How to proceed on potential commercial deal

Question

I am a SF wholesaler in Houston.  I recently had a conversation with a potential seller that led to a discussion about commercial property he owns and that he considers a headache.  He just wants to get rid of the property due to complaining tenants, etc.  I gather that in the past he has avoided the use of realtors, so I get the feeling he won't be listing the property.

I know nothing about commercial but I certainly don't want to pass up this opportunity.  Would an option contract and assignment fee scenario work in this case?  What role would I need to play in this type of transaction other than finding a buyer for this property?  Any caveats, advice?

Thanks in advance for your thoughts!

Don Konipol · Answer

Okay I'll take a stab at this.  You first have to be able to evaluate the quality of the deal before you can decide if and what to offer on it.  Commercial transactions are nothing like residential transactions, it is not simply a matter of looking at sales comps for five other houses that have sold in the subdivision.  Valuations are at best guesses, appraisals cost alot of money and are far from accurate, and everyone is a seller at the right price.

Bottom line is that you need to educate yourself first before jumping into commercial properties.  A friend of mine who had done quite nicely with houses decided to go for the big bucks lure of commercial properties.  He asked my advice, didn't like what i had to say so ignored it, and spent one full year exclusively concentrating on commercial deals and never completed a deal.  Meanwhile he gave up a nice 6 figure income he had been earning in residential!

I don't believe that you can be successful in commercial real estate without extensive knowledge, and I don't believe you can be successful without persuing it full time.  If you decide to try your luck anyway and prove me wrong, let me know the details so that I can modify my opinion.

Bill Gulley · Answer

Good advice Don, but I'd like to know what kind of property it is! Commercial takes in a wide varity of properties, stip center, apartments, office, office/wharehouse, all would carry with different points for a new landlord/investor.

Yes, you could use an option on any of these. Yes, you could sell your option or assign the contract. Finding a buyer will not be the same as doing a SFD deal, and the property type will have a bearing on how you market it.

Valuation should be with comps per sq. ft. and an income approach. Dpending on the type of property, location, traffic count and other aspects may be assessed. For your cap rate, ask an appraiser what cap rate they use in that area for like properties. If it is possible to see the property with a qualified Realtor, you can get an opinion there while interviewing Realtors for your sale, be sure to tell them you have it under contrcat and avoid that side of representation. Best to provide alot more details so Don and I can reconsider our opinions! Bill