Are you interested in learning how to wholesale commercial real estate? If so, you have come to the right place! In this blog post, we will walk you through step by step how to get started in the world of Wholesaling Commercial Real Estate. We will cover everything from finding deals to putting together offers, to closing the deal. So if you are ready to learn, let’s get started!
Key Takeaways
- Commercial real estate is an asset class that, like any other, benefits from careful planning.
- Learn the similarities and differences between the residential and commercial real estate markets.
- As a wholesaler, you do not have to invest as much money as you would if you were purchasing the property.
What Is Commercial Real Estate Wholesaling?
Commercial real estate wholesaling is not house flipping. A wholesaler puts a commercial property under contract, then assigns their equitable interest in that contract, not the deed to another buyer for a fee before closing. The wholesaler never takes title. What they’re selling is their position in a signed purchase agreement, not the building itself.
How This Differs From Flipping a House
- Flipping: the buyer takes title, renovates, and resells the title later.
- Wholesaling a CRE contract: the wholesaler assigns the right to buy — their equitable interest under the purchase and sale agreement (PSA) — to an end buyer, who closes directly with the seller.
- The assignment fee is the wholesaler’s compensation, typically paid at or before closing, and is separate from the seller’s price.
Who This Is For
Investors with off-market CRE deal flow and a vetted list of qualified buyers for that asset class (industrial, retail, multifamily, etc.), but limited capital to close themselves. It is not a fit for someone without an existing buyer network. Commercial due diligence timelines are longer and buyer pools are thinner than in residential, so a contract that can’t be assigned quickly can tie up earnest money with no exit.
How the Process Works
- Identify a property and confirm with the seller, before signing anything, whether the PSA can be structured to allow assignment.
- Negotiate a PSA that explicitly permits assignment of the buyer’s interest. Many standard commercial contracts restrict or prohibit this by default.
- Put the property under contract with an earnest money deposit sized for a commercial transaction.
- Market the contract position to a qualified buyer network, not the general public.
- Assign the contract to an end buyer for a disclosed fee.
- The end buyer runs their own full due diligence and closes directly with the seller.
Due Diligence the Assignee Still Needs
Assignment does not shorten or remove any of the underlying diligence. The end buyer is still buying the real property, so they still need:
- Title and survey review
- Zoning and permitted-use confirmation
- A Phase I environmental assessment (Phase II if the Phase I flags a concern)
- Lease abstracts and estoppels if the property is occupied
- A physical condition assessment
- Realistic financing-contingency timelines
When It’s Not a Deal
- The PSA prohibits assignment outright and the seller won’t amend it.
- The contract doesn’t include a real inspection or due-diligence period.
- The assignment fee would push the end buyer above what the asset is worth at market pricing.
- The wholesaler hasn’t disclosed their role and fee to the seller.
Why Wholesale Commercial Real Estate?
Less Money Out of Your Pocket
As a wholesaler, you do not have to invest as much money as you would if you were purchasing the property.
Naturally, you will have to pay to generate the leads, which we will discuss in a moment.
Additionally, you will need to pay for the earnest money deposit, if one is required, and any due diligence you believe will help you sell the property more quickly (such as surveys, marketing materials, title searches, and so forth).
But apart from that? You have minimal responsibilities!
Bigger profit margins
Wholesalers don’t participate in commission-based sales; rather, they set their own prices for properties.
A wholesaler may offer a site to investors for $125,000 if the asking price is $100,000 and the market value is $140,000. Since the wholesaler will make a gross profit of $25,000, and the buyer will save money by preventing the project from going to market, both parties have an incentive to act quickly.
Commission-based real estate agents may only net $3,000 to $6,000, while a wholesaler can make up to eight times as much.
Also, a wholesaler’s markup in the six figures is not unheard of for particularly large commercial deals.
Fewer Competitors
There is not a lot of activity in the wholesale market for commercial property.
Now, there are certainly some reasons for that, which we’ll discuss below; however, with fewer competitors comes a vast, untapped market for you to exploit.
Since the market can only support so many commercial real estate brokers, competition for jobs is fierce in this field.
And since there are many investment firms competing for the same deals, the prices tend to rise.
You won’t have to worry about small businesses stealing your wholesale customers because you’ll be cooperating with the big players.
The Disadvantages of Wholesaling Commercial Real Estate
Sourcing Sellers Can Be Difficult
The first step in wholesaling commercial real estate is finding the property. This is not always easy, and it can take a lot of time. Some wholesalers specialize in finding properties that have already been listed by owners, but most will have to do their own research to find potential sellers.
Finding sellers can be especially challenging if you’re looking for distressed properties. These are often owned by people who have fallen on hard times and are trying to sell quickly so they can get out from under the debt associated with their property. It can also be difficult to find sellers who are willing to work with you as a wholesaler.
Sourcing Buyers Can Be Difficult
We’ve all heard the saying, “Selling is half the battle.” But when it comes to wholesaling commercial real estate, finding buyers can be just as tough as selling.
When you’re wholesaling, you need to find a buyer who is willing to purchase the property at a discount. This means you need to know your market and how much money potential buyers in that market are willing to spend on any given property. If you don’t know what the going rate for that type of property is, you’ll have trouble finding someone who’s willing to buy it at your price point.
Wholesaling Can Be Questionable
In general, wholesalers operate ethically.
But there are a few who have contributed to the widespread negative perception of the practice.
