Need Advice from fellow pelican real estate moguls

[plexiform]

I'm looking to buy my first commercial/mixed use property and I've made an initial offer which has been denied by the seller. Yes it was a lower offer and comes with a contingency of selling my existing home but it was by no means an insulting offer in my mind. Or maybe it was and I just didn't realize it.....I offered just under 20% lower than asking.

My accountant tells me the Cap Rate is 2% at the asking price and that he would have offered 65% of the asking price. I thought that was really low so offered much more.

I realize any contingency offer is less desirable but I am confident my house will sell quick, but not confident enough to remove the contingency as the worst case scenario (committing to buy the new place and still own my current home) would be unsustainable for me.

What is the best strategy to re-engage a seller to make sure my next offer sticks? Appreciate your experienced recommendations.

[Cajundaddy]

Bring cash or bring your own financing to remove the contingency. The guy wants to sell his place and not tie it up in a deal that goes nowhere. If necessary, you may be able to get a 2nd on your existing home, pay in full on the new place, and pay off the 2nd on the sale of your current home. My dad did this to finance a commercial build at a much lower rate than a commercial loan.

[Bill Douglas]

Don't make it conditional. Conditional on selling your own place etc. Low offers are good. sooner or later someone will take you upon your offer. And as they say in real estate, you make your money when you buy a place.

Disclaimer: I'm no mogul.

[Googam]

Don't know your market ..........but as a real estate investor, manager & developer, I'd never consider a property with a penciled out cap rate of 2%. It's over priced. Your accountant is right.

[Steve Viegas]

I agree with Googam. That being said, if you want your offer to stick, put down a deposit that 'goes hard', meaning you cannot get it back.

Offer has deposit money attached but after a given time, the deposit goes hard and is the sellers if the deal does not go through. If you think it will take 45 days to sell your house, then you put that number up for the deposit to go hard.

You can withdraw your offer and retain your deposit before that point in time.

[CalPersFatCat]

Originally Posted by Googam

Don't know your market ..........but as a real estate investor, manager & developer, I'd never consider a property with a penciled out cap rate of 2%. It's over priced. Your accountant is right.

And that property better be an A+ Class.

This is an appreciation play, correct? You are just looking to park capital. You are not looking for the thing to cash flow and throw off income, correct?

DL

[mrbeverlyhills]

All very good advice; but if you are willing to take a %2 cap, I have a bridge for sale.......

Seriously, write the same offer with a 72 hour right of rescission. He can give you notice he intends to rescind his acceptance, you then have a chance to remove the contingency sale. Nothing is permanently binding on either side that way.
But %2, I hope this place needs nothing and long term tenants are locked in; any unexpected repairs or vacancies and you will be writing a check each month.

[Eric Coffey]

Originally Posted by Googam

Don't know your market ..........but as a real estate investor, manager & developer, I'd never consider a property with a penciled out cap rate of 2%. It's over priced. Your accountant is right.

Originally Posted by CalPersFatCat

And that property better be an A+ Class.

Originally Posted by mrbeverlyhills

All very good advice; but if you are willing to take a %2 cap, I have a bridge for sale.......

Without knowing all of the facts/particulars, none of the above are absolutes. In fact, many savvy CRE investors intentionally seek out under-performing assets, and/or those with other issues (deferred maintenance, etc.).
The value-add space is still relatively hot, especially in multi-unit/multi-family properties.

So, it all depends on the numbers and your intended plan/exit strategy.

YMMV...

[plexiform]

Property description: newly built building with 3 residential units and 2 commercial use units.

Intended use: I’d like to move in to one of the residential units and rent the rest out. Currently all units are rented. The owner of the building lives in one unit. The owner would like to stay in the unit and pay rent for the next one year and possibly two years. All other tenants are contracted until June and have voiced no plan to stop renting.

Market: California coast. Very limited nice places to rent and rent is fairly high.

My current plan: I am going to look at refinancing my existing home and using that as a down payment for the new property. I will either rent out my existing home or just keep living in it until the owner of the new property decides to stop renting the unit he is currently living in.

