Small office building at the tax sale - over my head?

Question

Me:  Newbie - bought 5 single-family tax liens at the last tax sale, still waiting for the redemption period to time-out and get the deeds.  A few grand in capital to play with at the next tax auction.

Target:  A 4-unit office building in a B to B- area at the next tax auction.  Frontage on a main 4-lane road with plenty of shopping around, a mile from the interstate.  Appears to have been vacant for a while, but looks good from the street.  Been through the auction a few times with no takers.

Strategy A:  If it doesn't need much, quickly sign a commercial property manager and get some warm bodies in there producing rent to cover taxes, signage, and CapEx.  I'd be completely dependent on the property manager to find tenants, this market is new to me.

Strategy B:  If needs anything more than minor cosmetics, price it for a quick sale.

What I can't do:  Take on significant debt / risk, or leave it sitting empty racking up tax bills.

My current plan for the SFH tax liens that I'm waiting on is to sell those quickly to pay down some personal debt, and set some cash aside for future tax auctions.  In addition to this property, I have enough cash to buy perhaps 1-2 more other properties at the next auction.  It's possible that I could take some of what I net from the sale of my current tax lien properties, plus the net from one other property at this next sale, and possibly have a max of $20k to put into this property quickly.

One side of my brain sees a potential cash cow if I'm able to get it rented quickly.  The other side of me sees that it's sat unsold at a few auctions... I'm wondering what other investors know that I don't, and I'm afraid of getting stuck with a hard to sell property.

Can anyone offer any input?  Should I leave things like this until later when I have more experience and a bigger war chest?  Thanks!

John Roorda · Answer

I appreciate everybody’s input. I was able to look in the windows, and saw massive water damage that’s beyond my budget to repair. This one is dead for now, thanks!

Ronald Rohde · Answer

It won't sell quickly if vacant. Anyone who can find tenants would have already bought it. I wouldn't rely on that assumption.

John Roorda · Answer

Yeah, TI is a major obstacle because I don’t have the cash on hand to do much more than minor cosmetics, and I’m unsure of taking on debt for this.  That makes my only exit strategy to price it for a quick sale before the next tax bill is due, which leaves me risking holding the bag if it doesn’t sell quickly and isn’t in a state for tenants.

Caleb Krumsieg · Answer

@John Roorda I love tax liens as a way to enter with low risk. The office building is the opposite of that method. Not necessarily a bad idea, but I applaud you for taking some time to think this over and ask for advice.

I agree with @Greg Dickerson that location and cost to bring in tenants (TI Allowance) are some of your biggest factors here.

One other note, you said that you would hire a property manager to fill the building. In commercial real estate, you typically hire a leasing broker/agent who may or may not work at the same firm as the property manager. Commercial property managers are solely focused on the operations. If you haven't already, I would get in contact with as many managers and brokers as you can find in that specific market and ask for their thoughts on the building. They'll be able to give a better guess on the lease-up time frame than investors in completely different parts of the country.

Good luck! Hope it all works out!

Greg Dickerson · Answer

This all depends on price and location. It may not have sold due to the reserve not being met? Big question would be cost to make ready for  new tenants. Depending on the tenant it could cost a good bit of money.

Calculate the projected rents minus expenses to determine NOI and that will give you an idea of potential income and values.

John Roorda · Answer

Bob, those are great points.  Zoning is C-2 "Community Commercial".  No front windows, so not likely to draw any retail, but great for a mortgage broker or lawyer or something.  Previous owner was a lawyer, and google tells me that he angered the entire universe and split for FL in the middle of being disbarred 2 years ago.  Parking is roughly 25 spots, shared with a small vacuum cleaner shop next door, and the lot isn't striped.

CapEx?  Hell if I know.  Judging by the recorded lien release, the roof is ~16 years old.  Parking lot is in good shape aside from lack of stripes.  Windows and doors appear to be all there and undamaged.  HVAC and plumbing unknown.  My carrying costs will be a tough one... as long as I can get one of my other tax lien properties sold pretty quickly, then I'll at least have some reserves to make the first tax payment or so while I'm getting tenants lined up.

Bob Langworthy · Answer

Risk tolerance varies widely. I'll make some points in favor of doing it as you already know many reasons not to. Others will also chime in with some of the very valid risks associated with a deal like this.

1) Cash flow is king. If you get it cheap and find tenants you'll be in great shape.

2) Your carrying costs may be less than you think. Do some math to figure out how much it will cost you out of pocket to hold the property while vacant. It might not be bad.

3) Commercial real estate valuation is formula based. Once you have tenants, you'll be able to do some work to calculate the value of the property.

4) You have experience as a real estate investor. While it's not in this asset-type, it is still relevant.

5) You've already proven to yourself that you can learn about investing in an asset and then actually do it. That puts you ahead of most people.

A couple questions that immediately come to mind for me:

1) What are the zoning regulations for the property?

2) Parking. Not enough: stay away. More than enough: revenue opportunity.

3) What capital expenditures need to happen sooner rather than later?

Hope this helps,