Hello all. I have a deal that I have under contract. It is a 6800 sq ft retail building in a neighborhood setting. It is pretty run down and could definitely use a face lift. There currently is a Dominos and a mexican grocery store, but they are both leaving within a month. The owner just dropped the price to $150k and I put it under contract right away. How can you lose at 150k? I don’t know but I’m getting nervous. I’m a pretty successful house flipper, but looking to get into commercial. Is this a pretty risky play? It will be fully vacant. It’s located in a decent neighborhood, but there are a few apartments, and mostly residential surroundings. The traffic is not much, I’m not sure why because it looks like a location with potential. Is this a risky play? I could continue flipping houses and make good money with low risk, but I’m getting burnt out. Please let me know your thoughts. Thank you all and Mr. Alcorn.
Q: “How can you lose at 150k?”
A: Buy something actually worth less than $150,000, or have a building vacant for a year or more.
Q: “Is this a pretty risky play?”
A: You’ve answered your own question. “It is pretty run down and could definitely use a face lift… It will be fully vacant… The traffic is not much… mostly residential surroundings”. Yes, this is a risky play.
I think you probably already know you jumped into the deal without thinking it through, hence the second-guessing here.
A “face-lift” (aka as tenant improvements or TI) can cost between $25-$75 per square foot. Average TI in my market is about $45 psf if the structural, mechanical, plumbing and electric systems are in good shape, i.e. no major repairs or replacement, and normal CapEx items like roofs and paving are in good shape.
The price is below replacement cost, but my first question in that situation is always “If I had the opportunity to replace it, would I?”
Often the answer is no, but that also opens the door to considering other uses if the present structure was torn down (a "scape-and-build). In this case from what you’ve described I suspect the only commercial use is for small local shops (e.g. beauty shop, nail salon, c-store, etc.), or perhaps redevelopment into a small apartment building (depending on parcel size).
There may be additional circumstances that support your feeling it has potential, but from the info given I don’t see it.
ray
Thank you, that helps.