Posted by ray@lcorn on December 06, 2003 at 14:12:45:
Roger,
What you’re looking for does likely exist, but you have to be aware of what circumstances have to be in place to make the deal work for you, the seller and the lender.
You also have to be aware that you are not the only buyer out there. We’re in a market which, in spite of lousy fundamentals, continues to trade at valuations unheard of just a few years ago. The reasons for that are too numerous to go into here, but the result is that there is a lot of money chasing the few good deals out there. That means marginal deals are getting even more attention than they deserve. So many deals have sold in the past two years that most of the experienced players realize that we’re getting down to the deals culled for good reasons. Turnarounds, short leases, functional obsolescence, locationally challenged… those are the deals that can be bought on the terms you are describing.
More than likely a deal like that will not be a candidate for a new bank loan, especially one with an 80/20/0 structure for a borrower with no experience and little capital. Even 80/10/10 is usually viable only when the borrower has a track record and adequate reserves to carry any negative cash flow. So unless you are willing to put up substantial equity or have significant net worth you are willing to pledge as additional collateral, I doubt seriously that a local bank is going to come to the table on a pure real estate loan basis. However you may have some other options. (see below)
A more realistic scenario is to find a property with a “don’t wanter” motivated seller, assume the existing financing, and combine some cash and some carry to meet both yours and the seller’s immediate needs.
Remember the first rule of dealmaking: No one; not the seller, the buyer, the lender, or even the lawyer closing the deal; will sit down at a closing table unless they think they will be somehow better off when they get up from the table.
That’s why we harp on finding problem properties and crafting solutions for the sellers. If you want to get into a property for less than the market requirements of capital and experience, then you are going to have to bring something else to the table in order to make that seller feel he is going to be better off when he gets up.
Ask yourself “what problem is the seller dealing with that you can help with?” If the leases are below market, short term and vacancies are above market, then it is likely the building has a negative cash flow. If you aren’t willing to deal with that or have the ability to correct it better than the present owner, then why would he want to hand you the building? If you want to make a bargain purchase on easy terms, then you are likely going to have to take it as-is where-is, along with some pretty glaring blemishes. I’m not being critical of you personally here… just trying to make a point that you can’t have it all… be realistic about the counter-party’s needs and how to find the mutual level of benefit between you.
Think in terms of solving problems… therein lies opportunity in every market. But first you have to find the problems. Watch for foreclosure sales… that’s a great way to get a building at a discount. Get active in the market and look at everything that is being offered for sale. While you’re looking at one building ask about the building next door that isn’t for sale… yet. Ask lots of questions. You’re looking for problems, and most people have a boatload. Be alert for those buildings with owners that have living problems… old age, divorce, death… people’s circumstances change all the time, and they have to make hard decisions regarding their assets. Distressed sellers like that are looking for a way to avoid the worst case of an auction in a down market… anything above that has to look better. Take out a three line classified ad for a week or two just to see what happens. Then get ready to solve some problems… yours and their’s!
Use what you have to work with to get where you want to go. As a surveyor you should come in contact with all sorts of people doing something with real estate. Use your contacts in the business to network, get the word out you’re looking to buy.
In the meantime, you should be talking with a bank about your desire to relocate your business into owned space. That is something they are generally very interested in helping with. Owner occupied buildings have less risk than non-owner occupied, and it may be that they would be willing to extend more liberal terms than for a typical real esate loan. You may qualify for an SBA loan guarantee program. However you need to be doing the footwork for that relationship now, before you put a building under contract. Interview several banks and find the one that sounds most in tune with your needs. Not every bank is the right bank for every borrower. It is a personal fit, and it is your obligation to do your homework to find the right bank for you. If you don’t have a business plan, do one. Get your financial house in order so you will be ready to supply documentation when asked for. You have to start from where you are to get where you want to go, but the operative word there is “start”.
So yes, buying an office building at the bottom of a depressed market (though determining just where the bottom is can be tricky) could possibly yield a great deal on a relative dollar basis. But in order to realize the great deal you have to still be the owner when the market turns. That means you have to have the staying power and market savvy to succeed. Be sure you evaluate the worst case scenario, and can deal with it. Think the deal all the way through, lest you end up being the next “don’t wanter” seller.
ray