4 Ways To Wholesale An Apartment Building
Wholesaling an apartment building is usually only thought of in terms of an all cash transaction, where the seller agrees to a low price in order to get a cash sale and the end buyer comes in with cash plus bridge financing to fund the transaction.
This is indeed a tried and true model, but they are only available in any kind of abundance at a certain stage of the real estate market cycle. Once a market heats up, the deep discounts are harder to find.
If you broaden the transaction types you can do, you are able to wholesale more deals in a single market over a longer period of time.
Below are four transaction types that will expand your opportunities as an apartment wholesaler.
1. All Cash For Double Discount Price: This is the classic scenario for wholesaling an apartment building (or any other piece of commercial real estate). The property is usually distressed and attempts to market it have been unsuccessful. To price your offer as a wholesaler you first look at what would make sense for property as a value-add. You then discount price again to take into account what you need to make for an assignment fee. Persistent follow-up and negotiation by the wholesaler gets the deal under contract at a double discounted price, and the end buyer comes to closing with cash paying the single discounted price, cashing out the seller and paying the apartment wholesaler their assignment fee. As long as market conditions allow for extremely low prices, end buyers are able to easily mobilize capital for your asking price and deals go through easily.
2. Create Owner Financing: When a seller needs a certain price and has been unable to sell the property, or when an all cash sale does not suit the seller’s financial plans, owner financing can provide the seller with what they want and make a sale happen. The value of owner financing for wholesaling is, obviously, that no banks are involved. This enables you to negotiate terms with the seller that are “extremely” attractive to the end buyer. For example, no payments for six months after closing, zero interest, no pre-payment penalty. It also enables deals to close very quickly. For the end buyer, they only have to raise funds for down payment, and repairs if needed, rather than the entire purchase price. The lower cash requirements and simplicity of no lender qualifying make these deals very easy for the end buyer to manage and close comparatively quickly.
3. Quiet Assumption: Thanks to the growth of securitization in commercial real estate financing there are a lot of apartment buildings now with “conduit loans”. A conduit loan comes about when it is one of many mortgages that are put into a pool on Wall St, the pool is sliced into to smaller denominated securities, and the securities are then sold to institutional investors. Aka, commercial mortgage backed securities, or CMBS.
Conduit loans are relatively easy for the apartment owner/operator to get, but the downside to them is they are structured with the interests of the security holder in mind, more than the property owner’s. The security pays its holder a coupon every month until the due date (usually ten years), when the principal is paid back in full. The property owner, on the other hand, is faced with having to make the payment each month, and then refinance or sell, to pay off the loan at an exact date ten years into the future, or pay a roughly 20% prepayment penalty. It is this costly inflexibility of the loan terms that causes problems for the property owner when they need to sell before the loan maturity date.
Their problem is an opportunity for the apartment wholesaler. Apartment buildings with conduit loans on them can be bought and sold utilizing a “quiet” assumption. On the surface, everything remains the same, the entity holding title, the insurance policy, the bank account making the payments, everything. But behind the scenes, the ownership interest of the entity (usually an LLC) has been put into a management company LLC, the ownership interest of which you put under contract and wholesale to the new buyer (the difference between the cash promised the seller and that paid in by the buyer going to you) . The conduit loan stays in place and the new buyer takes over managing the property.
These deals are very clean, and depending on how little cash you negotiate the seller down to, some of the most profitable.
4. Master Lease Option: For sellers who are having trouble selling a stabilized (or marginally stabilized, e.g. 20% vacancy) property don’t have a lot of flexibility on price, the wholesaler can create value for their end buyer by negotiating a Master Lease Option (MLO), allowing the buyer to control the property with very little risk. This is very useful for an apartment investor as they can profitably utilize the 3-5 years of the MLO term to get the property operating at peak efficiency and maximum occupancy before committing the more significant down payment require on their purchase money mortgage.
Like owner financing, the MLO transaction is merely a matter of ensuring there is clear title, doing due diligence, and then drawing up the contract, so it is very quick. No new financing and the time consuming processes involved. In addition, the terms of the MLO are what you negotiate with the Seller, making possible low monthly lease payments, and other terms, that make the deal highly attractive to the end buyer. The low upfront cash requirement of an MLO also expands the universe of available buyers, making the wholesaling of an MLO about as easy as it gets. The only downside is the assignment fee you get from flipping and MLO contract is smaller than what you would get from the first three transaction types; typically 1% of the purchase price. This can be rationalized by the ease and speed of the transaction overall.
By broadening your repertoire of transaction types you can do more deals within a single market and take advantage of many more opportunities with creative financing. Deals involving owner financing and assumptions are often the most profitable to wholesale, as well as being quicker to close.
Cash is king, but creative financing also packs a punch.