Residential to Commercial

i stumbled across a FSBO owner today while driving home. it’s this really old residential property on what is now an almost 100% commercial storefront street. This old house was built in 1920 and is completely vacant… it’s 1300 sq/ft and on a 8500sq/ft lot. I couldn’t get in, but did talk to the owner, and because of where it’s sits it’s been designated a commercial sale… i’d have to get a commercial loan. This definitely has potential, but the questions are already piling up in my head.

What would be the next step in even beginning to analyze this potential deal? I have no experience when it comes to a rezoning and rehabbing, or a rezoning and getting the land appraised and possibly considering a new vertical build.

I would check with the city to see if there is any tax credits for rehabing that building. I would also see if you could get a mezanine loan for the improvements and at interest only during the construction phase. I would also do some due dilligence as far as what the absorbtion rate is for that area based on property type and find out how much product is currently in the pipeline for delivery in that area.

First, this is going to be a higher risk deal since it is new construction and you’ll need some solid financials for a lender to work with you. But before that, what price is the seller asking? Is the price at market value or is he wanting too much? My guess is that you won’t be stealing this property. You’re looking at land value if you’re demolishing the building.

Are most of the commercial properties along the street retail in use? Why types of buildings are they and what condition are they in? You don’t want to build an excellent quality building in an area of average quality buildings because you won’t get sufficient rent to support the project. Would you develop office or retail? How big of a building could you legally put on the site assuming rezoning?

Are you going to lease the building (if so, what would your terms be?) or sell the building (price?) once it’s complete? If leasing, you need to have a good idea of an absorption rate. How many vacancies do you see along the street? Are tenants moving to that area or away from it? Call the numbers of agents who have signs in front of the properties to get a feel for what the immediate market is doing. All of these questions determine the financial feasibility of the project. You need to run some numbers to see if this is worth your time before messing with rezoning. Run the numbers assuming the property can be rezoned.

It sounds like rezoning shouldn’t be a problem. Just make that a condition of the sale and call your city or county to get the process started. The zoning officials would probably be happy to rezone the property. I think rezoning is the least of your concerns. Don’t get caught up with rezoning and contractors. You’re putting the cart way before the horse. You buy real estate to make money, so determine if there’s money to made.