The Commercial Mindset - Posted by Chuck Prime

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Posted by Chuck Prime on July 06, 2010 at 21:59:48:

Ray, many thanks for the thought-provoking response. I’ve been mulling it over for a day and a half, and having a similar conversation on another forum.

In short, I’m starting to think the “creative real estate investor” strategies which educated homeowners so well (and contributed to the bubble) just never made it into the commercial world. It’s almost as if commercial people have that old mentality of, “aww, that stuff doesn’t work”. There’s just not a lot of commercial wholesaling that I know of, and there’s not a lot of crossover between the commercial and the residential investors. I wonder if there’s a fortune to be had by educating the commercial people one seller and one agent at a time. “I’m a specialist at finding buyers when traditional methods fail, .”

I also wonder if I’ve gone off the deep end.

“Daisy Chains” - I think you’re onto something, and not just in theory. A realtor has already approached me representing some interested buyers with recently freed up cash. My informal rule on brokers has been: you hire 'em, you pay 'em. I should be able to formalize that by adding this to my offer: “Buyer pays for all agents or brokers hired by Buyer.” I sent word up the line to my relevant seller that I will gladly keep the brokers off his side of the settlement sheet. Not heard back yet.

“And/or assigns” - I’ve always used “and/or Nominee” because that’s how my title co liked it. But a problem I’ve had is separating “Buyer” and “Nominee” and my LLC name in some of my wording. I suppose that “and/or assigns” is a little slicker, since it doesn’t refer as specifically to another party. Is that why you use it?

Buyers cutting me out - I’m really getting the impression from you and another person AND from the calls I’m getting that cutting out is common. I’ll proceed as if they really ARE out to get me, at least until there’s counter-evidence.

Hiding my intent to assign - in my state, contracts are property and are thus sellable unless they directly specify otherwise. So hiding my intent is probably legal, but that doesn’t make it right (just like being illegal doesn’t make something wrong). In short, hiding my intent means misrepresenting myself, and that could lead to all kinds of problems. It could also build me a rep as a dishonest person, and how could I counter that rep if I earned it? I should stick with clean deals.

Re options - Never used one, know nothing about them. If my seller is unwilling to sign a purchase contract with me, why would he sign an option which gives me similar power? Does an option inherently prevent daisy-chains? Does a 3k option fee matter to someone selling a 50plex? I could be missing something here. I did include the ‘option option’ when I sent the “no daisy chains” word up the line.

Licensing - none for me either. I refuse to be owned by politicians, and that is precisely what business licensing does, and precisely what it was designed for.

“NCND agreement” - do you mean Non-Circumvent / Non-Disclose? I missed this early on, but now it REALLY has my interest, because I’d always assumed they weren’t worth jack. But if you’re using them, I’ve probably been wrong all this time. The realtor I mentioned volunteered out of the blue to sign something like that with me.

That could be important.

Do non-circumvents really offer any protection? Of course I’ve put in some calls around here, but not heard much back yet. If they do, you may have just saved my deal.

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The Commercial Mindset - Posted by Chuck Prime

Posted by Chuck Prime on July 04, 2010 at 23:24:17:

I’m a wholesaler in AZ. I’m new multi-family, but have wholesaled SFRs for about 5 years. I write purchase contracts, I assign them in escrow, and I show up on the HUD. I’m careful. The vast majority of my stuff closes, and always has.

So far I’ve recently worked my first 2 commercial deals and brought successful buyers for both.

But there’s a problem that never came up in the residential stuff, probably because now I’m dealing with a different mindset.

Most sellers of multiplexes won’t sign a purchase contract where the buyer is “[my LLC] and/or Nominee”. And some agents with high-DOM listings advise their high-DOM ‘sellers’ against it. These people don’t believe in wholesaling, so I’m left with no protection against being ripped off.

Commercial sellers say, “Bring me a buyer BEFORE I sign with you. I won’t cut you out.”

Commercial buyers say, “Give me the property address BEFORE you have a contract. I won’t go around you.”

I’ve never ripped off, or BEEN ripped off, but it’s a different mindset here. I don’t know who I’m dealing with. I find it surprising and grossly inappropriate that these people ask a complete stranger to blindly trust them. Unwilling to trust people who are unwilling to let me protect myself, I’m missing out on a 62-plex deal I’m confident I can get done if the due diligence checks out. (The CAP looks to be just under 12% at 10% vacancy.)

Currently I’m withholding the address from all potential buyers until they make a good-faith and temporarily refundable deposit. (Yes, the title co will do it.) I already gave my buyers pics, numbers (with more on the way), general area, everything I have which doesn’t identify the actual property. If they make the deposit, I get my contract, it goes to title, the buyer gets the address, and all goes normally from there.

