Apartment Wholesaling System

“Wholesaling Secrets Of A $500,000+ Yearly Income Buying And Selling Large Apartment Buildings – Insider Secrets Of How To Wholesale Apartment Buildings For Huge Assignment Fees!”

Main Manual

by Ben Innes-Ker Copyright Notices

© 2012 Power Marketing Inc.

All rights reserved. No part of this book may be reproduced or transmitted for resale or for use by any other party other than the individual Licensee who is the sole authorized user of this System. Licensee is authorized to use any of the samples in this course for his or her use only. All other reproduction or transmission, in any form or by any means, electronic or mechanical, including photocopying, recording, or by any informational storage or retrieval system, is prohibited without express written permission from the Publisher.

Published by: Power Marketing, Inc. ® 900 E 7th St,#277, Bloomington, IN 47405 First Printing: 2012

While all attempts have been made to provide effective, verifiable information in this Book, neither the Publisher or the Author assumes any responsibility for errors, inaccuracies or omissions. Any slights of people or organizations are unintentional. If advice concerning tax, legal, compliance or related matters is needed, the services of a qualified professional should be sought.

This book is not a source of legal, regulatory compliance, or accounting information, and it should not be regarded as such. It's a guide to buying and selling apartment buildings. Due to the nature of law and varying rules regarding activities in different states, some practices proposed in this Book may be prohibited in certain circumstances and locations. Since federal and local laws differ widely, as do codes of conduct for members of professional organizations and agencies, Licensee must accept full responsibility for determining the nature of any and all business transactions and/or practices adopted and enacted in his or her particular field and geographic location, whether or not those transactions and/or practices are suggested, either directly or indirectly, in this Book. As with any business advice, Licensee is strongly encouraged to seek professional counsel before taking action. Any and all references to persons or , whether living or dead, existing or defunct, is purely coincidental. Table Of Contents

Introduction

Chapter 1: The Opportunity No Cash or Credit Required Risk/Reward Higher Prices Bigger Profits Greater Base Of Deals To Work From Plenty Of Deals In Up Markets And Down

Chapter 2: Getting YOU Ready 4 Ways Apartment Wholesaling Is Different Risk Analysis Personal Financial Statement Current Resources

Chapter 3: The Apartment Wholesaling Scenario What It Is Earnest Money Contingencies The Spread

Chapter 4: Two Ways To Go Assignment Simultaneous Close

Chapter 5: Earnest Money Spread Between Seller And New Buyer Earnest Money Apartment Sized Earnest Money Deposits Where Do You Find Private Money Investors For Earnest Money? Your Presentation (Pitch) To Private Money Investors The Promissory Note And Escrow Instructions

Chapter 6: Profile Of A Deal: Knowing What A Profitable Deal Looks Like Classes The Deal Analysis Worksheet Cap Rate Estimating Value Motivated Sellers Where's The Spread? Knowing What To Pay Chapter 7: Creating Dealflow A Word About Competition Networking Lead Generation Advertising: Online Advertising: Offline Direct Mail Using Commercial Brokers

Chapter 8: Finding Buyers Building A Buyers List Networking Advertising: Online Advertising: Offline Your Own Detective Work 1031 Administrators Looking For Buyers First Tools For Staying Organized

Chapter 9: Negotiating Positioning Trust Factoring In Your Spread The Balance Of Weakness Next!

Chapter 10: The Contract What Contract To Use The Letter Of Intent (LOI) Contingencies Getting The Contract Signed Protecting Your Deal The Letter Of Assignment

Chapter 11: Managing The Be Prepared Deal Timeline Staying In Touch With Seller And Buyer Closing Day When To Pull Out If The New Buyer Doesn't Close

Chapter 12: A Deal: From A-Z Assignment Simultaneous Close Chapter 13: Getting Started! X Factors Experience Is The REAL Teacher Take The First Step Seek Out A Mentor Welcome To Your New Life! Introduction:

In 7 Habits Of Highly Effective People, Stephen Covey uses a metaphor to explain Habit 2, Begin With The End In Mind.

He states: “It's incredibly easy to get caught up in an activity trap, in the busy-ness of life, to work harder and harder at climbing the ladder of success only to discover it's leaning against the wrong wall. It is possible to be busy, very busy, without being very effective.”

This applies perfectly to the field. There are so many ways to be in real estate, so many ways to make money, but also, so many ways to waste your time. Our quest is to look at all of the available opportunities and determine which one is going to give us the best return on our time, energy, and capital.

If you have spent any time at all trying to make money in real estate you eventually gravitate to commercial. Commercial real estate is where the greatest returns are on all three of your resources. The numbers are bigger, so the profits are bigger.

