How is a small fish supposed to JV with the big(er) fish?

Question

Hello BP, this is not really a "how do I get started" question so much as a how do I finish getting started question.

I began to pursue commercial real estate about a year ago when I realized the SFR market here was saturated and that the same principles of putting together a good deal and then finding a partner should be able to work just the same with larger properties.

And when I say 'began to pursue" I don't mean "I read a couple books and been thinking about it" I mean I took some people in the industry out to lunch, got in touch with brokers in my area, receive listings in my email, get property financials and rent rolls from CBRE to analyze, and  went and got a full time job for a commercial real estate research company.

There are three commercial retail properties in Arizona that I believe have great potential, two off market and one listed. I have no fear of writing a LOI or making an offer, the problem I have is what happens if it's accepted? I don't have the earnest money to put down on a $3-10M property, so how is a broker or an owner ever going to take me seriously enough for me to at least be able to take the deal to a possible JV partner? Even more than that, how is someone like me supposed to secure the deal well enough to have a quality presentation for a JV?

I suppose my quandary can be broken down as:

What are the expectations of the broker/and or owner of an interested buyer?

How can I appear to meet those expectations?

How can I actually meet those expectations?

What's the time frame expected from receipt of the LOI, to the written offer, to the deadline for earnest money?

And most importantly, what should the order of events be from when I first come across a property to when I'm closing on it with a partner?

Jay Hinrichs · Answer

Frankly if you don't have the EM to buy a 3 to 10 mil property... and your JV partner does.. then I doubt they will see any value you bring other than a finders fee.. Account Closed  Ken what do you think someone with the ability to buy that kind of property.. my experience is they will have their own commercial brokers and get deals fed to them that are off market and do them themselves.

I would think this person would need to find some really hot smokin deal and get a fee. since they have no ability to tie it up.. maybe biting off a little more than they can chew presently.

Duke Marquiss · Answer

If you are looking at the deal and you are not embarrassed by the price you offer, you are offering too much.  Look at distressed property, either financially or physically, and make an offer that would make most people cry.  I am not saying that you take advantage of the seller, but sometimes a smack of reality is what it takes.  Look for properties that have been on the market for over a year. Look for vacant dated type of deals that have a good location.

Di-sect the deal.  What would it cost to build that particular building from scratch?  Land acquisition, planning and zoning, plans and specs, contractors (historical costs per square foot to build) and then figure out how to re position the building to fit the current needs in the community.  Look at condo process and if viable, the sum of the parts is greater than the whole. Then, figure out what you want it to look like when you are done, cost it out for the rehab, then make your offer accordingly.  Make your offer for cash, closing in three weeks, no contingencies and no appraisal.  If accepted, find a hard money lender or private money lender that you can either borrow the money or partner with the lender.  Do the work and let the ones with money lay back.  Takes time, but the profits are much bigger than your pain.

Remember, if you find a good enough tree, there is someone to help you climb it.

I recommend reading the book "A Whack on the Side of the Head".  It will make you think differently.

Happy hunting. (By the way, I have followed this model for a number of years and presently own over 40,000 square feet of office space, have over 80 rental doors and 200,000+ square feet of industrial space.  Dead broke 7 years ago.)

Felix Goldstein · Answer

@Dovid Staples, sounds like you are in the same boat as i was. i was like a blind mouse trying to find my way out of a maze.  also you mention that other investors are more competent that you. just because their bank account is bigger then yours, doesn't mean they are more competent.  There have been plenty of large companies that went under.

something else that you can offer is to manage the property. especially for the one with an out of state owner.  management has to be local.  the owner can be anywhere.

i would talk to a lawyer about this. I'm not an attorney but if you just "informally negotiate" you are not protected. and consult with an attorney if you even have the right to offer the property without anything in writing.  I'm assuming by "informally netotiate" you mean you have nothing with a signature. maybe an email.  from what i heard a while ago a letter of intent can be legally binding. it was a while ago. i don't remember. that is something to ask an attorney about. nothing in this post is meant to be legal advise. i'm not an attorney.  i'm just speaking from my experience.

