An Investor’s Guide to Commercial Real Estate Wholesaling

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Key Takeaways

  • Wholesaling is a commercial real estate investment strategy that allows investors to turn a profit without taking ownership of a property.
  • Wholesaling involves investors finding a real estate property to purchase, getting the property under contract, and then finding an end buyer to purchase the property at a higher price than that offered to the seller.
  • Success with wholesaling comes with great effort. Perhaps more than any other form of real estate investing, profitable wholesaling relies on the investor’s ability to negotiate a good deal and have strong market knowledge.
  • Investors interested in wholesaling should also consider whether a real estate syndication might be a better option to achieve their risk and return objectives, along with their ability to dedicate time to commercial real estate.

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The traditional way to make money in a commercial real estate investment is to buy a property, hold it for some period of time while managing it well, and then sell it for a profit when market conditions are ideal. While this is certainly a proven strategy, and can be very profitable, it isn’t the only strategy that works. There is another strategy used by some investors, which is known as “wholesaling.”

In this article, we are going to define what commercial real estate wholesaling is, how it works, and the benefits and risks of utilizing this investment strategy. By the end, investors will have the information needed to determine if wholesaling is a good fit for their own investment preferences.

At First National Realty Partners, we are a private equity firm who specializes in the purchase and management of grocery store anchored retail centers.  If you are an accredited investor, interested in partnering with a private equity firm to allocate capital to a commercial real estate investment, click here.

What is Wholesaling in Commercial Real Estate?

Wholesaling is a commercial real estate investment strategy that allows investors to turn a profit without taking ownership of a property. Using this strategy, investors find a real estate property to purchase, get the property under contract, and then find an end buyer to purchase the property at a higher price than that offered to the seller.

Wholesaling is generally considered a more advanced investment strategy and beginners getting started in the real estate industry may do well to find a mentor with wholesaling experience. Transactions can be complicated because the investor or wholesaler does not hold the property for any significant length of time and does not intend to use it for any purpose other than as a means of generating a profit through the sale. These deals usually take place within a short period of time, and oftentimes, the wholesaler never actually takes possession of the property at all. Instead, they find an end buyer to take over the contract before the deal closes.

A wholesaling transaction works in three steps.

Step 1: Find a Distressed Property

The first step to wholesaling commercial real estate is to find a property. This step is often the most time consuming because it involves investors searching high and low for distressed properties that wouldn’t usually be listed for sale with a real estate agent. These properties are often not suitable for typical buyers because of one or more defects that require remediation, such as structural, environmental, or safety issues.

The goal of a wholesaler is to find properties owned by motivated sellers because this increases the chances of finding an undervalued property. This gives the investor more leverage to negotiate an advantageous purchase price with the seller, and it allows the investor to resell the property quickly to another investor or buyer for a higher price.

Finding a property suitable for a wholesale deal can be difficult, and investors working this corner of the market use several strategies to find off-market deals. Some of the most common strategies include sending direct mail marketing to property owners, networking with realtors or other real estate professionals, and using social media platforms to connect with potential buyers. Wholesalers also like to keep an eye on bankruptcy filings, drive around their local market to look for distressed properties, and make cold calls to potential sellers.

Step 2: Negotiate the Purchase Price

The second step for the investor is to negotiate a sale price and to put the property under contract for purchase. The key to success in any wholesale transaction is to negotiate the sale price at a discount to the property’s fair market value, or what the property would fetch on the open market. To the investor, this spread represents the potential profit on the deal and is the most important part of any wholesale real estate transaction.

From the distressed owner’s standpoint, they are usually willing to offer a discount in return for the speed and certainty of closing. If the seller is under financial stress, a quick sale, even at a price below market value, can be an attractive option.

Step 3: Find a Buyer – Negotiate a Sales Price

Once under contract, the investor will try to sell the property on the open market and by finding an end buyer. Ideally, the investor will negotiate a price with the end buyer that is higher than the one negotiated with the seller and then “assign” the sale contract to the new buyer. If the investor is successful in doing this, they stand to earn a profit margin from the difference between the negotiated price with the seller and the negotiated price with the end buyer.

It’s important to know that investors who wholesale properties often look to buy and sell the same property on the same day, or even simultaneously. This is known as a double close. In this scenario the investor closes on the purchase of the property from the seller and the sale to the end buyer at the same time. This is a more complex transaction than the simple purchase of a rental property, and not every escrow company can support this type of commercial deal.

Example

To illustrate how this works, consider a simple example. Suppose an investor finds a motivated seller who just incurred a major medical bill and needs to tap the equity from a multifamily investment property. The wholesaler negotiates a purchase price of $950,000.