And risk? We all have our own appetite for risk, it's important to know what yours is. This book is for those who want to maximize the return on their time and effort without taking a lot of risk.

That's apartment wholesaling; putting profitable apartment deals under contract and assigning or simultaneously reselling them to an apartment investor, with the difference in the two prices going to you.

Large transaction values, five/six/seven figure spreads, negligible risk. That's leaning your ladder against the right wall.

There is another side to apartment wholesaling though; it's a lot of work. Most of it is front loaded, meaning you don't make any money until you have put in a certain number of hours and made a certain number of contacts. But what you will find is, it's worth it. Not just for the money you make, but for the people you meet, the relationships you develop, and the transformation that occurs in you as you face down your fears and bring value into other people's lives.

Let's get started. Chapter 1: The Opportunity

Wholesaling apartment buildings gives you a unique set of benefits that you don't find in any other area of real estate.

No Cash Or Credit Required

Wholesaling apartment buildings consists of you buying a property from a Seller at one price, and then turning around and simultaneously reselling the property to a Buyer at a higher price. At closing, it is the Buyer's money that pays for the Seller's purchase price, your profit, and any closing costs you are responsible for.

If it is the Buyer bringing all the money to the closing table, how much money do you need to kick in? And how good does your credit have to be?

Right! Zero (money), and zero (need for credit). You are leveraging the credit, financial resources, banking relationships, and overall money raising ability of the Buyer in order to get the deal done. No cash or credit is required from you at any point in the transaction.

Not to be dramatic, but merely to illustrate a point; you could have just lost your house to , filed Chapter 7 Bankruptcy, lost your job and moved into your Mother's basement. As long as you have a phone, fax, transportation, and know what to do, you can still successfully wholesale a large apartment building and make five to seven figures in the following two to four months

You do not need any of your own cash, or credit, to make money wholesaling apartment buildings.

Risk/Reward:

For most, the elimination of nearly all the risk while still being able to make five to seven figures per deal is the most eye popping benefit to wholesaling apartments. If you are used to what you make wholesaling houses, then apartment assignments seem like the Promised Land. In a way, they are.

You are positioning yourself as the Gatekeeper, the toll booth. For sellers, you are the path to a quick sale without the rigmarole and hassle of listing with a realtor. For buyers, the apartment operators, you are an endless source of deals that make them wealthy. Everybody loves you!

In the meantime, you don't need to worry about management issues. You don't have to deal with contractors. You don't have to worry about keeping the building full. You are not borrowing millions in debt and risking not being able to pay it back.

You do need to raise a bit of capital to post earnest money, but as we will see, this is an easy sell and you are completely protected at every point throughout the transaction.

If you are risk averse, wholesaling apartments is the place to be. Your involvement with the property is confined only to the term of the contract, and you get to slice off 10-20% of the property value in profit without exposing yourself to any of the risk that goes with being an apartment operator.

Interested?

Higher Prices, Bigger Profits:

How much cash you have to invest and how much risk you are willing to take usually determines the price range you will buy in. However, when none of your personal money (or credit) is required, and the risk you take is near zero, you are free to do deals in any price range.

Whatever price range you end up doing deals in will be a matter of what you decide, not a matter of what you think your financial resources allow. Needless to say though, the higher the price range you work in, the greater the profits you will make.

To briefly illustrate; let's look at two scenarios. In each, you make 10% of the value of the property in profit, which is easily achievable.

In scenario #1, you wholesale a $500,000 apartment building, and after reselling to your buyer (for 10% more than you paid the seller) you pocket a $50,000 profit.

In scenario #2, you wholesale a $7M apartment complex, and after reselling to your buyer (for 10% more than you paid the seller) your profit is $700,000.

Both scenarios take the same amount of time and effort, and in both cases not a penny of your own money is used. The further you go up in price range, the more the dollar amount in profit increases. It is, after all, simple arithmetic.

Greater Base Of Deals To Work From

In the residential field most of the wholesaling opportunities exist in fixer-upper , and of those the greatest number lie in the lower price range houses. There are a number of reasons for this. One is, the steepest discounts are available in low end distressed properties which lenders won't finance, and most rehabbers can lay their hands on $10-20K in cash and/or have private lenders willing to fund them. A second reason is, residential lending has been bitten by fraud enough times that lenders will only allow a direct assignment from the owner of record to the new buyer/borrower at closing.

This means simultaneous closings on properties where lender financing can be obtained, basically don't exist, leaving most of wholesaling opportunities in low end distressed properties.

Not so when wholesaling apartment buildings.

