Can anyone with experience offer advice?Looking to buy a commercial building for my business and rent out the rest
I’ve had my eye on this building down the street from me for months. It’s had a ‘for lease’ sign on it since the day I moved in and just days ago it was replaced with a ‘for sale’ sign. Covid has hit this part of the city hard and I’ve seen over 10 buildings on the main drag are now for sale so I want to jump on it since the market seems to be in some trouble. 

I have a bit of money for a down payment and other overhead costs to get started but now need some creative solutions. 

About the property: it is in shambles but the best location for miles. The listing claims it’s in “average condition” which lets me know it’s well below average. It’s appeared to be vacant for at least 2 years and the last business to occupy it was a funeral home service which only operated out of the basement and first floor. 

My guess is the seller is motivated. I’ve been doing my research and now understand the basics (NOI, cash on cash, cap rate etc) but how is any of that calculated if it’s been a vacant property for years and probably paid off just sitting there? 

My second question is would a lease to buy option be the smarter move? And how do I go about pitching that so the seller bites? I think it would buy me some time to get the business up and running as well as find an occupant to fill the top two floors. 

My last question: what should I do or know before going to see the property to avoid getting screwed? 

Thank you!
[{"id": "ggj8bq2", "text": "Why would a seller entertain a lease to buy option - if things go well you get all of the upside while operating as normal, and if things go poorly no skin off your back you just break the lease. \n\nHonestly if this is a funeral home I have no idea how to approach it, sounds like super short dollars just buy the house and move on. It sounds like too small of a building to be an investment for someone else even if it leases you\u2019ll likely be at break even on your occupancy costs which is cool but I\u2019d think about it from that perspective not as a potential investment opportunity", "replies": [{"id": "ggjs0kp", "text": "A seller would entertain a lease to buy if they\u2019re strapped for cash and can no longer afford the property sitting there which I\u2019d bet money on being the case given the area. \n\nIf it is the case it\u2019d house my business on the 1st and second floor and then if the top leases then fine if not I could honestly live up there haha. It\u2019s zoned residential/business. \n\nWould you still not consider in my situation? It\u2019s 6500 sqft to add more specs", "replies": [{"id": "ggjtrqa", "text": "It\u2019s so outside of my strike zone I have no idea. Personally as a seller though no I wouldn\u2019t entertain that unless I was paid some premium. I\u2019d imagine something like that would sell for pricing similar to a house", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ggjqq4s", "text": "Get yourself an experienced commercial Realtor as a buyer's rep. A dilapidated old commercial building, likely with many code violations, is not beginner territory. If it's a listed property likely the seller will pay the commission. Shop around for representation, and don't be surprised if it takes longer and costs more than you expected.", "replies": [{"id": "ggjs7a4", "text": "Thank you! Would you suggest I bring someone else to inspect for me? Or is that not common practice before purchasing?", "replies": [{"id": "ggk5v4p", "text": "Buying commercial property is quite a bit different than a residential transaction. The contract is different, the lending rates and lengths of loans are different and also a certain level of expertise and sophistication on the part of the buyer is presumed. It's hard to give all the particulars in a brief post, but probably your best bet after finding a good agent is shop for lenders, then on to move to a letter of intent (LOI)\n\nA LOI is a non binding document submitted by the prospective buyer to the seller that precedes the actual purchase agreement and helps to define what that agreement will contain. A LOI lays out the proposed terms, how much down, what kind of loan, and how long a due diligence period you will require as well as other details.\n\nDepending on what you plan to do with the property you may qualify for a 504 small biz loan. This loan requires you to occupy at least 50 percent of the business for your own use, it has an attractive a 10% down payment, and a much longer period of amortization than a conventional commercial loan. They take a long time and you have to provide detailed financials. There's a lot of paperwork and many conditions both to get into the loan and also to get out of it if you do not hold the property for the full term of the mortgage..\n\nUnlike a residential deal where the inspection period (due diligence) is usually fairly short, in commercial the LOI usually spells out a significantly longer inspection period and during that time it's up to you, the buyer, to discover if the property is suitable for your envisioned use.  The rules about disclosure are often quite a bit different than they are in residential - where sellers are required to disclose everything they know. In commercial the seller often doesn't disclose (and often isn't required to disclose) all that is known about the property. You - the buyer - have to find it out and that can mean multiple inspections, which can be time consuming and expensive .\n\nAlso, every commercial deal I've done in the last ten years on older run down property the lender required an environmental assessment (EA). Around here they come as stage I and stage II. Stage I costs a couple of thousand and is pretty much a quick once over. Stage II is a lot more detailed and costs quite a bit more. The lender requires it when there have been toxic or hazardous materials used on the site, underground tanks, potential ground and/or water contamination and things like that.\n\nShort answer: Find an agent, talk to potential commercial lenders, preferably at banks where you have an established relationship, and draft a letter of intent. If you get that far you'll be farther than most people who think about buying commercial property.", "replies": [{"id": "ggl7v9l", "text": "Thank you so much for the detailed response. I have a lot to research so I appreciate the rundown/guide", "replies": [{"id": "ggn5mdc", "text": "Let us know how it goes for you. Where is the building you want to buy located?", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ggjszje", "text": "If the owner is selling, they have a problem that they expect to solve by selling the property. You need to find out what that problem is. Then you and the owner can brainstorm solutions to that problem. That could involve a lease with option to purchase. It could involve an installment sale. It could involve the owner keeping the property.", "replies": [], "depth": 1}, {"id": "ggjzbbn", "text": "If you are using over 51% for your business you can look into an SBA loan and possibly get by with only 10% down and rolling in closing costs. They would look at your business income and personal wealth and those numbers would need to support the loan. While you can also rent out the other 49% of the building I don't think they will consider that income for the loan metrics.", "replies": [{"id": "ggk27z8", "text": "Thanks for the response, I appreciate it. I\u2019ll look into SBA loans to see if I qualify", "replies": [], "depth": 2}], "depth": 1}, {"id": "ggqftgz", "text": "Not sure where you are writing this from, but typically a funeral home as former use would be listed on Certificate of Occupancy and would also require an engineer's assessment through a Phase 1 and 2 report of the property (and based on those findings, could require more money to correct any findings in the assessment).  The Certificate of Occupancy would also have to be changed to allow for whatever use you intend to use the retail for.  In NYC, there are use groups that cover various forms of businesses.\n\nThe cap rate you mentioned is obviously a projection of what the building will earn you, after expenses, in terms of an investment rate over the course of the year.  An investor will buy based on this, less the projected capital improvement costs, while an owner occupier would usually pay a premium over the investment value to use it for themselves. \n\nWould love to share more thoughts, but every real estate deal is unique and on a case by case scenario.", "replies": [], "depth": 1}, {"id": "gh9u4vg", "text": "Vacant buildings are valued in a bunch of different ways depending on the area and whether if youre trying to maximize the value for the buyer or the seller.\n\nA method I use is to find the rent and cap rate comparables for that area to get a good idea of the stabilized building's value and then subtracting the costs of repairs to get the property into market condition. Then subtract more from that number due to the inherent risks of buying a vacant property that requires repairs while factoring things like average occupancy for that asset type in that area.\n\nNone of these numbers are readily accessible to the public so you should hire a commercial real estate agent.", "replies": [{"id": "ghaujkj", "text": "Thank you for this! I\u2019m checking out the building tomorrow", "replies": [], "depth": 2}], "depth": 1}]