Maximizing Profit: A Step-by-Step Guide to Assigning Contracts During the Feasibility Period
Commercial real estate wholesaling is a strategy used by investors to buy and sell commercial properties quickly for a profit, without actually taking ownership of the property. The investor, known as the wholesaler, enters into a contract to purchase a commercial property and then assigns the contract to another investor before the closing date. The wholesaler makes a profit by charging a fee for finding and negotiating the deal.
There are several steps involved in the commercial real estate wholesaling process:
Identify a property: The wholesaler starts by identifying a commercial property that they believe has potential for a profit. This can be done through market research, networking with other real estate professionals, or by working with a real estate broker.
Negotiate a contract: Once a property has been identified, the wholesaler negotiates a purchase contract with the seller. This contract includes the purchase price, closing date, and other terms and conditions.
Find a buyer: The next step is to find a buyer for the property. This can be done through networking, marketing the property to potential investors, or by working with a real estate broker.
Assign the contract: Once a buyer has been found, the wholesaler assigns the contract to the buyer. This involves transferring the rights to the property from the wholesaler to the buyer, with the wholesaler receiving a fee for their efforts.
Close the deal: The buyer and seller then proceed to close the deal on the agreed-upon closing date. The wholesaler does not take ownership of the property and instead receives their fee for finding and negotiating the deal.
In commercial real estate, a feasibility period is a set period of time during which the potential buyer or tenant of a property can conduct due diligence and determine whether the property meets their needs and requirements. During this period, the buyer or tenant may review various documents related to the property, including the lease or purchase agreement, financial records, and any inspections or appraisals that have been conducted.
The purpose of the feasibility period is to give the buyer or tenant an opportunity to fully understand the condition and potential of the property before committing to the purchase or lease. It is also an opportunity for the buyer or tenant to negotiate any terms or conditions that may need to be adjusted in order to make the deal work for them.
The length of the feasibility period will depend on the specifics of the transaction and may be negotiated between the buyer or tenant and the seller or landlord. It is typically a few weeks to a month, but can be shorter or longer depending on the complexity of the property and the needs of the parties involved.
Here is an example of a homerun triple net (NNN) deal:
The investor puts land under contract at a $2 million purchase price.
During the feasibility period, the investor conducts due diligence on the property and finds a suitable tenant.
The investor and the tenant enter into a ground lease with terms of $350,000 NNN annual rent plus escalations.
The tenant invests $7 million in improvements to the property, including building a new facility.
The investor collects the agreed-upon rent payments on a regular basis, providing a steady stream of income.
It’s important to carefully consider all factors and negotiate terms that are favorable for both the investor and the tenant in order to create a successful ground lease arrangement.
Commercial real estate wholesaling can be a lucrative strategy for investors who have the skills and knowledge to identify and negotiate deals quickly. It requires a thorough understanding of the commercial real estate market, as well as the ability to find and connect with potential buyers.