How To Increase Commercial Property Value And Put $25,000 Cash In Your Pocket...
A savvy real estate investor can increase commercial property value without having to wait for market appreciation. An even savvier investor recognizes the opportunity to increase the property value and then earns a fee for bringing that opportunity to another party's attention. In fact, I was involved in a real estate deal a few years back that involved just such a situation.
Now I wish I can say that I played the part of the 'savvier' real estate investor in this story, but alas, I will have to settle for playing the part of the plain old 'savvy' property investor. (Actually, once I finish the story I will let you decide who was 'savvier'.)
I got a call one day from a local commercial real estate broker with an 'apartment building' he was trying to sell. (He was actually trying to sell the contract on an apartment building for another real estate investor). I had never met him before (the commercial agent that is), but he had been referred to me by a mortgage broker who had worked for me on a couple of my previous commercial real estate deals. The commercial broker knew my real estate investing history, knew I owned property in a nearby city to where this apartment building was located, and knew I could act fast if necessary.
Important Point #1: Once you are in the 'commercial real estate investment game' so to speak, you will start to access some great deals through your network of contacts that you normally wouldn't have access to. So get in the game early, even if that means just starting to contact some commercial real estate agents to let them know what type of properties you are looking for.
Here was the situation. Another investor had an apartment building under contract for $600,000, which was (I realized after I did my due diligence) a great price. The apartment complex was in fairly good shape, but the realtors who had been marketing it for sale did a poor job and they were just not attracting any offers. The owners had accepted a low offer simply because they weren't seeing any action on the property. The other investor had planned to complete the sale but at the 11th hour, couldn't line up the financing. His options were to walk or sell the real estate contract.
This was about the time I got the call. Again, after my due diligence I realized two things. One, the commercial property value of this building was at least 20% above the contract price. Two, I knew that the rents were well below market value, and once they were raised the building would be worth an additional $125,000 to $150,000.
I can't recall how much the other investor wanted for the contract, but in the end I paid him $25,000. Too much? I don't know. Sometimes I think I should have negotiated harder, but the reality was, and is, that another five or ten thousand wouldn't have made a difference in the big picture. Why? Well, within 8 months of purchasing the apartment building, the commercial property value was appraised at $850,000.
$225,000 profit in 8 months ($850,000 less $600,000 purchase price less $25,000 to purchase the contract)
And like I said earlier, there were only some minor renovations that were required to the apartment property in order to realize its true commercial property value.
Important Point #2: Sometimes it's best to look at the big picture. I can guarantee you that there are many people who would read this story and focus on the fact that I paid $25,000 for the contract, and not on the 'big picture' and the fact that I made $225,000 profit in 8 months with minimal effort.
Important Point#3: When looking for commercial property deals, pay special attention to apartment properties that have been owned by the same person for a long time. Why? In many cases you will find that the owners have not been aggressive in their rent increases. Hence the apartment's rents are well below market, thus lowering the commercial property value when it comes time to sell. These types of owners have simply become complacent and are just not interested in aggressively managing their properties anymore.
The Pièce De Résistance of this deal...
Once I had increased the commercial property value up to $850,000 I refinanced the apartment complex for $621,000, almost my entire purchase price. And even at virtually 100% financing this property has cash flowed very well for me over the years.
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