In need of financing ideas - Posted by Joanne(MA)


#1

Posted by joanne m on February 22, 1999 at 22:21:12:

Dear JohnBoy,
You’re right. When I read your first post(notice I put 2 of the same posts still trying to master this)all I could think of is you’re right. All I’m buying is a dwelling,but my imagination skipped that part completely. So you made me stop and do research, was I buying something that was, or FMR. Thanks for the wake-up. The price is based on the dwelling. It’s a beautiful 1882 Victorian no work to be done. Thank goodness can you imagine the cost. If I need more waking up please do, you won’t hurt my feelings. I don’t have time to become a reaestate genuise. I’ll take all the advice and comments I can get. Thanks again.
Joanne


#2

In need of financing ideas - Posted by Joanne(MA)

Posted by Joanne(MA) on February 21, 1999 at 20:59:13:

I’ve been reading your posts and the advice that you give is very good. So I’m here for some of that good advice. I have this opportunity to buy a B&B,the owner is willing to L|O
He has left it up to me to put a proposal together the asking price is 299,000 unfurnished in excellent condition.
I have not an idea at all. If someone can save me from looking to ignorant about a great opportunity that I would love to take. If you need more info to fill in the blanks let me know I’ll be checking in. Maybe someone out there can start me in a direction. The Inn has a wonderful rep and if run correctly a good income He seems very open to any ideas I’m trying to do this with as little up-front as possible,but to not be rejected at the same time.
Thanks Joanne


#3

Re: In need of financing ideas - Posted by MaryEllen

Posted by MaryEllen on February 22, 1999 at 03:21:47:

Why is the owner taking the furnishings? Can you replace them on no budget? Is the B&B operating right now and making a profit? Why are they selling? Do you know anything about running a B&B? Do you have the capital to carry you through until it does make a profit? Is there a big loan on the property that you would have to make payments on? Are they willing to train and give you list of current clients? What about advertising costs? If this is what you want, I know you will find a way to make it work. How about advertising to do a lease/option with someone who can run a B&B?


#4

Re: In need of financing ideas - Posted by Joanne MA

Posted by Joanne MA on February 22, 1999 at 09:15:21:

Dear Mary Ellen,
You’ve asked some really great questions. Ok here we go… The persons who hold the property (clear and free no mortgages held) had it as a private residence
then l/o to a couple that ran it as a b&B for 2 yrs, the partnership broke-up and the one didn’t think he could run it by himself. So off he went of course with the furnishings, not all is lost I’ve been collecting beautiful furnishing, enough to start.I really can’t answer the budget ? untill I figure the deal to make him. I do know the B&B business. I’t just that Realestate deals are not my specialty
and so here I am asking you all for some advice.I know what to do with the business I just dont know how to get there. And the options seem endless with them owning it. As for a partner I’d rather not. The house is empty and the owners want it to go to good home. On books it made 60,000 + . Does any of this help? Thankyou so much for responding as I said before you asked great questions, It made me stop and think.


#5

Re: In need of financing ideas - Posted by JohnBoy

Posted by JohnBoy on February 22, 1999 at 10:28:13:

I don’t know a thing about a B&B, but if all the furnishings are gone then it sounds to me like your buying a house, not a B&B. The B&B is gone as it stands now. What is the value of the property as is? Are other homes simular to this one selling for $299k? You don’t want to pay a price for a property based on what it used to be or could be. You want to base your price on what it is today. In this case it sounds like you would be buying just an empty house that you will have to refurnish and re-establish as a business all over again. If anything, that would be worth less in my opinion.

When you say, on the books it made $60k+. Was that in gross revenue or “NET” profit after all expenses?


#6

Re: In need of financing ideas - Posted by Jim Beavens

Posted by Jim Beavens on February 22, 1999 at 15:53:09:

I think you’re going overboard by calling this property worthless as a B&B. I agree that comps should be pulled to ensure that one isn’t overpaying, but if the buyer has experience running a B&B, and has sufficient furniture and other materials to outfit it as such, as well as some cash reserves to hold her over until it’s generating income again (this is very important!), this might work, depending on the answers to a few more questions. And the most important would be this: do you plan on living there?

As a pure commercial property, you would take the $60,000 gross income and subtract the expenses…let’s use 60% off the top of my head (I have NO idea whatsoever what figure to use for expenses, as my limited experience lies in small apartment buildings, and this fits in much better in the motel category, which SEEMS to me like it would have higher expenses with weekly/daily cleanup, meals, etc…but I’m totally clueless here). This leaves you a net operating income of $24,000, which with a $300,000 purchase price gives you an 8% cap rate (NOI/price). Normally I would balk at something like this, but if you’re going to live here then that would basically take care of your housing costs plus some of your expenses if you do some things yourself…you’re basically buying a job that pays $60,000 a year plus provides for your housing. If you want something like that, then that’s fine…it’s not for me, but I can see how somebody could like that sort of thing. If I’m mistaken and that 60% figure was for the NET income, then forget everything I’ve said; this would be a great investment whether you live there or not.

