You’ve probably heard of people who wholesale non-commercial property. But what about commercial real estate wholesaling? The fact is that wholesaling can work well with all commercial real estate asset classes including multifamily, office, retail, industrial, and even vacant land. Here’s a quick look at how to wholesale commercial real estate properties.
What Is Commercial Real Estate Wholesaling?
Wholesaling commercial real estate involves locating a distressed property with an owner motivated to sell, putting the property under contract, and then assigning the purchase contract to another buyer.
Real estate wholesalers don’t close on the transaction and take ownership of the property. Instead, they act as a middleman by finding good deals, estimating the updating costs and fair market value, and collecting a wholesale fee when a new buyer takes over the contract.
Advantages of Wholesaling Commercial Real Estate
Compared to the daily grind of working with picky tenants and unmotivated sellers and buyers, commercial real estate wholesaling can result in a higher deal volume that yields some very attractive profits.
The three biggest advantages of wholesaling commercial real estate are:
Bigger profit margins
Commercial real estate wholesalers make their money on a portion of the difference between the discounted sales price the motivated seller accepts and the value of the property after repairs. Because commercial real estate values are usually in the millions of dollars, the spread is much higher and so are the profit margins.
You would think that there would be a lot of competition when there’s so much potential profit to be made in commercial wholesaling. However, the opposite is true. That’s because the majority of real estate agents are intimidated by commercial real estate, so they stick with non-commercial property.
Fortunately, their loss is your gain. Less competition means you have more negotiating power with an owner, which leads to potentially lower sale prices and higher profit margins when you assign the contract.
Financing can be easier
The underwriting process for financing a wholesale property can actually be easier for the buyer. When a borrower pays fair market value for a building, the lender goes through an excruciatingly long approval process to determine if the value is fair.
In a commercial real estate wholesale transaction, it’s obvious that the price is below market. The wholesaler has found a property with an unbelievably good price, and even when the updating costs and wholesale fee are added in, the buyer accepting the assigned contract still has a property that’s well below market value.
How to Calculate the MAO of Wholesale Real Estate
The MAO is the maximum allowable offer a wholesaler can make on a property. Sticking to an MAO formula on every deal helps a commercial real estate wholesaler keep emotion out of the transaction.
Two pieces of information are needed to calculate the maximum allowable offer: 1) Cost of estimated repairs, and, 2) After repair value or ARV. With this data in hand, the next step is to calculate the MAO.
Let’s use a small multi-tenant office building that needs $150,000 in repairs as an example. If the ARV of the property is $1 million, the MAO would be:
- $1,000,000 ARV x 65% = $650,000 – $150,000 deferred repairs = $500,000 MAO or maximum allowable offer to the seller
Multiplying ARV by 65% is used to give the wholesaler room for potential error. If a higher percentage is used, the sale price will be too high, reducing the profit margin. If it’s too low, a lower deal volume will result.
After the wholesaler puts the property under contract for $500,000, the next step is to find a buyer to assign the contract to. The minimum value of the office building to the new buyer would be $500,000 plus the $150,000 cost of repairs. Assuming the negotiated wholesale fee is $100,000, the buyer would put a total of $750,000 into the deal and still have an office building $250,000 or 25% below market value.
Why do Sellers Agree to Wholesale Their Commercial Property?
It’s logical to ask why a seller would agree to sell a property at a price that’s well below fair market value. Some of the most common reasons why sellers agree to wholesale their commercial property include:
- Dispute with business partners
- Pending divorce or argument with family members
- Inherited property an out-of-market owner doesn’t want
- The owner doesn’t have the time or capital to repair or update
- Estate sale with no heirs of the deceased
- Pre-foreclosure property
- Tax lien looming on the property
- Investor tired of dealing with problem tenants and simply wants out of the property
4 Common Mistakes in Wholesale Commercial Real Estate
Wholesaling commercial real estate offers an opportunity for potentially big profits. However, money can also be lost if mistakes are made.
Here are four common mistakes to avoid making in commercial real estate wholesaling:
- Lacking the in-depth market knowledge needed to calculate the fair market price and after repair value of the commercial property.
- Misunderstanding what buyers are looking for makes it more difficult to assign the contract.
- Faulty due diligence that underestimates the cost of repair work.
- Not understanding the basic property valuation formulas such as cap rate, ROI, and cash-on-cash return used by buyers to analyze potential commercial real estate investments.
Everybody Wins with Wholesale Commercial Property
Wholesaling commercial properties can be a win-win-win situation. Owners can clear property they don’t want or can’t afford to maintain, wholesalers generate hefty fees for negotiating MAOs and accurately calculating ARV, and buyers get great deals on buildings that are still well below market value, to which they can add value.
The key steps to wholesale commercial property are:
- Find a motivated seller
- Control the property by putting it under contract
- Locate a buyer to assign the contract to
- Collect a negotiated wholesale fee when the deal closes