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Wholesaling a home, or up to four units, that's fine. Wholesaling apartment complexes 10 units or larger, probably not a good idea. Let's discuss. Wholesaling is when a buyer puts a deal under contract and later assigns the contract over to another buyer for a fee, and typically that’s done before they close on the property. Most wholesalers do it because they either don't have the time, money, or infrastructure in place to close on the deal themselves and manage it long term. Though there are some wholesalers who do it for living and do very, very well. The vast majority of wholesale deals are typically done on homes, condos, or two-to-four-unit apartment buildings. Very few deals over 10 units are transacted successfully by wholesalers. There are three main reasons why it's more difficult for wholesalers to transact on larger apartment complexes. Reason #1 - it's a more sophisticated market. The buyers and sellers of larger apartment complexes know what they're doing. They’re pretty good at pricing things appropriately. Not to mention larger apartment complexes are more desirable to the marketplace, which naturally commands a higher the price, and the less likely it will be for a wholesaler to get in there at a lower value and then flip it to someone else before closing. And because the players are so sophisticated, usually the due diligence periods are shorter because they want to be competitive against other offerors, which means there is less time for a wholesaler to go and find another person to flip it to. Reason #2 - the vast majority of deals are done by brokers. Experienced brokers are kind of like gatekeepers for their sellers. They're going to ask buyers they don't know for letters of recommendations, financials, banker letters, and they're going to ask for a list of the assets that buyer owns. So, unless that wholesaler also closed on a number of complexes and held them for a year or longer, you can see how it'd be really difficult to pass those simple criteria. Reason #3 – Most of the time the broker and/or seller will mandate in the contract that the deal is not assignable to another entity unless that buyer is a principal in the buying entity. Every broker and seller are going to be looking for this clause, called the assignability clause. If you read it, it says ‘this contract may be assigned to a related entity and otherwise is not assignable.’ Being assignable to a related entity means that the principal or principals who put in the contract are going to be the same principal(s) that are part of the new entity, should it be assigned to a new entity. Now let's talk about if a wholesaler gets qualified by the seller and the broker, and gets a contract signed that allows assignments without being part of the new entity, let's talk about why it's still not a good reason to do that. If your goal is to have a long, multifamily investment career. The #1 reason you don't want to wholesale larger apartment complexes is reputation. Reputation is everything in this business. It determines how many listings you see first from all the brokers, and remember brokers are doing 90% or more of every transaction in the larger apartment complex market, and reputation determines whether or not you get selected as a winning bidder in a multiple offer situation. Also, if you have a reputation for wholesaling deals or flipping them, especially before closing, how do you think sellers and brokers are going to feel the next time they come across you? When brokers get new listings, you may not make it to the distribution list. and when you turn in an offer in a multiple offer situation, the sellers and the brokers are going to talk about your history. In the 14 counties I cover in Florida, and keep in mind this exists in any state or market you work in, in these 14 counties, there are roughly 4 million people. There are roughly 2,000 assets over 10 units and there are less than 900 assets over 100 units. Those 2,000 assets are owned by only 960 people in the entire county. There are roughly 60 full-time multifamily brokers that do most of the transactions in my markets. Florida, by the way, is one of the top states for real estate in the country, and there are only 60 brokers that handle all that transaction volume. Word spreads lightning fast, and in just a couple of years, you’ll be known by all of them for flipping deals before it closes. Please understand, I am not poo-pooing wholesaling. I actually love the business. I think it's a great business plan and I know plenty of folks who are very good at it. But I think the most success exists in four units and under because you will probably very rarely see the same players you do in the larger investment world. In the larger apartment complex world, it's a really tight market and we all know each other, and we all talk. Now there are four reasons why wholesaling can put a bad taste in the mouths of a broker and their seller. #1 - sellers and brokers don't want to feel like they wasted time being under contract with someone who never had the ability or the intentions to close in the first place. #2 - no seller or broker wants to feel like they left money on the table. Attracting wholesalers is a sign the property wasn’t priced correctly. It was priced too low. #3 - the property had already been marketed across the globe, and then if a wholesaler comes in and is now remarketing it again to find a replacement buyer, that devalues the asset even more. Not to mention the seller and the broker don't have control over who the wholesaler is showing it to and thus it becomes an issue if those other buyers are now talking to on-site staff and management and they may not have wanted that to happen. #4 - it could be a violation of the confidentiality agreement they signed. When they signed a CA to receive financials or perhaps won a contract, both state they can't share proprietary and financial information to others who aren't part of the entity that's buying the deal. Most CA agreements have some wording that says “You are acting as a principal in this transaction and not a wholesaler or an agent of or acting on behalf of any other party.” Now some CA agreements don't specifically point out the wholesaler part, but there is usually language that would not allow a wholesaler to send all this information to other parties that are not part of this agreement. Of course, I’m not an attorney, so please make sure you talk to your attorney and make sure you're protected. If you're a wholesaler, or maybe you’re really good at finding deals, the better alternative is to just partner with those who do have the ability to close on deals. I assure you someone who's good at finding deals will always be able to find someone to partner up with. And the fee that the wholesaler would have made by assigning the contract would become their equity in the asset with the new buyer as their partner. Partnering with investors who close on deals, even if you're only getting a tiny percentage of those deals, will make you far more money over a long career because you’ll create a good reputation. You’ll find that deals will flood to you by those who control the inventory.
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