WHOLESALE TO ME... HERE'S MY BUYING CRITERIA

 
Wholesaling is a great way to start out in real estate.  To be successful you need to proudly embrace the position of middle man or woman.  You need to network.  Your success will depend on your buyers list and your ability to find good properties.  That is where your value lies.  You need a buyer who is serious and moves fast on good deals.  This market won’t wait around for indecisive buyers.  I’m one of those serious buyers.  I move fast on good deals and once I commit to a deal I very rarely walk and, if I do, it’s only as a very last resort and with great pain and deliberation. 

You have got to have confidence in your buyer and your buyer has to have confidence in you, the wholesaler.  The only reason I would pay finder’s fees is if a wholesaler is saving me the time and hassle of pursuing dead end after dead end looking for an acceptable deal.  I want deals presented on a silver platter.  I want wholesalers who have deals when they call me, not another dead end. 

I think new wholesalers often neglect or under price 3 key general aspects of a rehab deal.  Many newbie investors only account for the purchase price and the repair costs on their deals, but there is more.  Make sure you also account for closing costs when you – or I- buy the home, holding costs, and closing costs when I sell the home (including realtor fees and possible closing costs paid for by the buyer.)  These three items can easily add up to 23% of your end sales price.  You won’t be in business if you neglect or even undervalue these costs.  

Base your deals on the numbers.  Know the value of your property “as is” and know the value after repairs (I can assist you with this.)  Know the value and costs of your repairs.  Know the costs of the transaction.  Make sure you (or in this case your end buyer, me) have at least a 20% net margin after all costs.  Here is how I figure most of my flips.  Take the after repair value or what you think you can sell the home for after it’s fixed up and then deduct:

(1) 20% for your buyers profit.  Some people require thicker margins, but I really recommend not going any less than 20%.

(2) 6.5-8% for closing costs when you sell ( I normally pay 4% for a realtor and 1/2% in misc closing costs and I like to budget 2-3% for the buyers closing costs at least in my market)

(3) The cost of your repairs (get estimates) or, at least a good list of repairs.  I’ll help you with those costs if you put together a good package.  Pictures, and lots of them, are also helpful.

(4) 6 months of interest costs.  Take the purchase price and multiply it by .12 and divide that number by 12 and then multiply that number by 6.  That will give you a good ballpark of what my interest costs for 6 months will be.  You should also add in taxes and insurance but I can help you with that.  For a rule of thumb, on this last deal I completed I spent about $5,000 on taxes and insurance for 4 months on a home that sold for $420,000.  Or, 1% of the end sales price will be close enough for our purpose at this point.

(5) 7% of the purchase price for closing costs when I buy it.  I pay 4- 5 points and usually about 2% for closing costs (title fees, title insurance, tax stamps, lenders lawyer, etc.

(6) Your finder’s fee 

The resulting number will be the minimum price you (the wholesaler) should be willing to offer on a property.  I know step 4 and 5 is confusing since at that point you won’t know the purchase price, but you should have a ballpark idea.  Just put a good estimate in for step 5.

Example Scenario:  You find a home that will be worth $500,000 after it’s fixed up.

After repair value = $500,000

Deduct:

Step 1) 500,000 X 0.2= $100,000 this removes the 20% profit needed to make a deal worth while.

Step 2) 500,000 X 0.08= $40,000 this is the closing cost for when I sell the property

Step 3) Good estimate of repair costs

Step 4) Say $250,000 X .12=30,000 divided by 12= 2500 (my monthly interest costs) x 6 months = $15,000.  Throw in $5,000 for taxes and insurance.  This is a good estimate for the projects interest costs.

Step 5) $250,000 X .07= $17,500 this is my closing cost when I buy the home.

Step 6) Your finder’s fee.  I would say 10% of the end profit would be reasonable.  $10,000.  Or, whatever you feel you can get. 

So your math will look like this:

500,000

-100,000 Minimum Profit requirements

-40,000 closing costs at sale

-50,000 Repairs (I just made up a number for this example)

-15,000 6 months interest

-5,000 taxes and insurance

-17,500 closing costs on the purchase

-10,000 finder’s fee
262,500 is your maximum purchase price.

Once I go through the above backwards plan and get a purchase price; I then go through it again starting with my newly discovered purchase price and adding all the costs to make sure the price falls within a good window for a fast sell.  Holding costs can kill you.  Cash flow is one of the biggest rehabber killers.
 

These are not absolute numbers.  Some deals I would have to see thicker margins.  For instance if the comps were really uncertain, the neighborhood is particularly risky, if the project is a long distance from me and therefore more difficult to manage, and an endless number of other factors.  Some deals are attractive enough that I would feel comfortable cutting it a little tighter.  Every deal is different.  However, if you bring me a deal that looks like this then we have a really good chance of getting it done.  Flipping is more art than science.  The numbers above are about as much science as you get and offer a good starting point.

Happy hunting.

Justin Pierce
Snow Goose Homes LLC
703-587-8929 cell
888-680-6881 office