How To Structure An Apartment Bulding Wholesale Deals

Question

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.

Mark Allen · Answer

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.

Lorelei Kolegue · Answer

Joseph GozlanI 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.

Joseph Gozlan · Answer

@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.

David Benton · Answer

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.

Mark Allen · Answer

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.

Shawn Ackerman · Answer

@Solomon Solomon Once you get the first contract written up by the attorney, you can use it as a template moving forward. Best of luck to you.

Solomon Solomon · Answer

@Shawn AckermanHello Shawn, thank you for your help. I believe I'm allow to write my own contracts but I'm definitely going to use attorney, just to be safe.

Solomon Solomon · Answer

@David BentonDavid, Thank you so much for your response. That means I need to line up buyers first before looking for the apartments to wholesale.

Solomon Solomon · Answer

@Mark AllenHello 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 · Answer

@Joseph Gozlan Thank you so much Joseph. I really appreciate your help.