In commercial real estate there are no unsophisticated home buyers to protect, so generally, there are not the same concerns among commercial lenders that there are in residential lending. Deal making is much more creative and entrepreneurial, and as a consequence, back to back closings with lenders financing the secondary buyer happen regularly without much fanfare.

This being the case, the opportunity to wholesale apartment properties exists not only in low end distressed properties, but right through the spectrum of property classes and price ranges all the way up to premium priced elite properties.

This opens up a much broader base of property for you to work from. It also makes competition less likely (there is virtually zero anyway) and deals are much easier to find and put together.

Plenty Of Deals In Up Markets And Down

One of the interesting features of market cycles is the number of residential real estate (and loan) agents in the business. In the flurry of an up market, agents proliferate. When the economy takes a dive and business dries up, the numbers of agents doing business decrease, in most markets, by about a third.

This is not so much a comment on real estate agents (it is a little bit), but a sign of the diminished demand for houses. Which brings up a key point about our business.

Real estate is all about supply and demand.

When a market cycle changes from up, to down, where does all the demand go that was driving the booming housing market? Where do all those people go? They move out of houses and into apartments. And with them go their incomes.

This puts apartments in a unique position. In an up market when the economy is booming and the money is flowing, Class A and B properties are in in demand as their land value starts appreciating. Then in a downturn, Class C properties are in demand as the middle class tighten their purse strings and return to more affordable housing.

This is not the case with other classes of commercial real estate. Land, office, industrial, and are all dependent on the business activity of an appreciating market for demand to exceed supply.

Thanks to the unique demand characteristics of apartments though, there is always one sector of the apartment market that is in demand. For the wholesaler, a down market simply means shifting his/her focus to the property class that is coming into demand. In up markets and down, there are always plenty of apartment deals to wholesale. Chapter 2: Getting YOU Ready

It's likely that wholesaling apartment buildings will be different to what you are doing now, in a number of ways.

1) Deals will be in higher price ranges. As already discussed, positioning yourself as a wholesaler of apartment buildings frees you from the risk inherent in taking possession of the property. You face the same risk wholesaling a $300K 6 unit building as you do $5M apartment complex. Near zero. So it makes sense to work in the higher price ranges.

2) It will require more networking than you do now. Commercial real estate owes it's very existence in large part to networking. It's just the most effective way to get things done. Unlike residential real estate where services are largely commoditized, commercial real estate relies more on personal relationships and referrals. If you want to find deals, buyers, a good attorney, a good lender, private money investors, and pretty well anything else, networking, tapping into the relationships and networks of others, will uncover it for you most quickly and effectively. If you haven't done much of it in the past, you will be doing a lot more of it now.

3) You need to have your financial house in order. Wait, wasn't it possible to do this bankrupt, mangled credit, jobless and living in my Mother's basement? Yes, but you will have a greater chance of moving out of that situation when you have your financial status documented, in the form of personal financial statement, understanding your tolerance for risk, and being aware of what resources you do have at your disposal. You will not be getting a mortgage or taking title to a property, but you will be working with lenders and private lenders, so you need to have your financial house in order, whatever your current status.

4) It will require a different mindset. Almost everything about buying and selling apartment buildings is intimidating. The million dollar property values, the size of the buildings, the size of the earnest money deposit, the size of the mortgage, the high brow attorneys, the condescending bankers, the hard nosed brokers. The list goes on. But the truth is, these things only strike terror into you heart when you don't know how to deal with them. Every single aspect of an apartment deal has a best practice and a specific way to successfully deal with it. The only thing is you don't yet know what that best practice is, so you are afraid.

Knowledge is the antidote to 90% of what you fear. I am hoping I can eliminate that 90% for you with what you learn in this ebook. The other 10% is your mindset. Mindset and personal development are their own unto themselves, but there are a few mindsets to adopt that will help you get traction in apartment wholesaling. They are as follows ...

You Are In Control: This applies both externally and internally. Externally you are the orchestrator of the deal, and control every aspect. The more personal responsibility you take for every aspect of the deal, the more likely it is everything will go just as you want it to. Internally, you control what you think about. You control what you pay attention to and what you ignore. You are not a victim. You control what you put in your mind and how you feel about things.

Every Problem Has A Solution: If something presents itself as a problem, there is by definition a solution. You just haven't found it yet. You may need more information, you may need to talk to or meet more people who can help, but the solution is out there.

