Commercial Real Estate Investing For Dummies. Peter Harris

Commercial Real Estate Investing For Dummies

going to search online. When they find the listing, they’ll think “Why do I need this wholesaler? Bring me something that's not on the market.” Your buyers can find listed properties easily enough without you. That’s why buyers want wholesale deals that are not on the market

We call this branch of commercial real estate the Branch One properties. These are all the unlisted or for sale by owner properties. You’ll need a good system in place to generate these Branch One leads. This includes direct marketing, networking, and other methods that enable you to go out and uncover the right situations, properties, and problems that lead to a wholesale deal. If you’re not especially motivated and would rather just find a listing and talk to a broker, then commercial wholesaling isn’t going to be your cup of tea.

Step two — analyzing properties

Step two is to analyze those properties so you know how much they’re worth. You’ll need to determine your target price for each property so you can get them at a wholesale price or terms. The problem for most beginning commercial real estate investors is that they learn the cap rate formula but they don’t realize that sellers (and brokers) almost always lie about the, expenses for the property.

If you’re relying on the information provided by a seller to determine the value of a property, you’re going to agree to pay too much for the property. As a wholesaler this is the fastest way to get frustrated and quit. The reason is that unless you have the property under contract at a wholesale price, that is, your purchase price needs to be BELOW the actual value of the property, you’re not likely to find a buyer who will close on the deal.

The secret is to be able to quickly use some simple formulas (see Chapter 3) that allow you to determine the real value of a property without relying on the expense information provided by the seller.

Step three — getting it under contract

If you are going to wholesale commercial properties, you’ll need to get the property under contract. This gives you control of the property because the seller can’t do a deal with someone else after they’ve signed a contract with you.

Getting the property under contract gives you something of value to sell when you wholesale the property. We see rookie wholesalers sometimes try to wholesale a property they don’t have under contract. You need to get the property under contract for two big reasons.

Getting it under contract — reason # 1

First off, there’s little to no value in saying, “Hey, I found a great deal, but no I don’t have it under contract.” Getting the seller to agree to sell at a wholesale price is what makes the deal work. The signed contract that you have is the written proof that you’ve “done the work” to get an attractive price on the property. Authors.

If you don’t have a contract, it’s pretty clear that no one is going to want to deal with you. Yet, every week while working with my mentoring clients, we run across rookie wholesalers who think they can wholesale a property they don’t have under contract.

Getting it under contract — reason # 2

The second reason is a big one. For a wholesale transaction to be legal when you are operating without a real estate license, the property needs to be under contract.

In all 50 states, you can’t bring together a buyer and a seller without a real estate license. However, when you have the property under contract, then by law, you can assign your contract to a buyer and receive money at closing.

Laws are constantly changing, and some states have taken steps to restrict or eliminate your ability to wholesale a property by having it under contract. Check the legalities of wholesaling in your own state, and while you’re at it, check to see whether it’s legal for you to virtually wholesale properties in other states.

You must, just to be extra clear here, have the property under contract. Got it? Some people claim that without a real estate license you can put a buyer and seller together and get a “consulting” fee. You’ll probably even see some investors doing this. That doesn’t make it legal.

The purchase contract you use must be assignable. This means that you have the right to let another buyer “step into your shoes” and take your place in the transaction. While it’s not required, this is usually done in exchange for an “assignment” fee. Legally, any contract that doesn’t prohibit assignment is actually assignable. Despite this, we make sure it’s crystal clear by always including a clause that says the contract is assignable.

Step four — finding a buyer

A ton of buyers are out there for good apartment deals. Not surprisingly, there’s going to be very few or no buyers for a lousy deal. You’ll discover this very quickly if you agree to pay too much for a property. As a wholesaler, you need to be able to give your buyers a deal with some meat on the bone. This usually mean that your buyer’s price needs to be below the actual value.

This makes sense, especially when you consider the rookie wholesaler who gets a property under contract for 95 percent of value. As soon as this newbie tacks on their five or ten percent wholesaling fee, they are now competing with thousands of other properties that are listed by professional commercial brokers. These brokers are good at marketing and presenting properties. On top of this, the brokers usually have a listing with a longer time period to find a buyer than the time that a wholesaler has to move a property.

We know we’re driving this point home here. Make sure that you have enough equity in the deal to be able to add your wholesaling fee while still giving your buyer a great deal. This means that your buyer is able to purchase the property below its actual value, or in some cases below the proforma value. This would apply to a property you’ve found with rents that are well below market rates, as one example.

You’ll want to make sure that you are able to qualify your buyer. Just because a buyer comes back after looking at your deal and is willing to sign your assignment agreement, doesn't mean that they are actually going to be able to close on the deal. If you don’t qualify your buyers correctly, this could ruin your deal and adversely affect your reputation. You’ll want to make sure you understand what your buyer’s needs are and make sure they can perform.

Watch out for buyers who plan on “re-wholesaling” your deal. This is where they agree to pay you an assignment fee without having the ability to purchase the property themselves. This puts your profits and your reputation into jeopardy because they may not be able to find another buyer (who’s willing to pay even more for the property).

You’ll want to verify that your buyer has already spoken to a lender who is willing to provide a loan for the property. You can do this by asking your buyer to provide a pre-approval letter from their lender. Since pre-approval letters are not final approval, we like to contact the lender to determine what else they’ll need from the buyer to actually fund the loan. You also should verify that your buyers have the money available for the down payment and closing costs. Ask them for a “proof of funds” which can be a copy of their bank statement showing an adequate amount of money on hand.

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