Possible deal, need major advice please

Real Estate Deal Analysis & Advice
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Possible deal, need major advice please

Jake Engle
Real Estate Broker · Pennsburg, PA · Member since 2014 · 47 posts · 6 votes

I am in the process of analyzing a commercial property that I have an opportunity to purchase with owner financing and no money down. The property is a store front, with a large storage area in the back and two 3-bedroom apartments above the store. One of the apartments is in good condition and has tenants, while the other apartment is pretty much completely gutted and needs to be finished.

My plan is to convert the store (approximately 2000 sq. feet) and the back of the store (another 2000 sq. feet) into two more 3 bedroom apartments.

When all is said and done, I anticipate the numbers to look like this:

Gross monthly rent: Conservatively $4,000 (although $4,800 is realistic)

Taxes: $6,500

Financing: owner is desperate to be done with the property and is willing to finance a 30 year mortgage at 5% interest with no money down. I know you are asking why doesn't she just sell. The fact is that she went through a messy divorce with a very wealthy man and he has to purchase this building for her. He financed the building and still has 11 years left on the loan. If she were to sell the place and the bank took the payoff, she believes he would never pay her directly.

Rehab: I am in the very early stages of getting estimates on the rehab costs. This is a major undertaking that I anticipate costing in the ballpark of $100,000.

I understand there is a lot of info that is missing and factors to consider, but if the above was accurate, what would be the most you would be willing to pay for the property? I am in the early stages of trying to put an offer together, but any of your expertise would be very much appreciated.

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Cal C.
Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
11y

ditto on the zoning.  I'd also make damn sure you have crystal clear title.  

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  • Brent Paul
    Rental Property Investor · Shakopee, MN · Member since 2015 · 985 posts · 374 votes
    11y

    I would first make sure that's ok with the city zoning.  I'm not sure how that would work since it's partial residential and partial commercial now.

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  • Jake Engle
    OP
    Real Estate Broker · Pennsburg, PA · Member since 2014 · 47 posts · 6 votes
    11y

    Thanks for your input Brent. That is another thing that I know I have to consider and look into.

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  • Cal C.
    Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
    11y

    ditto on the zoning.  I'd also make damn sure you have crystal clear title.  

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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    11y

    Are you actually going to transfer the deed to your name, purchase subject to or are you going to lease from her.

    I'm just wondering if a deed transfer will trigger the ex-husband to then be done with the payments regardless of whether the owner carries the note for you or not.

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  • George Calbert
    FPO, AP · Member since 2015 · 120 posts · 19 votes
    11y

    How much is your payment going to be to the owner? if the numbers are right I think it could be a good deal is a potential home run for a lesson in alternate financing. 

    What are you back up plans if the zoning doesn't work out. Maybe use the area for 6 to 8 storage units might be a good commercial back up plan if you can't do the residential apartments. 

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  • Jake Engle
    OP
    Real Estate Broker · Pennsburg, PA · Member since 2014 · 47 posts · 6 votes
    11y

    Well that was going to be my next post on this subject. I am not exactly sure of the best way to handle the situation. The seller is literally open to anything and just wants to get rid of the property. I thought her providing the financing in this situation would be the best solution to her problems.

    I obviously have a lot of kinks to work out. I know that it can be very profitable with the right structure. I am not rushing into anything and have a lot of analyzing to do. I appreciate your feedback and welcome any further suggestions.

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  • Jake Engle
    OP
    Real Estate Broker · Pennsburg, PA · Member since 2014 · 47 posts · 6 votes
    11y

    Thanks for your reply George. I don't anticipate paying any more than $250,000. Put into a payment over 30 years with %5 interest and taxes included, I'd be looking at $1,900 a month. I believe the owner will be willing to accept any number I come up with, I was just hoping to get a max that would make sense for me to pay.

    The storage idea is certainly one that I am really considering as well. What I failed to mention as far as the back storage area goes, is that there is a loading dock with large door that currently provides entrance to the area. It is a huge space and could definitely be profitable as is being a storage unit, or numerous units.

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  • George Calbert
    FPO, AP · Member since 2015 · 120 posts · 19 votes
    11y

    Just remember the price needs to be based on the income the property is producing currently, not the potential income. 

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  • Wendell De Guzman
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    11y

    Getting clear title is crucial here. Given the property is in a divorce, you need to ensure you check the title to be sure that the wife has the right to sell the house to you - 100%.

    You have to factor in all the expenses in renting an apartment. Use the 50% rule to be conservative. So if you're getting $4K a month less 50% rule equals $2K/mo. You then subtract the mortgage payment from that which is $1400/mo and you end up with roughly $500/month cashflow.

    Is this a good enough deal given the risks of zoning and spending $100,000 upfront?

    Personally, I would stay away from a deal like this.

    But if you're buying it at a BIG discount vs. its market value, maybe you can do the deal.

    To calculate exactly the cashflow, you can use the Cashflow Analyzer I uploaded in BP Fileplace. Here's the link:

    http://www.biggerpockets.com/files/user/Mister4clo...