As to your original question: since the sellers have 100% equity, you could float two proposals to them. Option #1: Have the seller carry 100% of the financing (worth a shot, at least…would make everything hell of a lot easier). Option #2: Offer 80% of the asking price ($240,000), with them carrying back a second mortgage for 30% of the purchase price ($72,000). If they like option #2, then start looking for a lender that will give you a 70% LTV loan that doesn’t mind subordinate financing (btw, your offer would be contingent upon finding acceptable financing). You could present these two offers at the same time and phrase it as the classical “price vs. terms” scenario. It might be tough to find a lender without any of your own money in the deal, but again whether you live there or not could have a big effect on this. At the very least, you should write up a detailed business plan showing projected income and expenses, exactly what work you would be doing yourself vs hiring help for, etc. Everything should be itemized month-by-month…if you plan to have an operating loss the first month, which will lessen the next two months until you finally make a profit in the fourth month, that that should all be detailed in the business plan. Search the web for more information on writing business plans (SBA, etc).

Note that none of this should be construed as advice to go for it. I certainly wouldn’t do this, and you should look carefully at the past operations to see if this is a truly desirable investment (since the previous tenants no longer hold any stake in this deal one way or another, I would spend a LONG time talking to them about how successful they were in running the business). But if you do your due diligence and decide you want to do this, the above should be a place to start. Good luck in whatever you decide.

Jim


#7

Re: In need of financing ideas - Posted by Joanne M

Posted by Joanne M on February 22, 1999 at 21:59:58:

Dear Jim,
Thanks so much for the reply, I really appreciate it,more than you will ever know. Yes I plan on living there. The real value for this place is 345k that was 5yrs ago I’m not pushing for a new one. Tax asses is 202k and i dont know when that was,dont want to push that one either. It has the ability to rent 5 rooms,there are 10 bedrooms altogther,code reasons.They think that the 60k is gross,but told me they would try to get ahold of the other person to see if they would talk to me. I have turned your idea slightly and asked them to hold 200k and go to the bank for 1k they are going for the idea. If they should come back with a deal, I will post and if you all could let me know if that would be acceptable terms. Realestate such a wonderful thing and scary for the ignorant.I had already been to SBA web site for businees plan, thanks for the suggestion. I’m thrilled that I stumbled on this site. Thankyou so much for the time, and another note, GREAT crash course article. Please feel free to ask me more or add to this idea.

Joanne


#8

Re: In need of financing ideas - Posted by Joanne M

Posted by Joanne M on February 22, 1999 at 21:58:51:

Dear Jim,
Thanks so much for the reply, I really appreciate it,more than you will ever know. Yes I plan on living there. The real value for this place is 345k that was 5yrs ago I’m not pushing for a new one. Tax asses is 202k and i dont know when that was,dont want to push that one either. It has the ability to rent 5 rooms,there are 10 bedrooms altogther,code reasons.They think that the 60k is gross,but told me they would try to get ahold of the other person to see if they would talk to me. I have turned your idea slightly and asked them to hold 200k and go to the bank for 1k they are going for the idea. If they should come back with a deal, I will post and if you all could let me know if that would be acceptable terms. Realestate such a wonderful thing and scary for the ignorant.I had already been to SBA web site for businees plan, thanks for the suggestion. I’m thrilled that I stumbled on this site. Thankyou so much for the time, and another note, GREAT crash course article. Please feel free to ask me more or add to this idea.

Joanne


#9

Re: In need of financing ideas - Posted by JohnBoy

Posted by JohnBoy on February 22, 1999 at 20:25:48:

I wasn’t saying the property is worthless as a B&B. I was saying I wouldn’t base the price of this because it used to be a B&B. The B&B that used to be there is now gone. Out of business. So to me, the $60k the B&B used to pull in would be worthless as far as using that to place a value on the property as far as the purchase price is concerned.

In my mind I would be looking at this as a business with the real estate included. Since the business is no longer in business, then whatever the business used to do wouldn’t have anything to do with what the value of the property would be worth.

As an example, that would be like taking two identical buildings on the same street. Both buildings have a pizza business in them that each did $100k a year in business. Except that one of the pizza businesses went out of business and they took out all the equipment leaving an empty building.

Both places are up for sale. The pizza place that is still in business is selling for $400k which includes the real estate. The second pizza place that went out of business is asking $400k just for the real estate. You would like to own a pizza place. Which one are you going to buy for the $400k?? The existing pizza place that is bringing in $100k per year which would include all the equipment, or the empty building that used to be a pizza place that you would have to put in the equipment, regardless if you already had it or not, and re-establish the business with?

How much would the real estate by itself really be worth Vs. the existing pizza place asking the same price? Would you pay the same price for the empty building because it used to be a pizza place?? This was the point I was trying to make.