Then, the investor goes on the market and finds an end buyer who is looking to purchase a multifamily property and they negotiate a sale price of $1,000,000. The investor will “assign” the purchase contract to the new buyer and stand to walk away with the spread – $50,000 – when the deal closes.

In essence, the wholesaler is working as a middleman to supply willing buyers with a pipeline of commercial properties for purchase. In doing so, they are compensated based on their own ability to negotiate an advantageous purchase price with distressed sellers.

Benefits of CRE Wholesaling

There are four reasons why an investor may want to consider wholesaling commercial real estate as an investment strategy.

Less Capital Intensive

For real estate investors, perhaps the biggest benefit to a wholesale strategy is the amount of capital required to complete a deal is significantly less than a traditional purchase.

The major capital requirements for wholesalers are expenses related to seller lead generation and any potential earnest money that must be paid to the seller of the subject property. When compared to the down payment on a traditional real estate deal, the capital required to complete a wholesale deal is much less, which means this strategy is more accessible to many investors, especially beginners.

Little Need for Financing

In a traditional deal, real estate investors work with a bank lender or hard money lender to obtain the upfront financing needed to close the transaction. However, this is not necessary in a wholesale transaction because the investor is simply acting as a middleman and is not taking possession of the property.

Wholesale deals can come together quickly compared to traditional transactions because there may not be a lender involved in the sale of the property from the distressed seller. Often, wholesalers search for end buyers who have the capital on hand to close the deal without involving a lender.

Profitability

The most important factor for wholesalers is the margin between the purchase price and the sale price because this determines the profit margin on each deal. Successful commercial wholesalers tend to be strong negotiators who can consistently purchase distressed properties at advantageous prices and sell them for a higher price to an end buyer. The risk to this strategy is the investor may take a loss if they are unable to find a buyer or the margin between the purchase and sale price is less than initially expected.

Other factors that can affect the profitability of wholesaling commercial real estate include the competition in the market, the demand for the type of property involved, and the costs associated with the transaction, such as legal and closing fees.

Competition

The commercial real estate market can be highly competitive, which can make it difficult for investors looking at traditional buy-and-hold properties to find good deals and secure contracts with buyers. Strong markets, especially, tend to draw more investors to search for deals, which heightens competition.

Wholesalers on the other hand, can take steps to limit the amount of competition they face.  For example, they can choose to focus on a specific type of commercial property or a particular geographic area. Also, maintaining relationships with sellers, buyers, and other industry professionals can give a wholesaler an advantage when it comes to finding and closing deals.

How to Start Wholesaling Commercial Real Estate

Starting a wholesaling commercial real estate business takes dedication and hard work, but the payoff can be lucrative for investors who are persistent. Investors looking to get started with wholesaling should take the following steps:

  • Market research: Investors need to take the time to determine which types of commercial properties are in demand in their market. They should also have a strong understanding of the going prices and rents for these types of properties. Having strong market knowledge allows wholesalers to negotiate profitable deals.
  • Network: The best wholesalers build and maintain large networks of real estate professionals. This allows the wholesaler to market each property to a wide array of potential buyers.

It is also important for wholesalers to establish relationships with other professionals in the CRE industry, including real estate agents, brokers, lenders, and attorneys. These participants can help to get deals done, which ultimately benefits the wholesaler.

  • Generate property leads: Wholesaling commercial real estate relies on finding properties that can be purchased below market value. There are several things a wholesaler can do to generate property leads, including searching online marketplaces such as LoopNet and CoStar, using different marketing techniques (direct mail, email campaigns, and social media, etc.), searching public records, REO and foreclosure listings, and driving for dollars.
  • Identify potential buyers: Wholesalers must find potential buyers who are interested in the type of property they have under contract and negotiate a purchase price. As wholesalers get to know the players in their local market, they will often send targeted messages to groups of buyers who are interested in the particular property type the wholesaler has under contract.

Mistakes to Avoid

Technically, commercial real estate wholesaling is open to a wide variety of investors, but it is important to know the pitfalls many investors fall into. These mistakes can be costly, so it is important to understand what they are and how to avoid them.

  • Lack of market knowledge: Market knowledge is everything in wholesaling.  It is important to thoroughly research the market and understand the demand for different types of commercial properties in your area.
  • No business plan: Without a clear plan for finding and evaluating properties, wholesalers may waste time and resources chasing property leads that are not profitable or are not in demand in the local market.
  • Failure to vet buyers: Wholesalers earn a profit only when a deal closes, so it is important to carefully evaluate potential buyers and ensure they are financially qualified to purchase the property.
  • Failure to evaluate the property: Wholesalers need to thoroughly evaluate each property to avoid purchasing a property that requires extensive repairs or has other issues that may not be apparent at first glance. It can be beneficial to enlist assistance from a property inspector or contractor to get a second opinion on the physical condition of the property.
  • Ineffective negotiating: Wholesalers must be able to negotiate effectively with both sellers and buyers to secure a good deal and earn a profit on the spread between the purchase and sale.