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Jake Engle

      this is probably a far more complicated transaction than your imagining.. and if the seller is willing to sell with no money down and carry 30 years then its probably is a white elephant to begin with.. careful his bummer property does not become yours.

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  • Gilbert Dominguez
    Investor · Chicago, IL · Member since 2015 · 677 posts · 309 votes
    11y

    I agree that you are looking at a white elephant. This deal is mostly all in your head and not really there in front of you to work with. You may be better off looking for a property that is already very much like what you have in mind rather than be thinking you are going to make it into what you want. In its current state it is not what you want to buy but you are thinking you can and will turn it into what you want. How much money will you spend and time to make it into what you want vs finding properties much more easier to work with and make potentially as much more money with far less headaches?

    Will the property in its current state generate enough money to pay for the mortgage you are thinking to take on through the owner financing? I would think that is the first thing you have to take care of. Once you check with the city and know for sure that you can do with the property what you are thinking then bring along a general building contractor and have them give you a bid on all the construction(remodel) you have in mind that way you are sure of your figures. Find an architect and structural engineer to give you prices on creating what will be your needed construction plans. Then ask your city building department to give you an idea how long it will take to get plans approved. Remember all this time you will be responsible for making payments on your mortgage to the owner. 

    I would suggest that if you still want to go through with the deal you make an agreement with the owner to let you improve the property at least enough to generate the payments you will be responsible for having borrowed from the owner through owner financing. Then you are earning the money to pay for the mortgage. Then you can take time to further remodel and improve the value of the property and increase the cash flow.

    If it makes sense to you offer to make this project a joint venture between you and the owner. I do not want to discourage you but this is a big project that could easily turn south on you and leave you with a dead property or a significant negative cash flow. If the property is worth $250,000.00 to you in your estimation then offer the owner $250,000.00 in the joint venture the rest will go to you, that way you are not making payments on a loan but simply investing in the improvements you will make to the property. If the owner is in a position where they really need the monthly income then agree to pay them monthly payments to be subtracted from the $250,000.00 she will have coming out of the joint venture. 

    I hope this will help you look at this deal from a different angle. Its not worth it if there is only a maybe this could turn out to be a good deal for you , you have to make sure it will be a good deal otherwise do not do it and move on. 

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  • Gilbert Dominguez
    Investor · Chicago, IL · Member since 2015 · 677 posts · 309 votes
    11y

    After further thought about this deal it came to me that the husband financed this property and most likely the deed is in his name in which case you are up a creek when it comes to her right and ability to sell the property . How can she owner finance a deal in which she does not possess the title and deed to the property?

    This leads me to think that a partnership or a joint venture in more in order of what can be done depending on her legal rights. Was the husband ordered to provide her with a place to live? That is one thing but him being ordered to buy a property in which she would have a deed and he be the one to pay for it sounds extraordinarily unrealistic. 

    The other thing that comes to mind is that even if she does have a deed in her name where will she live all this time that you would be working on the project? Who is getting the current income from the property if any part of it is currently being rented?

    I would not be looking at this deal without the advise of a real estate attorney. Like I said I think this deal is mostly in your head and not a realistic workable plan but let us say that things are possible. 

    How are you going to finance the cost of the rehab/remodel you have in mind? Do you have that much cash on hand to pay for it all out of pocket? How could you finance the rehab/remodel if you cannot get a deed or title to the property? We can assume you have other assets which you can offer as collateral for the money. I will just assume that unless you have plenty of cash on hand and or property to offer a possible lender. 

    Allot of questions on this deal !!

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  • Jake Engle
    OP
    Real Estate Broker · Pennsburg, PA · Member since 2014 · 47 posts · 6 votes
    11y

    Thanks for all of your thoughtful input Gilbert! 

    The deed is in the ex wife's name. Part of the divorce was for this building to be purchased with him paying the mortgage and it strictly being her on the deed. This property was purchased for the current deed holder to run a flower business out of. For the last 10 Years, she ran a flower business. There is a shop and then the large storage area with loading dock in the back. She has never lived at the property.

    Over the course of her time running the business, she has had a tenant in the one 3 bedroom apartment. He was paying 500 a month up until two years ago. The rent INCLUDED oil heat, water, and trash. She just recently raised the rent to $800, but is still losing money because of the oil costs to her. This rent is being charged in a market that could support 1000-1200 with utilities being paid by the tenant. She is not made out to be a landlord and has no desire to keep doing so.

    The other apartment has been vacant and needs to be finished.

    The current owner (deed holder) closed her flower business down so she can stay at home and watch her grandchildren. She isn't in a desperate money situation by any means, and likes the idea of getting monthly payments for a long time.

    I realize that the deal needs a lot of analyzing. The bottom line is, is that at some point, the deal would have to make sense. There is no current asking price, and she really has no other options in her mind. It is strictly myself as an option, and whatever offer I come up with will still be a better option than she has leaving it vacant and losing money. 

    I could also leave the property as a store front on the Main Street, but parking is scarce and I don't believe it would be highly sought after by businesses.

    Sorry for the rather unorganized post. While this certainly may sound like a pipe dream, there is significant motivation on the other end, so I would love to be creative to make this work.

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