Newbie Commercial Questions / Advice

[Tyler Todhunter]

Hey BP commercial community!  Novice investor here- Currently own home, 2 investment properties, have done some flips in the past.  I've got a wholesaler that occasionally sends opportunities my way- and he recently sent me a commercial property that caught my eye.  The details of his email are below:

3000 Sq Ft Commercial, 175K Purchase Price with Owner Financing, No Origination Fee's or PrepayBuyer Pays All Closing Cost40K Down8.99% 30yr Term 10 year Balloon

I followed up by confirming they were carrying the note and asking how the place is laid out.  Replied:

It's being sold as is and need some work. it's one storefront now and a second storefront that runs into the garage but it could be separated with a wall. Then it would be two storefronts and a garage. It's best if you walk through if you have some interest. I'll carry the note and I'll cut you a deal if you're interested.

I ran numbers, best I know how, and the market value at the local cap rate seems like it should be north of $350k.

Rental income	3000 ($1 - $1.25/sf per local property management, NNN)
Tax	55 (Tax records)
Insurance	80 (Estimate)
Vacancy	300 (10%)
Prop Mgt	300 (10%)
NOI	2265
Local CAP	7%
Value	388285.7

Am I missing any key components to my calculations?  Of course, I would need to know how much it would take to get it to marketable condition.  What other information should I be asking about?  What should I be cautious about?  With the price being half of what it could be, is that too good to be true or is this normal for a non-performing commercial asset?

Thank you for any input!

[Joel Owens]

You need to know the age of the building first. A small price going in doesn't mean a small overall cost to stabilization. The total cost could outpace the overall new value of the property that could be created.

You need to scope the sewer line going to the street to see what you have and also check the water lines. Old buildings can have cast iron sewer and galvanized water lines. Depending on the length of the run, how far underground, and where it is located under a parking lot etc. the cost can be tens of thousands or even 100k or more to replace. Even if plumbing is all new in the building if main is bad from the street to the building you can have water pressure, leaks in ground, and back up issues.

That doesn't even get into knob and tube wiring, lead based paint, asbestos, old heating and cooling systems that are now outdated and must be replaced, ancient water heater systems, unpermitted or grandfathered additions over the years, etc.

Ask the owner if they have a recent engineers inspection report of the property they can share with you. If any rehab was completed ask for documented pictures of the work in stages from start to completion. You are trying to take away unknowns to reduce risk and puts odds of success in your favor. The more you can't validate the more price generally comes down for unknown risk.