New developments: since making this post I’ve learned that an investor has submitted an offer and the seller is going to be countering but I will not know how that plays out until this coming week. Apparently the seller is contemplating removing the appraisal contingency. This means if the home gets appraised for less than we had planned that the deal would still need to go through and if the bank decides to finance the property for a lower amount then The buyer is stuck coming up with the difference. For example, if I am basing all my numbers on an expected property value of $1.9M and the bank comes back and tells me it’s only worth $1.7M they will be financing for $200k less than initially planned, so either I come up with $200k or I accept larger payments per month which may mean I’m putting up cash every month that I wasn’t expecting to because the rental income will not cover that.

So we will see how this plays out in the coming days. At some point I may just get sick of this seller for Imposing unreasonable requests and walk away. I like this property because it makes sense for me and my family but I don’t think it’s a great immediate investment. For me the true value is going to be appreciated 15-20years from now when it’s paid off and I’m retired and collecting rent as a steady supplement to my retirement savings and are assets I can pass on to my kids.

[jorian]

Unless there is a compelling reason why you have to have that particular property I don't see the attraction of a 2 cap. At that rate you are barely keeping up with the inflation rate. If you want to invest in R/E why not buy into a REIT. Dividend income, no management and good liquidity.

[Bill Douglas]

From a sellers view point (I've just sold a place). Why on earth would he wait a month to see if you can sell you house. AND lose the other potential buyers. He's just spent a bomb on advertising and other costs so he's not gonna wait around to see if you can get fiance, work out your numbers or sell your house. He wants a good, unconditional offer, right now. Sure he'll listen to you if you are paying way more than it's worth. But generally speaking, why should he do the buyer a favor by waiting for you to do you numbers.

[plexiform]

Originally Posted by Bill Douglas

From a sellers view point (I've just sold a place). Why on earth would he wait a month to see if you can sell you house. AND lose the other potential buyers. He's just spent a bomb on advertising and other costs so he's not gonna wait around to see if you can get fiance, work out your numbers or sell your house. He wants a good, unconditional offer, right now. Sure he'll listen to you if you are paying way more than it's worth. But generally speaking, why should he do the buyer a favor by waiting for you to do you numbers.

Valid point. I'm new to this and not sure what is a reasonable request for a seller to make. Do you think it is customary for a seller to say that he will not accept an offer contingent on an appraisal value? So if the appraisal says the property is worth $400k less than the asking price, he doesn't think that's a valid reason for the deal to be cancelled? I'm asking because I don't know.

I just don't see a ton of strong offers coming his way, so I anticipate he is eventually going to have to work with someone and let a contingent offer play out with all the associated risks. I could be way off and a serious investor could swoop in and pay a lot of cash and take it. However if my accountant is correct and the cap rate is low and the property is way overpriced, then I don't think there is much risk of that happening. I'm new to this so it'll be a learning experience. Like others have mentioned, in real estate you make your money when you buy at the right price so I am just going to remain cautious this time around and try to get this at the right price.

[Bill Douglas]

Umm, a different market I guess. Around here a seller may get six offers at the close of tender. And the seller just sells to the highest unconditional offer. If you can get away with making a nice low offer great! And the banks love it.

[Googam]

Well.....you asked for advice from the "Moguls". The general consensus seems to be it's not a good deal. But since you have the Red Mist, best of luck to you. P.S. If you do make a deal, don't let the old owner stay there. That's a recipe for disaster.

[fred cook]

A few years ago, I had a piece of commercial property (4 suites in one building) that was in a great location, just a couple of blocks from the town square with lots of traffic exposure. I operated it as a rental property for about 35 years and always kept it rented and made $$$ ! When I got ready to sell, I put it on the market thru a realtor friend. She suggested a price to ask but I told her to put it on the market at a price about 35% more than she suggested. Remember, with real estate, it is location, location, location! Shortly, I had a firm, cash offer for my asking price minus a few thousand for desired repairs/updates. I wound up taking the offer mainly because I was tired of being an out of town landlord. The point of all this is that as a buyer, you have a couple of things working against you. The first is, how badly does the owner want to sell? And the second is what is the realistic income potential from the property? The third thing that I had going in my favor was that my property had not been on the open market for almost 65 years and this was possibly the only chance the buyer might get to buy it. Good luck with your purchase efforts!

