Commercial Real Estate Investing For Dummies. Peter Harris
simplest and cleanest method to do this is to collect your entire assignment fee up front as an earnest money deposit from your buyer. After giving your buyer time to inspect the property and complete their due diligence (usually this is completed within 30 days), the earnest deposit becomes non-refundable.
If your assignment fee is larger, then get a portion of this up front as the earnest money deposit. (We’ve seen wholesalers with deals where they are making $100,000 to $200,000 or more.) Get as much as you can up front when you assign the deal and then collect the balance after your buyer’s due diligence period with you expires. While you might have to wait until closing to get all of your fee, the sooner you’re paid the less likely it is that someone’s going to try to trim your wholesaling fee down at the closing.
Buying From Wholesalers
Once you’ve gotten your feet wet by wholesaling a few commercial properties you’re likely to wonder, “Why am I giving these away when I could be keeping the entire deal for myself?” The good news is that getting started by wholesaling to others provides you with great practice at finding good deals. You can then use the wholesaling fees you’ve made for earnest deposits and down payments when buying commercial properties for yourself. So where do you go from here?
In addition to continuing to look for properties to wholesale or to keep for yourself, start networking with other wholesalers and let them know you’re looking to purchase commercial properties that have an upside.
Bob, one of our mentees, met Mike about a year ago in a Facebook wholesaling group. Mike found a few single-family homes and wholesaled them to Bob at a price that allowed Bob to make a nice profit on each one. Now that he’s moved up to commercial real estate investing, Bob makes a habit of letting everyone he talks to know that he’s looking for commercial properties.
Mike said he’d found a 40-unit apartment building and had it under contract at a great price. It was owned by a non-profit corporation that had owned it for three years and they wanted to get rid of it. Mike arranged a conference call with the owners and Bob discovered this was a mixed-use property with 40 apartments plus 3 retail storefronts, located about 100 miles from his home in Oregon.
Mike assigned his position in the purchase contract over to Bob. This gives Bob the ability to buy the property (which is worth $3.1 million) for a total of $2.5 million. In this case, we helped Bob structure the deal where Mike gets paid $200,000 as his wholesaling fee from the closing.
Some investors might question paying $200,000 as a wholesaling fee. After all, Mike hasn’t put much effort into earning that fee, right? The answer is that we look at the total cost of the property to see if it makes sense or not. In this case, after accounting for Mike’s $200,000 wholesaling fee, Bob’s total purchase price is $2.5 million, and the property is worth $3.1 million. After increasing the rents to market rates, the property will be worth considerably more.
Mike has followed most of the steps in this chapter to make a nice wholesaling profit of $200,000 on his first commercial deal. And since this is Bob’s first commercial property, he’s earned the Key Award. This is an award that Peter Conti gives to his clients to celebrate getting their first commercial deal. Getting your first commercial property may feel like it’s the hardest, but it unlocks the key to your future success with commercial real estate.
Other Tips to Closing a Wholesale Deal
In addition to qualifying your buyer (step four in the previous section), you’re going to do three other things to succeed while wholesaling commercial real estate.
Keep your marketing going. First off, you’re going to keep your marketing going for other buyers so that you have backup offers in hand in case your buyer is unable to perform for some reason.
Move your closing date up. Number two, you’re going to set a deadline with your buyer well ahead of the date you need to close the deal with the property owner. This gives you the time you need to have another shot at putting the pieces in place to make the deal work if you need it. Rookie wholesalers stop their marketing for a buyer, and they don’t set closing dates ahead of time like we’re talking about here. Don’t make that mistake.
Have a plan B, or C, or D. We’ve seen plenty of commercial deals that didn’t close on time for all kinds of reasons. The third thing for you to do, ideally, is have a plan B that enables you to ensure that the property is sold if your buyer doesn’t come through.
If you follow our advice on this, you’ll never end up in a situation where you’ve made a promise to the seller that you can’t keep. That can be embarrassing; it will affect your reputation; and depending on how you’ve structured the deal, you might even lose your earnest money.
Make sure you help the seller
You probably don’t want to think about this, but several of your plan B options might include situations in which you don’t end up getting your wholesaling fee. This makes more sense when you realize that if you can’t put the pieces in place to successfully wholesale a property, then you haven’t earned your fee have you?
Despite this, if you can still help the seller, you’re going to build relationships and get referrals that will pay off for you down the line. You could work with a broker who might be able to move the property quickly (at your wholesale price) to one of their buyers. You don’t get paid anything out of this, of course, and no, the broker can’t pay you a fee unless you’re also a licensed real estate broker.
Put your reputation ahead of making money
Another option might be to accept a lower wholesaling fee or even no fee just to get the deal done and help out the property owner. We know that this isn’t very exciting or fun to hear. Why would you put all that effort into a deal and not make anything on it? The reason is that the most valuable thing you’ll have as a commercial real estate investor is your reputation. By keeping your promise to a seller without making a fee, you’ll have people talking about you for years. We don’t want the deal to turn out this way of course.
Ideally, your plan B would be to develop the ability to come up with the funding yourself as a backup to wholesaling the property to a buyer. “But, Peter(s),” We can hear you saying now, “I’m new at this and don’t have a lot of money. How can I have a plan B to get the funding and close on a deal if I’m just getting started?” The big picture answer to this is that great deals attract money. We’ve taken brand-new mentees who didn’t even have money on hand to make the down payment and helped them line up investors who provided the capital they needed to buy and fix up multi-unit properties.
FINDING BUYERS
Most of the investors that are successfully finding buyers for their deals are getting great traction with multi-unit investing groups on social media, like Facebook. They're posting information about their deals and using social media to create relationships and find buyers. Another online resource is the REIA or Real Estate Investment Club forums. As a result of the changes caused by the COVID-19 pandemic, many of these groups now have online components. You can now socially network and find buyers online. Because of this, a lot of deals are now getting done online. This is not only easier and faster than going to meetings in person, but it also opens up your ability to invest virtually anywhere across the country.
Identifying what a good deal looks like
What makes a wholesale deal “good”? A good deal is one that makes your buyer eager to buy and earns you a lot of money. Ideally, you’d get it under contract below the market or actual value for the property. (We’ve mentioned this before, but it’s worth repeating!) You need to get the property under contract at a price that’s low enough so that there’s built-in equity for your buyer from day one.
So, if the property is worth