Help me analyze this owner financed commercial deal

Commercial Real Estate Investing
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Help me analyze this owner financed commercial deal

Kelly Payne
Real Estate Agent · Tulsa, OK · Member since 2010 · 60 posts · 15 votes

This is a property that more or less fell in my lap. I'm a wholesaler so I only know residential, but I have a probate lead that is a commercial building. It's mixed-use, with a retail, laundromat, two industrial shops, an apartment and a house (right behind) that are all on the same parcel. The portfolio also includes two rental houses next door.

It looks like the ARV of the the properties is around $300k (mostly based on assessor's valuations). It's in a low-income area, with long-term tenants. It currently nets $30k a year, with potentials toward $45k. The building needs a new roof in one section, and is generally run down but in decent shape, like most of the area.

The family is very motivated, and offered to do owner financing. I gave them a few options and here's what they countered with:

Commercial building and the residential properties
Purchase Price - $250,000
Down Payment: $50,000 - Cash
Balance of $200,000 - we will finance this at 4% amortized over a 30 year term with monthly payments of $955, Balloon payment in 5 years for the full balance owed.

I think she's willing to budget more, but does this deal have potential?

If it does, should I try to keep it myself, or should I partner or even wholesale it? As I said, I'm in unfamiliar territory, so any thoughts would be appreciated.

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  • Kelly Payne
    OP
    Real Estate Agent · Tulsa, OK · Member since 2010 · 60 posts · 15 votes
    14y

    *"I think she's willing to budget more" should say that I think she's willing to budge a little more/take less.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    Hi, don't know what you mean "budget" you mean loan more?

    Are all of the buildings on one legal description or several, I'd imagine the properties behind would be on seperate legal descriptions, or lots.

    Are all properly zoned, or are there ant special permits for the various uses?

    If there are seperate legal descriptions I strongly suggest you do seperate deals for each property, but they can be together at closing. You should also have seperate notes or a blanket loan with release amounts for each property as things happen and that would allow you to sell with less difficulty.

    As to it being a good deal, can't tell, has it all been appraised? Are you buying the businesses as well?

    If just the property, you'll want to verify leases, terms, conditions and amounts. You'll want an idea of how well the tenants are doing too.

    What are the environmental issues in your area with the industrial use and laundry?

    Check with the city and see if there are any environmental issues you will need to meet, is it on sewer?

    These are just some of the issues for such a property, need to first do the due diligence on the property. After that we can address financing issues. Good luck

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  • Kelly Payne
    OP
    Real Estate Agent · Tulsa, OK · Member since 2010 · 60 posts · 15 votes
    14y

    Thanks, Bill! Lots to think about and research.

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  • George Gray
    Investor · Birmingham, AL · Member since 2010 · 72 posts · 21 votes
    14y

    A couple of other things you might look in to in addition to what Bill Gulley mentioned.
    1)Utility metering since you have a water sucker for one of your tenants.
    2)The roof system. Flat built up roofs that have been poorly maintained are very expensive to replace and aggravating to keep repaired. I have had experience with warehouses with old flat roofs. They are a constant struggle to keep dry.
    3)Environmental Due Diligence. Older dry cleaning plants are notorious for environmental issues. They are also difficult and expensive to insure. A phase I and some legal research is a must if the numbers work on the rest of the deal.

    Even if it looks like a pass, it will still be a great project that you can gain a tremendous amount of experience on for use in the future. I started a similar thread on an apartment building here: http://www.biggerpockets.com/forums/432/topics/75915-8-unit-apartment-building-weigh-in

    The pros brought up things I had never considered and I got some great practical experience in trying to size up the deal.

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  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    14y

    It seems like a great deal. Not so much in terms of pricing.
    If the ARV for the entire thing is 300k and you're paying 250k,
    thats not much of a discount there. Thats almost to be expected
    these days.

    However. Where you're making your money is on the terms.
    4% interest rate amortized over 30 on a 5 yr balloon?
    Those are tremendous terms for a commercial loan
    with such a unique mix.

    The only concerns would be:
    1) Paying for the new roof out of pocket and on top of
    your 50k. I'd see if you can't take that out of your 50k.
    i.e. If the roof is 15k, then your out of pocket should
    be 35k plus 15k for the roof (i.e. 50k instead of 65k if
    you had to do the roof after closing).

    2) Would you be able to refi it once the 5 yr balloon is due?
    Kind of unique grouping of properties. Not sure
    how easy it is to get a loan to cover all of them
    as I really only do residential. But it seems like it
    might be something that comes up.

    3) How is it the net income might be boosted to 45k
    instead of 30k?

    If it were me, I'd definitely keep it for myself during the 5 year loan. 4% amortized over 30 should kick off some great cash flow. But I would still try to get them to move down off the price (80% of the ARV seems high).

    And I'd try to make sure that the roof repairs were put into your down payment. The seller would still getting 50k from you - 35k in cash and 15k in roof repairs (i'm just throwing that 15k out there obviously as I have no idea how much the roof is) so if you walk, they make out with 50k in value from you.

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  • Kelly Payne
    OP
    Real Estate Agent · Tulsa, OK · Member since 2010 · 60 posts · 15 votes
    14y

    George - Thanks for your thoughts. It's been a good experience already, so that's a great point about the learning opportunity.

    It is a flat roof, and I know enough to have heard that they're a pain. Do you know if it's possible to change it to a different system, or whether it makes financial sense to do so?

    Mike - Yes! It's the terms that are so attractive. I would cash flow right away, but entering a whole new territory and lots of risk by taking it on myself.

    I'm not sure I could refi after the 5 year balloon. My bank's commercial lender talked with me about this property, and said that mixed-use commercial is the most difficult kind of commercial to finance, since they underwrite retail/industrial/laundry/residential differently. He did say, though, that as long as the numbers were strong, it was always possible. Not exactly promising, but something, especially with the cash flow I would have.

    Right now there are two vacant shops in the building, so there's more potential for income than the current 30k net, but I'm basing my numbers on the current figures.

    I ended up trying to structure a non-recourse offer to her by having my bank take a 1st for the 50k down payment and the owners carry the rest as a second, but they didn't go for that (I wouldn't either, I suppose). I couldn't think of another way to structure it with as little liability as possible, so for now they're going to start looking for a commercial realtor, but if I come up with another solution, they're all ears.

    Any other creative ideas?

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    There may be many different ways to skin this cat if you'd get the info above.... just not enough here to suggest anything yet... :)

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  • Kelly Payne
    OP
    Real Estate Agent · Tulsa, OK · Member since 2010 · 60 posts · 15 votes
    14y

    Fair enough Bill. :)

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  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    14y

    You could build the financing issue into the deal.
    After the 5yr balloon is up, you'll want an option to renew
    another 5yr balloon loan at the same terms (i.e. 4% int rate amortized over 30 for the remaining balance) provided
    you pay down another 20k. But give yourself the option
    to get bank financing as well (not that it would be better).

    The key is to have that option to renew another 5 yr loan
    to avoid the risk of not getting financing and losing the
    property back to the owner.

    You should easily be able to save up 20k over 5yrs with the terms you're getting - especially if you think you can get those two business units rented.

    I'd still try to get them to drop the price a little more.
    But given the terms and the upside with filling the vacancy,
    I don't know that I'd push too hard.

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