Except (so far) they won’t do it, and my seller won’t sign WITHOUT them doing it. Maybe neither side is serious.

Or maybe I’m missing something. After all, it’s a new mindset here.

But I still need a secured position or SOMETHING with the same net effect. And I kinda doubt a non-circumvent will do it if things ever get bad.

And I don’t want to miss out on deal after deal waiting for those few who will work with me.

Many thanks for whatever y’all can tell me. Really.

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Re: The Commercial Mindset - Posted by ray@lcorn

Posted by ray@lcorn on July 05, 2010 at 11:12:08:

Chuck,

Congratulations on your two deals so far! That’s an indication that you’re on the right track. You’ve obviously figured out how to find buyers and get their attention. What you need is a little guidance on how to protect your interests. It is a different mindset in commercial property, and involves a different approach than with SFR.

What you’ve run into is a common occurrence in the commercial RE world.

I’ve been in this business for over 25 years. I generally do not sign exclusive listings with brokers because I am better at marketing my properties than they are. There are some exceptions to this, but that’s another post.

However I always reach out to the broker community and encourage participation with guarantees to pay a competitive commission. I will sign one-time-shows, NCND agreements, etc., but require they register their buyer with me so I don’t get in the middle of multiple brokers representing the same buyer. I have never, ever cut a broker out of a duly earned commission. This is a small world and word travels fast. Besides that it’s just bad karma.

However, in doing it myself I learned early on that I had to screen brokers and buyers to avoid what is known in the business as “daisy chains”. This is when a broker or buyer ties up a property in order to circulate it among as many other brokers or buyers as possible with a call for offers, essentially running a private auction. Then when it comes time to close the seller finds out there are two or more brokers that have to be cut in on the deal. The really slick ones don’t disclose this until right before or at closing. They know that sellers will start planning for the use of funds well beforehand, in many cases making commitments based on the sale of the property. That self-created pressure works in the buyer/brokers favor when closing arrives and there is a last minute “surprise”. Often the pressure on the seller is too great to back out.

So that’s why sellers are reluctant to sign a contract that you openly represent (to your credit) as a wholesale flip. Buyers are just following their own golden rule, that he who has the gold makes the rules. If they can do an end-run around you and snatch the property cheaper, that’s just business.

There are several alternatives to deal with this issue.

First and simplest is rather than using the “[my LLC] and/or Nominee” (in my contract the language is “and/or assigns”) in the first paragraph that identifies the parties, just drop the nominee language there and use a clause down in the boiler plate section of notices, jurisdiction, etc. that allows the contract to be assigned by either party without consent for tax-free exchange purposes or financing requirements.

Another alternative is to use a contract that is silent on the issue altogether. The absence of a restriction of assignment arguably leaves the door open to assign. (Note: I am not a lawyer and don’t play one on the internet. Seek competent legal counsel for compliance with your state’s laws.)

However, the third, and in my view the most preferable alternative, is to use an option rather than a contract.
Options are the most powerful form of leverage in real estate. They give you the rights of ownership without the obligations, for a relatively small amount of money.

Properly constructed and presented, an option is usually better received by sellers because the option fee is earned on signing. It’s better for you because an option gives you a insurable, secured and recordable interest in the property. This avoids any question of being cut-out of a deal or claims of performing third-party brokerage without a license. Further, since you have a legal interest in the property it is legal and commercially acceptable to have the ability to sell your interest without the seller’s consent. If the seller balks, you simply explain that he’s already agreed on price, and as long as it closes within the requirements of the option terms it makes no difference to him how you structure the transaction.

The downside to you is the option fee is not refundable. To reduce your risk, it is typical to structure the option fee in small monthly payments. A rough guide to option consideration is 1% of the sale price per year, so the monthly fee for a $1mm property might be structured as $10,000/12 = $833 mo., say rounded to $1,000, for a period of say, 3 months, plus one 3 month renewal, with closing to occur within say 60 days of notification that you will execute the option. You could also present the offer as a total option fee of $3,000 for say four months, payable at $750 monthly, plus a renewal. It sounds better that way and helps you manage the costs.

The beautiful thing about options is that there are no rules as to how much or how long. Whatever the parties agree to can be a legal contract. This allows you to tie up the property for as long as you like, or bail out whenever you like if you see the deal isn’t getting buyer interest.

I’ve never been a licensed broker and don’t want to be, but there are many brokers that would love to catch me middling property. I’ve used options for years to avoid any possibility I could be found in violation of broker laws. Like you, I’m careful.

I’ve used do dozens of deals, in fact just closed a warehouse deal to an adjacent property owner using exactly the scenario above. I also prefer options to control property for development projects. Most important is to construct the option to comply with your state’s contract laws and to set out the deal terms that fit your business model.

ray