Creating cashflow with apartment wholesaling. If you were talking about this with another real estate entrepreneur the conversation would probably revolve around doing more deals. A series of lump sum cash assignment fees occurring more frequently.
This would definitely be the case if you were flipping single family homes. The deals are simpler to do, they don’t take as long. But it’s different with apartment buildings.
Apartment buildings are income property. So 3-6 months after you wholesale a property to a new buyer, that investor (assuming they get straight to work on their turnaround plan) will soon be earning increased amounts of net operating income.
This creates options for you as an apartment wholesaler you don’t really have when flipping houses.
Your edge as an apartment wholesaler is to put extra time, effort, and emphasis on marketing and negotiating in order to assemble a lot of sellers with seeds of motivation in their ownership of the property, that then germinate and grow into a full on crisis that requires rapid liquidation of the property at rock bottom price.
Due to this being all you do, you can afford to put all your time and effort into identifying motivated apartment owners, and following up with them. This is how you get your double discount cash prices, and inordinately favorable (to you) terms for owner financing.
If you’re excited by the potential, but the big question weighing on you is, “how do I get started wholesaling my first apartment building”, don’t worry, this is well trodden territory. You have been snared by an insidious trap, but there is an answer, and a way out.
When it comes to wholesaling apartment buildings, there is more fear involved than wholesaling a house because … well, the numbers are bigger. The asking and selling prices are usually in excess of $500.,000. That’s out of the comfort zone of most beginning wholesalers.
The result is fear. Blind fear. The numbers way exceed your financial experience to this point, and your brain scrambles. It’s easier to look away and go back to where you feel in control.
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And that’s perfectly fine. In fact, it’s more than fine. It’s smart. Start where you are, build experience, and build your confidence. Keep it simple. Flipping houses is a simple process, that you at whatever level you comfort zone currently is.
Start where you are, but get started.
As Dwan Bent-Twyford notes, $10 is all you need to secure a house to flip for $10,000 or more:
To make the contract binding, you have to leave a deposit with the homeowner at the time of signing. We typically leave a $10 deposit. This way, if we are unable to wholesale the property, we are not out a lot of money.
$10! Who would take that? Everyone! When we first started asking homeowners to take a $10 deposit, we thought we’d get kicked out of the house. To our surprise, no one gave us any grief.
If you say it like this: “We typically give a $10 deposit and close in 45 days. That won’t be a problem, will it?” They always say, “Okay.” The only reason a homeowner won’t take $10 is because of the way you present it. Speak with confidence.
How to find cash buyers for apartment buildings. It’s the second most important part of the process, right in there behind finding a smoking hot deal. It is where the money comes from to close the deal, so it’s definitely important.
Too often though, ‘important’ gets equated to hard, or difficult.
If you have done your work properly in finding and negotiating a deal worth doing, and not cut any corners, finding a serious buyer with cash who wants to close asap, is almost a formality. There is work involved, of course, but the right tools and process flush out an end-buyer pretty easily.
How To Build A Buyers List
For the sake of example, you have a deal coming together. The seller is motivated, occupancy is 50%, rents haven’t been raised in 5 years, there is deferred maintenance, you have sent your LOI to the owner and after a bit of back and forth he signs and faxes you a copy of the signed agreement.
The property is in Lawrence Township, Indianapolis.
Time to get going with finding a buyer. Faxed LOI in hand and hard copies in the mail, this is the perfect opportunity to reach out and make contact with potential buyers.
So think, if you have a deal in a certain part of town, who are the people most likely to want to buy it?
Well, other apartment owners successfully operating apartment buildings in the same area.
Wouldn’t you agree?
Key word: “successfully”.
They already know the area, have done the research, and are comfortable owning property there. Owning another property nearby their existing property increases the return on their original research, helps create synergy with marketing for tenants, and builds their brand.
Plus buying out your competitors is always a good business move.
So a good sized list of high probability buyers are right there in your immediate vicinity. All you need to do is contact them, and ask them if they’re interested. Read more…
How to find distressed multifamily properties. I hate to disappoint you, but you won’t find these on any list.
Good deals, deals that are really “deals”, deals where there is a healthy profit for you, are a needle in a haystack.
To really ”get” this reality, grab a list of absentee apartment owners and start calling them, asking if they want to sell. See how long you last.
The deals are there. But where? Will you keep calling until you find them?
The answer is “no”, you won’t. Unless you love confrontation and rejection, it’s just too painful.
Having a system for lead generation and lead conversion is how you find distressed multifamily properties, develop profitable deals, and extract the needle from the haystack.
The System Is The Solution
Before setting out on your quest to put a smoking hot deal under contract, bear in mind, there are forces arrayed against you whose aim is to achieve the exact opposite; that is, to get you to pay more than you should.