There Are People Already Doing What You Think Is Impossible: If the prospect of doing a large apartment deal is daunting, just realize there are people in your market, and other markets, who are already doing these deals. Bear in mind there is nothing special about these people. They have an IQ that is probably the same your IQ, maybe less. There is nothing spectacular about their personality, nor do they have any special abilities that you don't. They have simply begun the process and are further down the road than you are. So if they, with their ordinary abilities and average IQ, can wholesale large apartment deals, the exact same thing is possible for you too.

Create Value: In any there are a hundred smaller transactions that take place. In every one of them parties on both sides are looking to receive value, in whatever form it may take. Focus on creating value, and the deal will form around you.

Exercise:

When you see someone performing really well, what you looking at is the result of preparation. Put the results of winging it and preparation side by side and you will be looking to two vastly different things. Preparation is critical to success in any venture, especially wholesaling apartments.

Before going out and looking for buyers and deals, your best preparation are the three elements of getting your financial house in order. 1) understand your risk profile, 2) put together your personal financial statement, and 3) create a comprehensive list of your current resources.

Understanding your risk profile gets you better acquainted with your tolerance for risk. Everyone has a different tolerance for risk depending on how old you are, your personality, your family situation, and other factors. Apartment assignments involve a lot less risk that taking possession of the property and are a great way to start and accumulate a grubstake fast. Someone with an appetite for risk who is free to pursue it, may wholesale a few apartment deals but feel the need to move on to bigger commercial deals and building a substantial portfolio. Another person may like the challenge buying larger apartment buildings, but have three children under the age of 7, so wholesaling one or two deals a year fits their situation perfectly. Understanding your risk profile will help you deal with reality and make good decisions going forward.

Completing your personal financial statement brings you into the reality of your current financial situation. Being human we tend to overestimate the good and underestimate the bad. If you are a professional investor you need to have documented what “is” re your current financial status. If you haven't done it already prepare your personal financial statement, and update it quarterly. There are deals where you need to “apply” for financing, and your personal financial statement will be required.

Create a comprehensive list of your current resources. Doing so will give you a better understanding of just how much you have at your disposal right now, both with what you bring to the table and who you know. Most people vastly underestimate their personal resources. You must understand and acknowledge the value of all your existing resources, including:

Financial: Cash, credit, stocks, bonds, other securities.

Intellectual: Information, knowledge, your personal experiences.

Social: Your network, who you know, who they know.

Professional: Bankers, brokers, lawyers, accountants, other professionals. Also, other real estate investors, your local REIA, commercial brokers, mortgage brokers, closing attorneys, escrow agents.

Government: People you know in government, grants, loans, tax credits, etc.

Fill out this list as completely as you can. Just about every resource you come up with can be leveraged into deals. We'll see how later. Don't limit yourself. List every resource you can think of.

To help with these exercises I've included forms for Risk Analysis, Personal Financial Statement, and Resource Analysis in the Resources Section.

Chapter 3: The Apartment Wholesaling Scenario

So what is the apartment wholesaling scenario? Simply this:

We find an apartment building we can put under contract for a price that is less than what we know another apartment investor would be willing to pay for it. Once you have the property under contract you then resell the property to a “new Buyer” at the higher market price. Your profit comes from the spread, between the contract price you had with the original Seller, and the price the new Buyer pays you for the property.

Pretty straightforward, but there are a few key points you want to pay special attention to.

1. Earnest Money

In most cases the deal you strike with the Seller will be very conventional; all cash, subject to obtaining financing, with earnest money. The earnest money requirement on apartment assignments will always be a significant amount of money. For example: 2% on a $1M property is $20,000. 1% on a $10M property is $100,000. ($10 binder deposits won't work here.) In some circumstances you can negotiate a promissory note for the earnest money, but in most circumstances the Seller wants cash.

Without earnest money, in the right amount, at the right time, the Seller won't take you seriously and you won't be able to control the deal. So how do you lay your hands on $10,000, $100,000, or more, earnest money for your Assignment deal?

The answer is, private lenders. Yes, the same private lenders you would use for rehabbing a house, you can use for posting earnest money on your contract with the Seller. Private lenders are after safe, high returns. As we'll see, you can provide all of this for them in exchange for quick access to their cash.

2. Contingencies

Once you have a property under contract, you want to give yourself as much time as possible to find a new Buyer and close. At the same time, you want the flexibility to be released from the contract, and your earnest money returned in the event you don't find a new Buyer, or the Buyer you do find doesn't perform.

The key to achieving both of these is writing contingencies in your Seller and Buyer contracts that work in your favor, and then managing those contingencies carefully throughout the closing period.

With the Seller, you drag everything out as long as possible, having long contingency periods, making them run in series (one after the other). With the Buyer, you make the contingencies as short as possible, making them run simultaneously (alongside each other). Ideally, all of your Buyer's contingency periods end before the respective contingency deadlines in your contract, with the Seller.

