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.