Commercial Real Estate Investing Not Always Sweet! That’s right! Our recent commercial real estate investor training foray into the Dallas real estate market turned out well, but certainly not as we’d planned.
To start off, we’d discovered a fantastic Dallas multi-unit property that had 10% down with non-qualifying assumable financing for the balance. And although this was a “C” class property, it was returning to our investors a whopping 30% cash-on-cash return! They were EXTREMELY happy, but as some wise soul once said, “It’s not a done-deal until the check has cleared the bank!”
One of my students, Ian Savage, brought me the deal. At our urging, he ALREADY HAD IT UNDER CONTRACT, pending a due diligence period. And while I was working with the investor to fund the deal, thank goodness Ian was doing what he’d learned in Jayme’s Commercial Real Estate Investor training, namely, “Do your homework!”
Here are Ian’s notes and comments after getting an inspector involved during his due diligence period. He refers to these items as the straws that broke the camel’s back:
Arrogant uncooperative behavior from owner; my impression is not a decent chap (speaks down to his Realtors too) so what else is he hiding? Besides, dealing with people like this is usually trouble.
- Poor package by Selling Agent (name withheld here)
- New Roofs in 2005 – not true, roofs are shot and tenants are at risk with very substandard below code, electrical system on the roofs (per property inspector).
- $36,000 expenditure being done for new low flush toilets and new shower heads – owner now refusing to do this, to the chagrin of RE Agent.
- Apartments in excellent condition – not true. Flooring worn out, old plumbing fixtures, old plywood cabinets.
- Cap Rate 9.8 % - not true, There was a $39,423 one-time payment to the owner for under surface rights. He included this in his Febuary 2008 income summary which he should not have, as is NOT operating income and is deceptive, as it wouldn’t be part of 2009 income. This puts the cap rate at 8.8 % .
- The seller included $10,949 in late fees as part of regular scheduled income; not a good management practice.
The City of Arlington will be sending me a full report of outstanding issues but this could take weeks and the owner refuses more than 30 days due diligence. The sense I got from the city is this place has a long rap sheet.
The owner claims he’s only going to net about $100,000 at closing. That and his attitude make a discounted price unlikely.
In good conscience I wouldn’t pass this project on to anyone else. The per unit cost will only go up as one dumps money into it and the age of buildings and their location just don’t support a high per unit cost. –Ian-
I could write extensively on this, but it all boils down to two items: A) Always do your due diligence and give yourself time in the contract to do so, without risk of losing your earnest money, and B) Some of the best deals that you’ll ever do are those that you walk away from!
If you want to learn more about commercial real estate come to our next Commercial real estate investing workshop in Dallas! Click here for more information.
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Great article on Commercial Real Estate.
ping back http:lifeinthenotesbusiness.blogspot.com
Thanks! Glad you enjoyed it!
Cheers!
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