Wholesalers, especially those new to the industry, might consider seeking the assistance of professionals as needed to help them develop a plan for finding and evaluating properties and managing transactions.

Is Wholesaling Commercial Real Estate Profitable?

The short answer is yes, wholesaling commercial real estate can be profitable for investors. But, success with wholesaling comes with great effort. Perhaps more than any other form of real estate investing, profitable wholesaling relies on the investor’s ability to negotiate a good deal and have strong market knowledge. The wholesalers who possess these skills can do very well.

The best wholesalers are able to scale their businesses to complete multiple deals at one time. They tend to hire staff to assist with administrative and marketing responsibilities.

One more note on profitability – while it is certainly possible to make a profit from wholesaling commercial real estate, it is important to carefully consider the potential risks and rewards before entering into this type of investment.

Drawbacks of CRE Wholesaling

Before jumping into wholesaling, investors need to be aware of the potential drawbacks to wholesaling commercial real estate properties. Failure to understand and account for these drawbacks could put investors in a position to lose capital and reputation in the industry. Let’s take a look at some of the most important drawbacks of wholesaling:

  • Low profit margin: Wholesaling typically involves a smaller profit margin compared to other commercial real estate investment strategies, such as value add or holding properties for long-term rental income. Successful wholesalers rely on volume, rather than high profit margins, to provide them with the cash flow to fund business expansion. Investors who attempt to wholesale at above-market profit margins will often be undercut by competitors willing to accept lower margins.
  • Legal and regulatory issues: Investors involved in wholesaling need to understand the local real estate laws because they may have some bearing on how a wholesale deal needs to be managed. More generally, commercial real estate transactions can involve complex legal and regulatory issues that often require the assistance of an attorney, tax professional, or other professionals.
  • Limited access to properties: Because wholesalers typically search for distressed properties, they often can’t see the property before getting it under contract. Distressed properties may be inaccessible for a variety of reasons, including being bank-owned or occupied by tenants.

Risks of CRE Wholesaling

Wholesaling can be a lucrative strategy for those who are able to find properties at discounted prices and are able to quickly resell them to other investors. However, it can also be risky if the wholesaler is unable to find a buyer for the property or if the property does not sell for as much as expected. It is important for wholesalers to thoroughly research the market and have a solid understanding of real estate values in order to successfully execute this strategy.

Why Investors Should Consider a Real Estate Syndication Over Wholesaling

A syndication is a commercial real estate deal structure that allows individual investors to purchase a fractional share of a commercial real estate asset.

In this structure, the deal leader or “syndicator” forms a corporation, LLC, or partnership and uses it to purchase a commercial real estate property. Then, they sell shares in the corporation, LLC or partnership to a group of investors whose combined capital is used to help finance the purchase of the property. Real estate syndications can be used for all commercial property types including multifamily apartment buildings, office, and retail properties.

There are several reasons why investors may choose a real estate syndication over wholesaling as an investment strategy:

  • Passive income: Wholesaling is a very active form of real estate investing that requires a lot of time and effort to be successful. Real estate syndications, on the other hand, offer the potential for passive income, as investors can participate in the ownership of a property having to actively manage it.
  • Diversification: Investing in a real estate syndication allows investors to diversify their portfolio and spread risk across multiple properties. Wholesalers often focus on one property at a time, although some are successful at scaling into multiple transactions simultaneously.
  • Professional management: In a real estate syndication, the property is typically managed by a professional team with deep experience in the particular property type and local market. A good management team can boost returns while minimizing the time and effort required by investors.
  • Use of leverage: Real estate syndications may offer the opportunity to leverage debt financing to increase the potential return on investment. Wholesalers don’t usually incorporate debt into their deals, so the opportunity to magnify returns isn’t generally available to wholesalers.

Summary of Wholesaling in Commercial Real Estate Investing

Wholesaling is a commercial real estate investment strategy that allows investors to turn a profit without taking ownership of a property. Using this strategy, investors find a real estate property to purchase, get the property under contract, and then find an end buyer to purchase the property at a higher price than that offered to the seller.

There are several reasons why an investor may want to consider wholesaling as an investment strategy, including low capital requirements, lower financing needs, profitability, and lower competition compared to on-market transactions.

At the same time, there are drawbacks to wholesaling, including low profit margins, the need to be aware of legal risks, and difficulty gaining access to certain distressed properties.

Investors interested in wholesaling should also consider whether a real estate syndication might be a better option to achieve their risk and return objectives, along with their ability to dedicate time to commercial real estate.

Interested In Learning More?

First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.

If you would like to learn more about our commercial real estate investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.

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