How To Structure An Apartment Bulding Wholesale Deals

16 Replies

Hello,

I am looking into putting an apartment under contract to wholesale to somebody else. This is my first deal and I want to make sure I can get a buyer for the apartment and If I can't within a period of time, I want to be able to get out of the deal without loosing my earnest money.

1. Do anybody have advice for my on how to structure this deal? What I must be careful of? A brief breakdown of how to structure this deal?

2. Do anybody have sample copy of how the contract suppose to be written to protect me in this deal?

Thanks so much.

I can briefly explain how I structure deals and you can get legal advice from an attorney for your deal. I do recommend you get legal advice from an attorney.

I think there's a standard contract under the "Tools" tab at top. If using that contract I would revise the contract to work for this application.

I have this clause in my contract "Earnest money shall be forfeited in the event of Buyer default."

I will then have a Due Diligence Period where I can walk and get my EM back. Buyer will notify by Delivering "Notice of Termination" to Seller within 60 Calendar Days of the Effective Date and may void this Agreement without further recourse and be refunded their earnest money deposit.

Your Due Diligence Period will vary based on size but specifies what I will check during this time such as leases, ledgers, tax records, inspection etc...

During the DD period I would be gathering documents and vetting the property for the buyer as much as possible as the clock ticks.

Close 30 Days after DD Period. Hope this is helpful.

@Solomon Solomon how big is that property (# of units)?

Larger apartment buildings (and commercial in general) don't usually go under contract until an LOI is accepted and the lawyers negotiated the detailed contract for a while.

Personally, I would take a contract off a wholesaler without my lawyer didn't draft/review it.

The easiest way for you to wholesale it is to put in under NOI (the verbiage of "and/or assignee" is common in these documents) which will outline the general terms and then you can hand it off to a buyer that will take the negotiations from there.

You should probably have a separate assignment contract to have the buyer sign because an NOI is not a legally binding contract which means a less ethical buyer can just bypass you and talk to the seller directly once they learn the name/location of the property.

If it's a smaller 2-4 units then just use your state contract like you would use for a regular SFR deal.

Updated over 3 years ago

In the above it should say LOI not NOI

@David Benton ,@Joseph Gozlan@Lorelei Kolegue

Thank you all for your answers. 

Joseph, the apartment is 25 units.

So, that means:

1. I will have two sets of contracts. One contract to lock down the property with the seller and have 60 days due diligence to allow me to find a buyer?

2. Then the second sets of contract for the buyer once I find a buyer?

3. Do I need to tell the seller that I am wholesaling the property and if I tell him, is that not going to be a problem if the seller see the price I'm selling the property?

4. What do you guys know should be the strategy to protect myself  so that I don't loose my earnest money if the buyer couldn't close for any reason such as funding, if the following scenario happens: I find a buyer at 45th day, he wants 30 days to close, but I only have 15 days left in my due diligence days with the seller? 

Thanks for your response.

Originally posted by @Lorelei Kolegue :

Joseph Gozlan

I think you have an error in your answer above. The third and fourth paragraph mentions NOI but I think you may have wanted to say LOI.

YES! LOI not NOI :-)

Thanks for the catch Lorelei (I always loved that name).

@Solomon Solomon I think you should line up the buyers before you lock down the property. 

Depending on the level of sophistication of the seller and the marker you're in, locking the property under contract could risk your earnest money. 

In the Dallas market, I've seem many contracts where the EM goes hard immediately or after the due diligence period. I also spent thousands of dollars myself on lawyer fees just to move from LOI to actual signed contracts that are legally binding. You can't use the standard realtor contract for single family property for this kind of transaction.

We just did this in Albuquerque on a 514 unit portfolio. Our standard LOI has an and/or assigns clause. $50k earnest going hard in 14 days. Difference between you and I... I have access to every multifamily owner's contact info in the nation so I can just call them up and pitch the deal. We also knew it was one heck of a deal about $1.1M under value when tying it up.

You have to be willing to risk much more money in wholesaling apartments. Do you know how to value apartments in your market? If it's a great deal, i'd partner with a more experienced investor who buys multifamily.

Mark Allen is exactly right. EM goes hard after 60 days. I always include a Notice of Termination clause for an unsatisfactory finding during the Due Diligence and for EM refunded upon Notice of Termination.

If you don't find your buyer to fund, you send the Seller the Notice of Termination and your EM is not at risk. Just make sure your contract is written right. The attorney you plan to hold the EM would be valuable in making sure your contract is solid. If funds are tight ask him to review your contract and recommend changes that protect your interests with the promise you will send him the business and he can add a fee for contract review.

@Solomon Solomon whether your wholesaling a SFR or a 1000 unit complex, The premise is the same. Get the property under contract for as deep a discount as you can then sell it for a slight mark up to an investor. Once the deal goes under contract, you should know just as much about the building as the owner as good information passed along to your end buyer is key in this business. In your market are you able to write your own contracts or is an attorney required to write them? Best of luck to you. Always remember to persist and you will WIN!!!

@Mark Allen

Hello Mark, thanks for your response. Actually, I believe I know how to value apartment :) I use the market cap rate to divide the Net Operating Income (NOI). (i.e. $50,000/0.08 = $625,000. So, the value of this apartment is $650,000. Trying to buy it $520,000 to wholesale it for $550,000).

Right now I don't have anybody to partner with but I'm actively looking.

@Solomon Solomon that's how you ballpark value. At that price point you could easily be $50k - $150k off and that's more than your fee.

If you're going to wholesale it you'll need to show investors why it's worth what you say it's worth and what their projected returns are at your sales price. A detailed financial model can typically help achieve that goal.