Please review this strategy on a commercial office building with 4 units. Two 2500 sqft and two 1000 sft. Total 7000 sft office building. 3 and 1/2 years old. Right now only one 2500sft and 1000sft areas are occupied by tenants with 2 years still left on a 5 year lease.
The other two units are vacant and the owner wants $985k for this property , he still owes $950k to bank. Property is not listed for sale.
The current income is only 5250/mo=$63000
The owner suggested that he set up $1.2M as sale price so that I can get 100% financed by the bank so I don’t have to put any money down.
Also I get a credit for this years property taxes. so have to really worry about getting the other 2 units leased within the next 12 months. This is worst case scenario where we have a negative cash flow of $8k for the first year ($5742/month mortgage assuming 5% for 25 years and 2k for insurance)
Exit strategy is to sell it off once it is 100% occupied.
The real questions I have are:
I don’t have a realtor so don’t wondering how to get comparable sale price/sft?
Would the bank finance with the weak leases and cash flow in the current situation?
I have a copy of the property taxes that shows fair cash value $683k. How do I translate this and the current operating income into a good purchase price?
This is all the info I have on this property. Called a local management company to get their opinion on price/sft.
Thank you for your responses. May be my post put a liar taint on the seller. Let me be more clear. It seems the property was appraised for approx. $1.2M 6months back. When I asked him if he will carry any second mortgage on this because it is currently on negative cash flow then he suggested that he would tell that the selling price is $1.2M… he actually owe the bank 950 and adding 18k property tax other expenses he want 985k to be out of this property. He didn’t list it for sale yet.
Seller Motivation: He is a re developer and also runs a property management company mostly specialized in multi family. He wants to get back to what is good at which is apartments… this is the reason I got when i asked him why he wants to sell this property…
then the sales price is $985k, the bank will want you to bring around 25% to the table, the title company will probable pay the property taxes, not give you credit for them since its the end up december.
The bank will want to see that you have considerable reserves since this is a negative cash flow property,they want to make sure you can ‘feed the aligator’ for long enough to turn it around.
If the seller is a RE Developer he knows what he is doing, nothing against you, but I try not to be in a situation where the seller knows a lot more about the business than I do
At 5%, a bank would never take on this kind of risk. A private lender might, but they’re gonna charge you a pound of flesh in interest and some outrageous terms if they believe you could pull this off.
BUT, there may be a better way to do this deal.
Normally, these types of commercial buildings are in their own corporation, which is good because you could do a 100% share sale of the corporation without disturbing the existing mortgage. Then, you could ask the developer to hold a 2nd VTB for the difference. If the developer thinks it’s such a money maker, let him put his money where his mouth is and hold a 2nd VTB for the difference.
I asked a property management company to drive by and see if they consider taking it on their port folio. I am getting their opinion on this property and any comps for price/sft?
As Andy mentioned that he knows what he is doing being a RE developer (the seller). Why would he sell if it is a money maker. As per the property management company the town is flooded with vacancies in commercial office space bldgs.
Still working on getting comps for evaluating the value of the building…
I talked to a local property management company and actually had him drive by the property. He said that the going rents in that area are only $6.5/sft as opposed to $18 mentioned by the seller. And the local vacancies on commercial are 25% and over per the PM.
I also researched at the recorder of deeds office to see what is the mortgage against this and found out that the seller took a $1.1M construction loan on the pin #. Don’t know if it is part of the subdivision or exclusively for this commercial building but the parcel number I used is the parent number of the pin against the buildings address. Atleast the seller told the truth on the mortgage…
So this property is under water and thats the reason he wants to dump it…
I am ruling out and done with this deal and now time to move on to the next…
Thanks all for reading and posting on this thread.