You only want to put properties under contract that are in demand by active buyers in your target market, and have enough spread for you to make a profit. But even with all the incentives tilted towards the deal closing, how the Buyer behaves is not entirely under your control.

By including the right contingencies in your Seller and Buyer contracts you give yourself maximum ability to manage the transaction to a successful close, while also protecting against the loss of your earnest money.

3. The Spread

The spread in a deal is the difference between what you pay the Seller and what the property is actually worth in the eyes of the Buyer. Buyers in the apartment business are usually operators assembling a portfolio and know what they want to pay. An Assignment Deal will have “legs” when there is enough spread for you to factor in a decent profit and still leave enough meat on the bone to resell to your new Buyer at a price that makes them excited.

Without enough spread, no-one's interested and it becomes difficult to do the deal. With a decent spread, you have plenty of room to factor in 10% or so of the property value for your profit and still make the price you give your new Buyer a bargain.

When the dollar signs ring up in your new Buyer's eyes, their juices start flowing and they do what it takes to protect the deal; including a hefty earnest money deposit, giving you the contract you want, and pushing hard through the loan process to closing.

It's all about the deal. The more spread you can create by doing a good job buying the property, the easier time you will have attracting a serious Buyer and the smoother your path to closing will be. Chapter 4: Two Ways To Go

Wholesaling an apartment deal is a two stage process; the deal you have with the Seller, and the deal you have with the Buyer.

Dealing with the Seller will always be the same process, getting the property under contract at a price that gives you a good spread, and terms that provide enough flexibility to resell to a Buyer, who may need to obtain financing to close. But there will always be a Purchase Contract between you and the Seller.

Dealing with the secondary Buyer, there are two ways you can go to sell the property. 1) Assign the contract to a new Buyer, or 2) contract with your new Buyer at a higher price and do a Simultaneous Close. There are pros and cons to each. Which way you choose to go really depends on the relationship you have with your new Buyer.

Assignment

When you trust the new Buyer, there is a collaborative feel to your relationship, and they “get it” regarding your assignment fee (meaning they have an abundance mentality, and don't care how much you make, they appreciate the valuable service you are providing them), it is best to use an Assignment Agreement. You “assign” the contract to the new Buyer for a set fee and they take over your position in the contract you have with the Seller.

The pros to an assignment are: – it is a lot simpler, – there are fewer fees at closing, – it ends up being a direct title transfer between Seller and Buyer, – the new Buyer does most of the work after the Assignment Agreement has been executed.

The cons to an assignment are: – you relinquish a lot of control to the new Buyer/Assignee – the new Buyer finds out how much you are making on the deal – the new Buyer can blow up the deal if they don't like the contract – the new Buyer can cut you out of your assignment fee if they are unethical.

Simultaneous Close

If you don't trust the Buyer, or if you get your feeling the Buyer would have a problem with you making the 10%+ of the deal you have factored into your assignment fee (ie. they don't “get it”, they have a scarcity mentality), it is best to use the Simultaneous Close and keep the two transactions totally separate. The pros to a Simultaneous Close are: – You have total control of the deal for the period of the contract – You have individual contracts on both sides of the deal – You have separate Earnest Money accounts – The Seller and the new Buyer never meet – You always have the right to buy the property

The cons to a Simultaneous Close are: – It's a lot more work – You have to manage two contracts – You have to manage two closings – You pay two sets of closing costs – There is more paper work and filings to make – You have to come up with Earnest Money

There are many ways to work with your Buyer to bring the deal to closing. The main issue though is Control. You must stay in control of the deal. The surest way to keep control of the deal is to have two contracts and assume you are going to do a simultaneous close.

If you are working with a Buyer for the first time you should definitely structure the deal as a Simultaneous Close. During that first deal, take notes on how they conduct themselves, how well they perform for you. Let them prove themselves to you.

If they were a little difficult, or maybe a bit too curious about your part of the deal, but they did close, stick with a simultaneous close next time. If however they were a pleasure to work with, diligent, helpful, quick to perform on their obligations in the contract, you may consider an Assignment Agreement with them next time they buy from you.

Ultimately, for the ease of doing business, you want to get to the position of assigning all of your deals to trusted, repeat buyers. When you buy “right” and are offering great deals, your end Buyer's profit is going to be multiples more than what you are making in your assignment fee. So when you connect with Buyers who are long term thinkers, who “get it”, they don't begrudge you your fee. It's the opposite. You have taken the onerous task of finding profitable deals, off their hands, so they can focus on their asset management. They are happy to see you receive a healthy wad of cash at closing. They want you to prosper. They want you to remain in business and keep doing what you are doing. You are making them wealthy.