Unscrupulous wholesalers rarely face repercussions because they are not subject to oversight by a real estate commission or any other governing body.
What this means is that a wide range of unethical actions are taken.
Transparency is key in the commercial real estate wholesaling process to ensure that no one feels misled or taken advantage of.
Obviously, a name like that would be bad for you.
How to Calculate the MAO of Wholesale Real Estate
For real estate investors, the Maximum Allowable Offer (MAO) is the highest price they would be willing to pay for a property before losing money on the deal.
The 70% rule is a popular MAO calculation method.
According to the 70% rule, a buyer shouldn’t pay more than 70% of a home’s after-repair value (ARV) minus the cost of repairs.
When the ARV of a property is high, as in $250,000 or more, investors may choose to lower the percentage to 75%. In extremely competitive markets, they might even use 75%.
Land investors typically deal with properties with much lower market values, so this rule can be lowered to as little as 10% to 30%.
Below is an example of the MAO formula that adheres to the 70% rule:
The MAO formula is: MAO = (ARV x 0.7) – RE – CC
Where:
- The value following repair, or ARV
- What is meant by “RE” is “repair estimate.”
- What we call “closing costs” abbreviates as “CC.”
Marie, for instance, has found a small retail building she intends to reposition and lease out. She estimates its after-repair value (ARV) at $155,000. The estimated cost of repairs is $25,000, and closing costs are estimated at $2,000.
Applying the 70% rule: MAO = (ARV x 0.7) − RE − CC = ($155,000 x 0.7) − $25,000 − $2,000 = $81,500.
So the most Marie could offer and still hit her target margin is $81,500.
Any MAO calculation is only as good as the values the investor uses, so it’s crucial to do a thorough job of estimating the property’s after-repair value, estimating repair costs, and calculating closing costs upfront.
Why Sellers Would Agree to Wholesaling
You can wholesale a seller’s property if you can convince them of a few key points.
Potential problems with the property include the need for expensive repairs that would make it unattractive to traditional buyers. In this case, wholesalers may be a viable option because they have connections to investors who are actively seeking opportunities like this.
It’s also possible that the owner is struggling. Perhaps they are years behind on their mortgage or tax payments.
Perhaps they just need the cash quickly for an unexpected expense. If you’re looking for a way out of that situation, wholesale is a viable option.
When dealing with unsophisticated sellers who may be unaware of the true value of their property, wholesalers may enter a murky area, if not outright break the law.
Let them know the truth about the property’s potential retail value after renovations, the current value of the property, and the price you’ll need to secure in order to turn a profit on the project.
The Ideal Commercial Wholesale Deal
1. Priced Under Market
The ideal wholesale deal will be priced below market value, but not so far under that the buyer can’t make a profit. If you’re looking for an investment property, this is important because it will give you a return on your investment and allow you to sell the property at retail in the future if necessary.
2. Rent Upside Potential
The ideal wholesale deal will have a rent upside potential. This means that the buyer should be able to increase the rent after renovations and still turn a profit on their investment. If you’re looking for an investment property, take note that it will allow you to sell the property at retail in the future if necessary.
3. In a Good Neighborhood
The ideal wholesale deal will be in a good neighborhood that has a large and diverse tenant base. This is important because it will allow the buyer to rent out the property for a profit and still turn a profit on their investment.
Mistakes to Avoid When Wholesaling Commercial Property
Failing to perform due diligence
You might as well be the one to investigate the property for potential problems.
During due diligence, a buyer may discover information that causes them to rescind the contract and leave you high and dry if you are unprepared.
The best strategy is to get started on this right away.
Overvaluing the property
Just because the property is in a good location does not mean that it is worth what you think it is. The best way to determine its value is by using a comparable sales analysis, but even then you can still get it wrong.
Being lazy after contract assignment
Just because you have a contract does not mean that you can sit back and relax. You may have been diligent up until this point, but now is when things get serious. This is the time when you need to pull out all the stops to make sure that everything goes smoothly and nothing goes wrong.
Wholesaling Commercial Real Estate FAQs
The following are some of the most frequently asked questions about Wholesaling Commercial Real Estate.
Is wholesaling real estate still profitable?
Yes, wholesaling real estate is still a viable strategy. There are thousands of investors who make their living from this business model and continue to do so every day.
Can a beginner do wholesaling real estate?
Wholesale real estate is a great way for newcomers to the real estate industry to get their feet wet with minimal risk and a high potential return. Some people find wholesaling to be so rewarding that it becomes their primary source of income.
How difficult is wholesaling real estate?
If you’re willing to put in the time and effort, real estate wholesaling can be a lucrative business venture. Although there is little to no danger in wholesaling, a substantial amount of work is required to see a satisfactory profit.
Finding properties that are being sold for significantly less than their market value, negotiating deals with sellers, and finding cash buyers who are willing to buy those properties all contribute to the difficulty of running a successful wholesaling business.
To be successful in wholesale, you need to be willing to put a lot of time and effort into gathering quality leads, networking, and carefully curating your list of wholesale buyers. Real estate wholesaling can be very profitable for those who are willing to put in the time and effort to learn how to do it properly.
Conclusion
The commercial real estate industry is a great way to make money and step into the world of real estate investing. By following the steps outlined in this guide, you can be on your way to becoming a successful commercial real estate wholesaler. If at any point you need help or have questions, don’t hesitate to give me a call or schedule a free consultation. I’m here to help you succeed!
