Let me say upfront that in an ideal world you would want to be buying well located properties with long leases…
But the reality is that there are many commercial properties which are sold as vacant.
So what’s the best way to approach a vacant property?
Before we get to that let’s pretend you were looking at a property which doesn’t have a long lease left. You look and the ad says the lease ends next year.
The first thing you need to do is to ask the agent if the tenant is intending to renew the lease. Or better yet, go straight to the tenant and ask them outright. It may be that they want to renew and it may not.
But here’s the thing. If they are intending to renew they may be interested in renewing early… basically you could negotiate a slightly better deal for them for the next 1 or 2 years in exchange for them renewing for 3 or 5 years on a new lease.
This is brilliant stuff. on the one hand you might make a tiny bit less that the current lease because you’ve cut them a deal, but on the other hand you’ve just increased the value of the property because you’ve locked in a longer lease.
Especially if you can secure a 5 year or longer lease.
If you find a property like this then talk to the tenant and then if acceptable, put in an offer subject to them signing a new lease.
I’ve found over the years that some landlords just don’t keep up to date with leases and once a lease runs out they just let their tenants go on a month to month lease.
This is exactly what most residential landlords do and so when they decide to buy a commercial property they take that same thinking over to their commercial property.
To my mind this is crazy.
It not only outs you in a dangerous position but also devalues your property.
Remember the longer the lease the higher your property is likely to be valued. A lease is part of the very backbone of your properties value… do you really want to leave all that to chance by allowing your tenant to go onto a month to month lease? No- way!
So what does that mean for a property that is vacant? If the lease forms the one of the main factors in a properties value does that mean that a vacant property is worthless?
Well, it’s not quite as simple as that… sadly.
There are other factors in valuing a property, but that’s a discussion for another time.
What I want to talk about here is what can you do if you find a property you like the look of but it’s currently vacant.
First thing I’d do is go ask the agent how many enquiries they have had to lease. it’s most likely that there have already been some attempts to lease the property. That’s not always the case, but it’s worth finding out.
A well situated property will generally have some interest in it and if so then you are already in a good position to put in an offer subject to getting new new tenant to lease the place.
But ok, now let’s say for the sake of argument you’re buying the property from someone who was also the tenant. He’s closed his business and now he wants to sell his vacant building.
Now’s when you need to know how to value a vacant property. It’s still a property so there’s going to be land value, but without a lease it’s not going to value as high as it would if there was one.
You have to sort of base the value on it’s potential, minus the tenant, minus the GST which you will be charged on top of purchase costs because it is vacant…
It’s tricky business and I go into it in detail in my course. It’s takes a fair amount of research to come up with a realistic number… which most vendors or agents will not give you.
You have to be able to come up with the number and then prove to them why it’s realistic and fair.
Once that’s worked out… you can still out your offer in and then put all your focus into finding that tenant.
I’ve done everything from local paper ads, letter drops and even Facebook advertising.
Even if you cut a deal, lower the first years rent… it’s worth it to get someone in the door and on a lease.
Remember, rental increases, revaluations, expenses… all those things are dependent on having a lease…
The longest it’s taken me to get a place leased is around 3 months.
But of course I choose well situated properties in high demand areas. The further away from high demand areas you buy, the higher your risk.
So as I always say, buy well first, and any other issues you may have with a property will quickly take care of themselves.