That said though, you will always come across Buyers who are just stingy by nature. They are solid Buyers and perform, but they want all the profit in the deal and can't abide seeing you make off with five or six figures of what they see as “their” money. Sometimes you have no choice but to work with Buyers like these. When that's the case, simply acknowledge they are that way and manage the deal as a simultaneous close, keeping Seller and end Buyer completely separate at all times. Both the Assignment and Simultaneous Close facilitate your transaction. One is no better than the other, as we saw, there are pros and cons to each. The one you choose to use for any given deal will be determined by the Buyer, how much you trust them, and how much control you feel you need to exert to successfully manage the deal to closing. Chapter 5: Earnest Money

Earnest money is a key aspect of the deal, both with the Seller and with the Buyer. The Seller wants to see sufficient earnest money from you to take your offer seriously, and similarly you want to get enough earnest money from your new Buyer to see they are 1) real, and 2) committed to closing the deal.

Although you and the new Buyer both need to post earnest money, your mentality is different. As a wholesaler, you are sorting through many deals, you are looking for a seller who is motivated and flexible on terms. You don't need any one deal. If a Seller is difficult to deal with you simply say “next” and move on. The new Buyer though has a different focus. The way they are looking at this property, they are going to invest significant time and capital to turn the property around and realize it's upside value. They are likely not turning up as many deals as you so when a “real” deal appears they want to grab it with both hands and not let it slip away.

So when it comes to earnest money, you want to put as little earnest money up as possible with the Seller but still be taken seriously. But at the same time, you want to get the maximum earnest money from your new Buyer to make it painful for them if they don't perform.

All of this occurs within a range of what is customary for earnest money. On the low end 1% is an acceptable amount of earnest money to pay to bind a contract; less than that and you start not looking like a credible buyer. On the high end 5% is likely the most you will be able to get out of a Buyer; requiring more than 5% earnest money you won't find many buyers willing to work with you.

You use the amount of earnest money you pay to set the right psychology between you and the two other players in the deal, but also to manage your risk. You always pay less earnest money to the Seller than what you get from the new Buyer.

Spread Between Seller And New Buyer Earnest Money

When getting the Seller under contract never pay more than 1%. Start negotiating at 0.5% or so, but never end up agreeing to pay more than 1% of the purchase price for earnest money.

Note: If you are doing a straight assignment, you need only get from the new Buyer what you paid the Seller. Your earnest money that you paid in to bind the contract will be recovered as your new Buyer pay their earnest money in.

In the case of a simultaneous close, you are pushing the new Buyer to pay 5% for earnest money. Often you will get it just by asking, but even if you let your Buyer beat you up a bit and settle at 3% you still have a comfortable spread.

At the very minimum your new Buyer's earnest money deposit should be 150% of what you paid the Seller. The optimum spread is one to two times. If your earnest money to the Seller is $10,000, $15,000 would be the minimum you get from the Buyer, $20,000 to $30,000 would be optimum, and $50,000 would be ideal.

Ultimately with earnest money you want to be sure that even in the worst case scenario, if your Buyer doesn't close and you have to release earnest money to the Seller, you have the new Buyers earnest money compensating you for what you released, plus a little extra.

Apartment Sized Earnest Money Deposits

One thing that keeps most people out of apartments is the bigger dollars involved. And that begins with Earnest Money.

Once you get above 8-10 units in just about any market, the values of apartment buildings start to far exceed single family home values, so naturally the earnest money required to buy these apartment properties will be higher too. Whereas you might pay $1,000 earnest money to secure a $100,000 contract on a single family home, you will need $30,000 earnest money to secure a $3M contract on a 70 unit apartment building.

Most people can raise $2,000 pretty easily from their own resources, but where do you get $60,000 for earnest money? Or for bigger deals, $100,000, or more? How do you lay your hands on that kind of money to tie up your deal?

Quite simply, you get your earnest money for apartments deals, whatever the amount, from Private Investors. Call them Private Lenders, Private Money, whatever; the same group of people who back you on a junker house rehab project, will also be the source of funds for earnest money on your apartment deals.

On your initial deals you use private lenders because you don't have the money yourself, but even later when you have more financial resources, you want continue to use OPM for earnest money so you always have the ability to act on a deal when it presents itself. You never want to be constrained from pursuing a profitable deal by a lack of personal funds.

So as a matter of business strategy you will always be using private lenders for earnest money so you can take advantage of any profitable deal that comes across your desk. This being the case, you need to start looking for private money investors “now”, and never stop.

