 25 year term.  I am sure that you have medical equipment that could be refinanced to help out with equity if needed.

If you can gather the cash to buy at a discount, make a lower offer to the note holder.  Contrary to popular belief, they do not want to own your building.  They do not want to foreclose - it is expensive and time consuming,  and they can't manage the property.

Good luck.

Bill Gulley · Answer

I think what was meant was the bank was going to foreclosure but sold the note and the investor got the deed in lieu and inquired about selling to the tenant.

In that case, you need to see your bank and yes, an SBA might be a good way to go if you have 50% of the space occupied. SBA is rather expensive with bonding and it's a federal debt you'll never shake lose of until paid off in full, they will take your first born, second born, drain a bank account and take your car all in the same day!

Try first to go conventionally with your bank on a commercial loan.

You can probably find out what the foreclosure bid was going to be (there is no auction house) the Trustee is on the deed of trust and that note was filed as public record, they may tell you.

The investor who bought the note probably paid very close to the payoff, perhaps more with costs to the bank.

You could start there adding a bit to the investor's profit. Ask the investor what they want!

You can tell the investor you have the first right of refusal, but actually, that died with the deed in lieu and your claim is against the prior owner if you paid anything for the right to purchase. A FROF is not an option, it's a promise to provide a buyer with an option at a future price if the property is being sold.

Be prepared to write checks, the appraisal will be hefty, inspections, bank fees and closing costs......guessing, 10K at around a 750K sale. The bank will want 20 to 25% down.

If you're a medical practitioner (Doc) I imagine your bank will be happy to work with you. after you get an asking price, go to the commercial loan department and they can lead you through the motions.

As to negotiations, well, that's horse trading, you may know what the investor has in it, but that may not mean much, the price will likely be what it's worth.  An appraiser (MAI) can tell you what the CAP rate should be on office buildings in your area, from that together with lease amounts you can get a value as to the income approach. If you get an appraisal, have the lender order it, they can't use one ordered by a proposed borrower....money wasted.

If the price is higher than you want to go, might talk to some of your peers and partner on the building, usually how the Docs buy in my area and they may buy more than one med building. You won't need a Realtor for this really, go to your attorney for contracting, use a title company through your lender. Good luck with it. :)

Joel Owens · Answer

See what the owner of the note that bought it off the bank wants to sell today without the auction.

If your number is much lower than what the seller wants then they will push to auction to see what other higher offers might come up. The note was non-performing so the bank sold the note off likely at a good discount. Even though the buyer bought the note at a discount they are still allowed in most cases to collect the full value.

Arlan Potter · Answer

I agree with Rob,

I am not sure your post makes sense. If he deeded it to the bank, then there is no note.

The bank owns it. done. There will be no foreclosure. Now if an investor bought the property, then deal with them.

Franklin Romine · Answer

@Jeff A.

You are a prime candidate for a SBA loan.  Talk to your local commercial lender.

Frank

Jimmy Klein · Answer

If you have right of first refusal you can let the auction house know this. They would disclose this to all interest participants. How it would work is that the winning bidder's price will be the price you have the first right to buy it at. So if for example, final bid is $10 million, then you have the first chance to buy it at $10 million. You have to notify the auctioneer immediately regarding this clause. I am pretty sure even in bankruptcy cases, the right of first refusal does not go invalid. You might get a pretty good loan in your case since you are an owner occupant and leverage can go up to 90% through the SBA.

Rob Beland · Answer

Im not sure you are asking the right questions or maybe have some facts mixed up. You said the owner gave it up to the bank and the bank sold the note? So that would mean the bank owns the property but pays a mortgage to the new investor? And you said the investor is going to foreclose. On who? The bank? As far as a loan you have to buy the property from somebody and you would go to a bank and get a mortgage to pay gor it. As an owner occupant you can get more favorable rates than an investor. Maybe you could clarify who actually owns the properry now.