I don't do letters of intents because from what i heard they are not binding. therefore, it seems like a waste of time to write one up.  I do Emails of intent. just a quick email outlining some of the important terms. if the seller agrees then i write up an actual offer.  that bring me to your concern of earnest money.  since you don't have the earnest money for a million dollar property. at least that is what is sounds like. then the only solution is to put zero earnest money down. that is what i do.  After sellers stop laughing LOL, i explain how i do things.  number one i tell them that i intend to raise 100% of the purchase price. so why would they want my earnest money. i'm looking to borrow the whole amount. i don't mind telling them that i don't have extra money to put into the deal. then i explain to them that since its practically impossible for me to find someone that will loan me 100% with me not having skin in the game, i'm planning to take on an equity partner.  i would give them the majority of the property ownership. i would be a minority owner in exchange for me finding the deal.  the other problem with earnest money that i point out, if im dealing with the seller with no brokers involved, is who will hold the earnest money? i would want it to be refundable if i don't find the money. if i give it to the seller, they can just not give it back!  anyways, this was my first plan that i came up with when i first got started. there are plenty of investors, that are open to something like that.  there is no preapproval letter for commercial properties. so sellers are fine with accepting an offer from you, with no preapproval letter, and giving you a reasonable time to find the money.

another way is for you to start wholesaling.

as far as deals that have happened here. take a look at 16004 Broadway ave Maple HTS Ohio 44137 Cuyahoga County. take a look at cuyahogacounty.us. that is a 10,000SF office property. rent there is $10-12/SF. its been a while since i looked at office space in that area so don't remember exactly how much rent is out there is. it was fully leased, in great condition.  i walked through the property. i offered 280k for it. since i didn't have earnest money and partially because one of the sellers thought i can not have an assignment clause in my offer, they didn't sell to me. they ended up selling for 210k! Thats a GRM of less then 2.  the area is alright. definitely NOT a war zone. good city to buy residential properties also. that is a very rare deal. most deals aren't THAT good but... you know.

Account Closed · Answer

@Dovid Staples Congrats on taking the step. Next, I suppose I would work up the numbers and meet with a couple of people who might be interested. I wouldn't include the address, that is for later. But the fundamentals help sell the concept. The JV partners are looking for returns. They want to know what is in it for them. In fact, Normally I'd take it to the AZREIA meetings and see if anyone there has a taste for the project. However, AZREIA has a webinar meeting for July so that won't work this month. BP has a MarketPlace where you can list the project. A project that is up to $10MM takes real interest. If they are interested, make sure they can close on the transaction.

Dovid Staples · Answer

@Jay Hinrichs I really appreciate the reality check (just listened to you on the podcast btw. Really great stuff). If I understand you correctly your opinion is there is no real way to provide value to a more competent investor at all? Perhaps if it's more in the $1-2M range? After all, brokers could not be finding every potentially great off market deal. In the case of one of them above I happen to pass by it a few times a week until I noticed it suddenly vacant and started digging into it. I also happen to know someone looking for just that kind of property. I am well and good with a finders fee. My main concern is mostly being able to follow them along throughout the deal to see and learn exactly what they do. In the context of a finders fee my question is still pretty much the same: how far could I reasonably go with a property owner and how could I package a deal before passing it off to another investor without any real clout of my own?

@Joel Owens I haven't taken classes on underwriting. I did not know such classes were available and will definitely make it a priority to find and take them. Since the the original post I have taken Jay's comment into account and can agree that at least one of the properties (the listed one) is way beyond my capabilities and one (owned by three partners) should not be my priority. That leaves me with a $1-2M retail property owned by an individual in California (Which is out of state and who's 70 as I found out and could explain the apparent management issue).

Account Closed thanks for that I really appreciate the boost in confidence being reminded of all the resources that are out there.

All in all what I'm hearing is the most I could reasonably do is reach out to the owner to sell, receive info on their operating expenses and rent roll, informally negotiate good terms and price, maybe even go so far as a non-binding LOI, and then pass it on to another investor till I'm fresh out of clout even for off market.

Joel Owens · Answer

Most larger properties in the whole U.S are syndicated deals in one way or another. If you drive an urban city to suburban many commercial properties are owned by groups etc.

Some are owned individually by ultra high net worth clients.

Even if one developer owns it or person they usually are a sponsor and have passive partners.

Have you taken classes to know how to underwrite a commercial retail property? If the listing brokers are any good you will not even get started with them going under contract. They might do a non-binding LOI with a CA agreement knowing at anytime they can go for a stronger buyer if one comes along and just back fill with your offer in case a long shot happens.

How is a small fish supposed to JV with the big(er) fish?

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