Commercial Real Estate Investing For Dummies. Peter Harris
in an area that has had decreasing cap rates for the past few years
For the long-term investor, here are some bad deals:
Overpaying in an area where cap rates are increasing
Buying in an area where the economy has been sustained by one large employer
An office building that’s functionally obsolete today with new building projects underway nearby
Short-term investors
Short-term investors hold their investments two years or less. Their goal is to buy, fix up, stabilize, and sell.
For the short-term investor, here are a couple of good deals:
Buying at a really low price by using ultraconservative resale figures
Acquiring an “easy-fix” rehab property with little down payment and owner financing in a seller’s market
For the short-term investor, these are some bad deals:
Buying a rehab in a market that starts to decline right after your purchase
Not doing a thorough enough analysis and due diligence and finding out that your rehab budget is actually off by double the amount
Assuming a loan with a large prepay (early payoff) penalty over the next few years
Part 2
Getting Started Making Deals
IN THIS PART …
Wholesaling a great way to get started
How to find deals that make sense
Making offers that get accepted
Strolling through due diligence
Chapter 4
Getting Started by Wholesaling
IN THIS CHAPTER
If you like the idea of owning commercial properties and are looking for an easy way to get started with commercial real estate, then you may want to consider wholesaling.
Wholesaling is the process of finding a commercial property, getting it under contract at a great price, and then selling your position in the deal for a “wholesaling fee” where your buyer’s total price adds up to be a very good deal. This is a great way to get started because you’ll be sharpening the essential skills of finding and analyzing properties without having to actually purchase or manage anything.
In this chapter you’ll discover how to get your foot in the door with commercial real estate by wholesaling properties. To wholesale commercial properties, you’re going to need to know how and where to find the right types of leads. We’ve got you covered. You’ll get to see how to analyze properties to see if the numbers make sense for a potential wholesale deal. One of the essential keys to wholesaling commercial real estate is getting the property under contract. We’ll explain why this is so important along with share some tips about contracts and agreements from the trenches. What comes next is getting clear on how to find the right buyer, followed by the essential steps to closing and getting paid for wholesaling a commercial property. Let’s get started with a story about you, in, let’s say, five or ten years from now.
Navigating Too Many Deals
To get a handle on wholesaling, imagine that you’re the vice president in charge of acquisitions for a large commercial real estate investment fund. Your job is to sort through the hundreds of deals that your team of deal finders feed you each week from across the country. Your deal finders are experienced pros who know how to find motivated sellers, connect with them directly, and get signed purchase contracts at below market prices or with creative financing terms.
What you’re going to do is to sort through the signed contracts you’ve been sent to separate out any deals that don’t fit your ideal requirements. Your fund has grown to where it only makes sense to do larger properties, so you put any signed contracts with less than 50 units into a folder on your computer labeled “Wholesale Deals.”
Another quick sort through the remaining properties based on your current acquisition guidelines allows you to eliminate a few more properties that have greater than 20-percent vacancy, are located in a metropolitan area with less than 200,000 in population, or properties built before 1978 when lead-based paint was still in use.
These properties are added to the others in the Wholesale Deals folder. Similar to a worker at the fruit packing plant, you’re sorting through the deals coming in to pull the ripest, juiciest, fruit off the conveyor belt because your fund “cherry picks” the best deals to ensure strong returns to its investors.
Using your experience along with some software and automation, you’re then able to perform initial underwriting for each deal using industry averages and market rents from each area to provide you with the projected cash on cash return. The strongest deals, those with the least risk and the highest returns, stay on your desk. Everything else goes into the Wholesale Deals folder.
This goes on throughout the week until Friday, when you open up the Wholesale Deals folder to take a look at everything in there. These are the deals that didn’t make the cut for your big investment fund, but you know there’s still some value here. Your job is to take these deals, which may be highly desirable to smaller investment companies or individual investors, and wholesale them off.
You run these wholesale deals through another analysis, which eliminates any properties that are too risky or have low returns that would make them unattractive to an investor or buyer. Because these don’t make sense for any buyer to move ahead, the contracts on these will be cancelled (which is allowed during the due diligence period).
Make sure that any properties you plan to wholesale have “some meat left on the bone.” If you discover that your purchase price is so high that after adding your fee an investor won’t have any room left to profit, then drop out of the deal so you’re not tying up a seller’s property, which isn’t going to work as a wholesale deal. The remaining deals are divided into two subfolders: One folder (the very best deals) is for your VIP buyers, while the other (still very good deals) is for the public.
The very best of these are initially emailed out to your VIP buyers list, people whom you know and have done business with previously. After three or four days, your buyers have scooped up most of these. Anything that’s left is added to the properties in the other subfolder, which you then market as wholesale opportunities to the public.
Since you probably don’t work for a big investment fund, here’s how to use this same concept: Get commercial properties under contact and then wholesale them to