Where Do You Find Private Money Investors For Earnest Money?

Private money that can be used for earnest money on your apartment quick-turn deals surrounds you as you are reading this now. The only thing preventing you having access to it is … no-one knows what you do or how they can profit by being your private money partner.

So, create a short presentation showing your deal and its merits, the return the investor gets, and how they are protected. Practice your presentation, then start calling. Who do you call? The list of private money sources is endless, however there are three sources that are highly predisposed to both, helping you, and being comfortable with real estate as an investment vehicle.

Personal Network: Start with your own personal network. Family members, friends, co- workers, professional acquaintances This group of people you already know, is sitting on multiple millions of dollars. Add to that the people they know and the number increases again. One thing Facebook is teaching us is we are much closer to many more people than we realize. The truth is, you already have a lot of connections.

With a polished presentation you can access all the private money you will ever need from your own personal network. This ability will only increase once you start proactively connecting with others to increase the size and reach of your own personal network.

If for some reason you want to look for private money outside your personal network, the next places to focus on are groups and associations that are related to real estate investing.

REIAs: Every city in the country, and increasingly smaller towns, has a Real Estate Investment Association (REIA). Join your local REIA, pay the annual fee and attend every meeting. If there are other REIAs around you attend those as well, you can usually attend as a guest for a small door charge.

A REIA is a group of people who are active real estate investors, or who want to be real estate investors and are coming to the meeting to learn more and talk about real estate investing. Two things are certain. One, every one there is familiar with real estate and how deals work. Two, all have capital to invest, or know someone else who does. Given these two facts, your local REIA is a perfect place for you to go to find private lenders for your deals.

Any given REIA will be composed: 10% active investors who are doing deals, 90% people who haven't yet done their first deal. Both are potential private lenders because both are familiar with real estate and potentially have capital to invest.

The bottom line is, join your local REIA, attend every meeting and network with every person there. When talking about what you do with a person, the subject of wholesaling apartments naturally comes up. If the course the conversation you have with a person reveals you are talking to someone with money seeking high returns, you float the fact you are currently looking for investors to fund earnest money on a deal. If there is an interested response, you pitch your deal. The worst case scenario is they say “no” for now, in which case you exchange cards and ask them if they want you to stay in touch for future deals. The best case scenario is they like what they hear and want to invest.

AOAs: Apartment Owner Associations have been around for a long time. Before REIA's became so popular in the 90's and 2000's they used to be one of the few places property owners could get together with their peers to discuss issues that affected them. Today they have evolved into politically active advocacy groups for real estate investors and .

The key point to bear in mind about AOA's is they are composed of apartment owners. You don't have to explain anything to them. They already know more than you do, they have cashflow, banking relationships, and cash.

Although AOAs are going to be a primary source of end Buyers for you, they are also a source of private money investors. Not all landlords are in acquisition mode, and for many, they have built a sizable portfolio and want to grow by allocating their capital (vs acquiring more property) from here on out.

AOA's have monthly meetings where their members, vendors, lenders, and other associated parties attend. This is an extremely valuable networking opportunity for you. Within an AOA meeting you come into contact with apartment owners who are sources of private money for you, apartment owners who are Buyers for your deals, and (as we will see in a later chapter) vendors, lenders, who can be sources of deals for you.

The AOA understands the prime networking opportunity each meeting is so if you are in a city of any size you will have to pay a fee to get in. On the other hand, you may want to become a member.

One caveat. Due to AOAs being a higher level networking opportunity, make sure you have your presentation well practiced before you go to a meeting. A 30 year veteran can size you up in a few seconds. You want his/her assessment to be a positive one; that, while you may be green, you have done your homework and you are looking to add value.

Practice your presentation, be a resource for AOA members and associates, and it will be a prime source of private money for you.

Your Presentation (Pitch) To Private Money Investors

The first part of raising private money for your earnest money is finding people with money to get in front of who are predisposed to either you as an individual, or to real estate investing. Now you are in front of predisposed prospects, what do you say?

The implement of persuasion you use is your presentation, or more simply, your pitch; what you say that tells your prospect in a nutshell why they should invest with you.

There are four parts to your pitch. 1) explaining the deal and how it works, 2) showing the investor they retain control of their money, 3) demonstrating the low risk of the deal, and 4) offering higher returns than the investor is currently receiving.

