How do I start a wholesale business?
If you are trying to achieve something new, it is easy to fall into the trap of thinking that it is too complicated or too difficult to do. The trick is to break every new challenge down into small pieces step by step.
Step one - generating leads
We suggest you concentrate on the apartments. Of all types of commercial assets, apartments are the best to sell in bulk because they are easy to analyze. Everybody wants them; they're making good investments, and there are more of them. Financing is also easier to obtain for apartments than for self-storage, office buildings, retailers, or industrial properties.
When you start selling wholesale, you'll want to look for properties from five to twenty units because those owners are easier to deal with. You'll also find that smaller transactions are easier to sell in bulk because there are more buyers for smaller properties.
It is essential in wholesale to avoid properties that are registered with brokers and go straight to the owners.
This allows you to get better deals, find out the salesperson's motivations, and obtain ownership under a contract at a price sufficiently low for you to have an interest in the transaction. We don't want to try to wholesale a transaction that has been traded by a broker because it doesn't make sense.
Imagine taking a business that is listed on Loopnet to your buyer. Once you give it to them, they start looking online. When they find the list, they're going to say, "What do I need this wholesaler for? Bring me something that is not on the market." Your purchasers may find listed prop parts quite easily without you. That's why buyers are looking for wholesale contracts that are not in the marketplace.
You will require a good system to generate these leads. This includes direct marketing, networking, and other methods that allow you to get outside and discover the right situations, properties, and problems that lead to a wholesale agreement. If you are not especially motivated and simply prefer to find a list and speak to a broker, then wholesale is not going to be your cup of tea.
Step two – analyzing properties
The second step is to analyze properties so that you know how valuable they are. You will have to determine your target price for each property to obtain them at a wholesale price or on terms and conditions.
The problem for most early-stage commercial real estate investors is that they learn the capitalization rate formula, but they don't realize that vendors (and brokers) nearly always lie about spending on the property. If you rely on information from a vendor to determine the value of an asset, you will agree to pay too much for the asset.
As a wholesaler, it is the quickest way to become frustrated. The reason is that unless you have contract ownership at a wholesale price, which is, your purchase price must be less than the actual value of the property, you are not likely to find a buyer that will enter the transaction.
The secret is that you can quickly use simple formulas that let you determine the real value of an asset without relying on the expenditure information supplied by the vendor.
Step three - getting it under contract
If you go to wholesale commercial properties, you will have to get the property contractually. This gives you control over the property because the vendor cannot agree with anyone else after they have signed a contract with you.
Getting the property under contract gives you something valuable for sale when you grow the property. Wholesalers sometimes try to wholesale a property that they don't have through a contract.
There are two main reasons why ownership must be obtained under a contract.
Getting it under contract - reason #1
First, there's little or no value in saying, "Hey, I found a lot, but no, I didn't contract him." The agreement works when the vendor agrees to sell at a wholesale price. The signed agreement that you have is written evidence that you have "done the job" to get an attractive price on the property. If you don't have a contract, clearly nobody will want to do business with you. Yet every week, as we work with my mentorship clients, we meet with junior wholesalers who think they can wholesale a property they don't have under contract.
Getting it under contract - reason #2
For a wholesale transaction to be legal when carrying on business without a real estate license, the property must be under contract. In the 50 states, you can't assemble 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 purchaser and receive money upon closing. Laws change all the time, and some states have taken measures to limit or eliminate your ability to wholesale property under contract.
The purchase agreement you use must be transferable. This means that you have the right to allow another buyer to "put themselves in your place" and take your place in the transaction. Although this is not necessary, it is generally done in exchange for a fresh "assignment". From a legal point of view, any contract which does not prevent the transfer is transferable. Despite that, we ensure that it is very clear by always including a clause that states that the contract is transferable.
Step four – finding a buyer
Make sure you have sufficient equity in the transaction to be able to add your wholesale charges while still giving your buyer a good deal. This means that your buyer may buy the property below its real value, or in certain cases below the proforma value. This would apply to a property whose rents are much lower than market rates, for instance.
You need to ensure that your purchase qualifies. Just because a buyer comes back after examining your business and is ready to sign your assignment agreement, that is not to say that they will be able to reach an agreement. Failure to properly qualify your buyers could ruin your business and damage your reputation. You will want to ensure that you understand what your buyer's needs are and ensure that they can perform.
Be wary of buyers who intend to "resell wholesale" your business. That's where they agree to pay you a transfer fee without being able to purchase the property on their own. This puts your bottom line and reputation at risk because they may not be able to find another buyer.
You will need to make sure that your buyer has already talked to a lender who is willing to grant a loan for the property. You can do that by asking your buyer to provide a letter of prior approval from his lender. As pre-approval letters are not final approvals, we like to reach out to the lender to determine what else the buyer is going to need to finance the loan. You should also check that your buyers have the cash available for the down payment and closing fees. Ask them for a "proof of funds" which can be a copy of their bank statement showing enough cash on hand.
Step five – close and get paid
The easiest and cleanest way to do this is to collect your entire transfer fee right from the start as a cash deposit from your buyer. After giving your purchaser time to inspect the property and complete their due diligence, the serious deposit becomes non-refundable. If your posting expenses are higher, then get some of that upfront like the cash deposit. Get as much as you can upfront when you award the transaction and then recoup the balance after your buyer's due diligence period with you expires.