There is a whole industry set up to assume you are the dumb money. So you have to be smart.
Profitable deals come from motivated sellers, people who don’t want their property, and want to end their ownership of it, so they can be free of the problem the property represents and can move on with their lives.
It’s important to realize, a seller only reaches this state after every other option to get a higher, usually unjustified, price has been exhausted. There is a lot of denial and magical thinking the seller indulges in before accepting the reality they will not get what they want, and (god forbid) have to lower their price, and/or be more flexible on terms.
Hand Me That 2 by 4
As the buyer, spending time on sellers who are not dealing with reality is time completely wasted. You want only to be spending your personal time and attention on a seller after they have been slapped around by the market. Ideally, right after they have been smacked up side the head with a 2 by 4 and their ears are still ringing.
For example, after 18 months on the market the property has fallen out of closing for the third time, the REO manager responsible won’t meet his numbers for the quarter and his job is on the line. Read more…
Finding the best markets for apartment deals is always top-of-mind for the apartment wholesaler. Life is easier, deals go through. But … there’s a crash coming in the real estate market.
Soon. And everything will change.
In fact, it’s overdue, it should have happened already. Since 2000 the money printers at the US Federal Reserve have been injecting liquidity into the economy, artificially inflating real estate prices, really kicking into high gear in 2009 with QE (“quantitative easing”) to stave off the market correction that is trying earnestly to happen.
Where are we today?
If you need a sign, 220 Central Park South, an apartment in NYC is selling for $250M, and has a buyer. Think about that for a second. It is more than double the previous most expensive NYC apartment sale. It may be a signal the run-up in prices that has been going unabated since 2009 is nearing it’s end.
Market tops are always hard to pick. Everyone is used to how things are, and no-one wants them to end. But here we are at the tippy tip top of this real estate bubble market. Prices are incredible, and there is simply no connection to any fundamental economic forces related to demand that would cause house prices to increase further.
The “only” thing keeping real estate prices where they are is the determination of the Federal Reserve Bank to keep interest rates artificially low by printing money.
Before too long, that won’t work either … and down we go! Read more…
A little appreciated but highly effective way to find multifamily deals to wholesale is, wait for it … door knocking. That is, walking into the leasing office of an apartment building and asking to speak with the owner.
I know, just reading these words, you’re already dismissing the idea. Cold hard reality? For working your local market this is one of the most productive things you can do. For a number of reasons.
1) When you walk into the leasing office and ask to speak to the owner, and then start speaking with the owner, you uncover situations that do not show up anywhere else. The owner knows the property like no other, and he/she alone knows when there is trouble brewing, and if selling now may be a good idea. There may be partner trouble, the death of a principal, foreclosure looming. Previous to any legal notice, the only signs of any of it would be the stress lines on the owners face. When you knock on a troubled apartment owner’s door; a) he/she sees you as a godsend, b) this is your motivated seller and no-one else’s. Read more…
Not far into your education on commercial real estate it becomes clear that raising private money is a skill you need to develop, and then perfect.
Indeed when wholesaling, you can sidestep the earnest money issue when flipping single family, but once in multifamily, inking a contract means you have about a week to wire a four or five figure earnest money deposit to a closing attorney to secure the contract.
If you have that money and are willing to post it, fine. If you don’t you need to raise that money from private individuals with capital they want to invest.
There is a lot of information swirling around out there about private money. While it is a very straight forward process, there is a legal component you must be aware of to stay on the right side of securities law.
For example, when you talk to a person about their investing in your deal, are you selling a security?
One way to find out is the Howey Test. In 1946 the U.S. Supreme Court heard the case SEC v. W.J. Howey Co. that established a precedent for determining what a securty is.
The Howe Test says, ”an instrument is only a security if it involves an investment of money or other tangible or definable consideration used in a common enterprise with a reasonable expectation of profits to be derived primarily from the entrepreneurial or managerial efforts of others.”
So if there is:
– an investment of money
– an expectation of profits from the investor
– profits arising from a common enterprise
– the operation of the enterprise depending on the efforts of a promoter or third party
… then you are selling a security and must be licensed with the SEC to do so.
This sounds ominous as just about every real estate deal ever done would fit that description.
There are exceptions to these securities laws though. The most relevant for apartment wholesalers wanting to raise private money is Rule 506.
Rather than me try and describe it to you, which I am not qualified to do, I (highly) recommend you watch the video Private Money 101 With Securities Expert Gene Trowbridge, and the followup video Private Money 201.
This is a part of your real estate education it is good to get square on, and not cut corners with, as tempting as it may be to do so.