Explaining The Deal: Begin by giving a brief description of the course the deal will take, and why the earnest money is needed in that process. The more familiar/experienced the prospect with real estate the more brief this will be. At it's core though it should resemble the following. What I am doing with this deal is wholesaling the property. I am buying at a low price and immediately reselling at a slightly higher price to another investor. This is a win/win for both of us. For the investor, he/she finds a profitable deal without the hassle of marketing for it, and I make a small profit without the risk of managing contractors and tenants.

To get the property under contract though I need to put up earnest money. It's usually a significant amount of money, so to cover this I bring in investors to fund the earnest money requirement.

Once I have the property under contract I contact my Buyer and I get them under contract at the higher price. They also pay earnest money to bind their contract with me. I always make sure I get more earnest money from them than I have paid to the Seller, so if we are doing an Assignment deal, you are reimbursed your earnest money when the new Buyer deposits their earnest money into escrow, and your interest is paid at closing. If we do a simultaneous close, you'll get your earnest money plus interest back when the deal closes.

This is the basic outline.

Investor Retains Control: Next, show the investor how they retain control of their money at all times throughout the transaction and have zero risk of capital loss.

I know one of the primary concerns you have when investing anywhere, is surrendering control of your money. When you invest with me you retain complete control of your money for the duration of the transaction. That means, if at any time during the transaction you decide you want out, you can get you money back. Here's how that works.

I never touch the money. When you transfer your money it goes from your account, your checking account or CD, direct to the account of a licensed and bonded escrow company, or title company, where it's held by the closing attorney. In addition, I'll give you the right to withdraw the funds at any time. If you see something in the transaction that you don't like you can contact the closing attorney and get you money back. So you have total control of your money for the duration of the transaction.

Investor Has Low Risk: Demonstrate to the investor how the transaction itself is low risk, and their money is never at risk of being lost.

This is a very low risk transaction because your money sits in an escrow account at all times and is never touched by anyone. Plus, I'll make it even lower risk by making you a party to the transaction, so you will see all the correspondence that goes on back and forth between the parties in the deal. If you see anything you don't like, you can contact the title company and notify them you want your money back. I'll let them know before you send your money in that you have the right to withdraw your money at any time, as long as you give me five days notice so I can go find a backup investor. So you have control and you have low risk.

Offer The Investor High Returns: Show the investor how they will earn more with you in just a few months than they will earn the entire year where they currently have their money. If they have their money in a CD it's not hard to offer multiples of what they are currently getting. You can offer them a straight number of points on their investment, or, to give a little context you can offer them two times Prime Rate or two times 30 Year Treasury Yields. Regardless of where these rates are, high or low, two times either on the investors principal will always be a pittance compared to what you are making on the deal, but it's a significant increase in return for the investor. If the WSJ Prime Rate is say 3.25% you offer the investor the following:

In terms of return, I can offer you a much higher rate than what you are receiving right now, with only a short term commitment. If you have you money in a CD or a Money Market Account right now you are probably getting 1 or 1.5%. If you invest with me, I will give you two times Prime Rate with no long term commitment. Prime Rate is, what, 3.25% right now … so at two times Prime Rate we'll be giving you 6.5% return for the use of your money for 120 days. That's 5 times what your CD is paying you.

On our current deal we are looking for $60,000. If we use your $60,000 I'll be giving you $3,900 in 120 days when we close. Or, if you leave that $60,000 in your CD at the end of the year you will have made $660. It's your choice, which one do you want to take? And by the way, I never touch the money.

That's the presentation. Practice it over and over, commit it to memory.

The Promissory Note And Escrow Instructions

Promissory Note: If the investor is interested and wants to go ahead you have the closing attorney prepare a Promissory Note with the terms you discussed with the investor. The security for the note is their ability to retrieve the funds, which is written into a set of escrow instructions.

Escrow Instructions: With a trust or mortgage there is the promissory note, and the security agreement which lays out how the property is recovered in the event of non-payment. Similarly here, you have the promissory note and escrow instructions signed by you that lays out how the Investor retrieves their money, in the event they decide they want to. The escrow instructions are the security for the promissory note.

The escrow instructions provide that: – the investor is a party to the contract – they receive all notices that occur in the transaction – they are free to withdraw the earnest money at any time, and in so doing cancel the contract – they will provide you with 5 days advance notice of their intent to withdraw When the investor sends their money in to the title/escrow company, the closing agent gives them the executed copies of the the promissory note and escrow instructions in exchange.

You can see how this is a very straightforward proposition and by the end the benefits literally jump out at the investor. If you are talking to a real prospect, someone who is predisposed to real estate investing and has money sitting in a CD or MMA, it is very hard for them to say “no” to this. You simply have to deliver the pitch.

Even though raising earnest money investors probably has you scared to death, the truth is it is the easiest money you will ever raise.