[john70t]

I see red flags.
-The seller built it and is selling it pronto. Why? Is the seller a flipper or over his head or some other reason?

-There is little other buyer interest in the property. Why? If it was such a good deal then the friend of a Realtor would have swooped in already. Sorry to the pelicans in the profession but Realtors lie to make the sale happen and get their money. "Other offers" happen all the time especially with used cars and auctions. BTDT. Even with 'buyers-agents' who is supposed to be your employee. What do they know that you do not?

-It is a huge investment and while versatile you will have to go out on a limb and juggle finances and your other personal property. How much are you prepared to lose? The bank appraisal might not see it as a worthwhile investment. Could you really go at it alone if necessary on a 2% Cap Rate provided nothing else happens? Will it still be desirable in 30 years when your fixed mortgage is paid off. You should be able to swing a 15 fixed. Have you done full research on the comps in the area and where the town is going? What businesses and attractions will prop up the local economy in the case of recession?

-The internet buzzing is that there will be another national RE slowdown or crash. That stays in the back of my mind. California business and middle class appears to be leaving in droves and they just sunk 3.2 billion into the train to nowhere while already in heavy debt. CA real estate tends to waver in huge swings. First to rise and first to fall. Buy low. Sell high.

-It's probably a beautiful property and you have fallen in love with it. That does not matter when the numbers don't work out and the bank repossesses it. Don't be that guy to join millions of others. Get a price point that works for you and start from there.

[CalPersFatCat]

Originally Posted by Eric Coffey

In fact, many savvy CRE investors intentionally seek out under-performing assets, and/or those with other issues (deferred maintenance, etc.).
The value-add space is still relatively hot, especially in multi-unit/multi-family properties.

No offense, but you may have won the "Captain Obvious of the Internet" award this week.

Yes, many savvy CRE investors intentionally seek out under-performing assets and/or those with other issues. That is why they have staff who spend 40 hours per week pouring through tax assessor records and county registrar records, calling, mailing, emailing and door knocking every single owner of multis within their targeted geographic area.

Be advised, properties that actually sell at 2% caps in 2019 are not value add, unless all of the value is in the dirt... But of course, now I am being Lieutenant Colonel Obvious...

DL

[Cajundaddy]

I agree with your accountant that this property is overpriced and you don't currently have the financial resources to make an unconditional offer at a fair market price. No way you want the current owner to continue on as a renter.

This is not your dream retirement property, keep looking.

Caveat: Not a real estate mogul but I did play one on TV once.

[CalPersFatCat]

Originally Posted by john70t

-The internet buzzing is that there will be another national RE slowdown or crash. That stays in the back of my mind. California business and middle class appears to be leaving in droves and they just sunk 3.2 billion into the train to nowhere while already in heavy debt. CA real estate tends to waver in huge swings. First to rise and first to fall. Buy low. Sell high.

-It's probably a beautiful property and you have fallen in love with it. That does not matter when the numbers don't work out and the bank repossesses it. Don't be that guy to join millions of others. Get a price point that works for you and start from there.

This seems like a big bite for a first timer.

If you are 30, do it. If you are 40 don't do it. If you are 50, for sure don't do it.

I've retired twice (Calpers the first time, Multifamily investing the second time), and I suck at staying retired so I am 1/4 owner in two electrical services company start-ups right now.

State imposed rent control of some sort is right around the corner, as is revocation of Prop 13 for income producing properties.

I am super, super financially independent, but I would not even think about pulling the trigger on that deal.

DL

[john70t]

There it is. plexiform please read this again:

Originally Posted by CalPersFatCat

State imposed rent control of some sort is right around the corner, as is revocation of Prop 13 for income producing properties.