The No. 1 reason wholesalers have such a terrible reputation in the real estate industry is because they never have good deals. The most common complaint I hear is that wholesalers aren’t leaving enough profit margin for investor-buyers to make any money deals.
So what’s considered a good deal anyway?
That would be a property that is going to bring our investor-buyers a nice return on their money after flipping. The biggest problem is that there’s a lot of wholesalers out there who don’t know how properly analyze deals!
It’s critical as a wholesaler that we analyze deals from a fix-and-flipper or buy-and-hold investor’s perspective because they are our primary customer. And what may look like a good deal for us wholesalers may not be a good deal for our investor-buyers.
First Thing’s First…
Learning how to run comps and analyze deals is the lifeline of your business. Once you’ve created lead generation, you’re literally going to sit and analyze deals day in and day out. That’s why learning how to properly analyze deals should be the first thing you learn before entering into the wholesale business. If you don’t know how to analyze deals, then you don’t have a business!
And you don’t want to become known as the wholesaler with bad deals because that is the quickest way to ruin your reputation as a real estate investor. I understand that analyzing deals can be challenging for beginners, but if you practice and follow these steps, you’ll learn how to properly analyze deals in no time.
I want to encourage anyone out there who is aspiring to become a real estate wholesaler, so here is a step-by-step guide on how to properly analyze flip deals.
Step 1: The 65 Percent Rule
The 65 percent rule is what is commonly known as the “70 percent rule” fix and flippers use, with 5 percent reduced so that wholesalers can build in a profit margin while still leaving the investor-buyers with a nice return.
This is the only equation you’ll need to know when analyzing flip deals, and you’ll want to use this equation when screening every lead that comes in:
Purchase Price = ARV (After Repair Value) x 0.65 – Rehab
Now, as wholesalers, our job is to take the load off of our investor-buyers by helping them find discounted properties. Investor-buyers are the lifeblood of our business as wholesalers, and if they aren’t pleased with the deals you send them, trust me, you’ll be out of business sooner than you know.
Following the the 65 percent rule will prevent you from chewing away at your investor-buyer’s profit margins, which will make everyone happy, including yourself!
Calculating the After Repair Value
The after repair value (ARV) is the cost you could sell the property for at retail price if the property was in retail condition. Think of the ARV as the cost of a property after it has been fully remodeled and is on the market with a real estate agent.
Now, the biggest factor in determining the ARV is running comparables. This is where you research the purchase price of similar properties to help you determine how much your property is worth at retail.
Find three to five properties on the MLS that are in close proximity to the subject property (typically within a .25 to .5 mile radius) that have been sold within the last six months. Locate properties that are similar in design, house type, square footage, bed-to-bathroom ratio, etc., the most important being location, time sold, house type, and square footage.
It’s vital to compare your property to similar house types. If you’re running comps on a townhouse, compare it with other townhouses. If you have a duplex, compare it with other duplexes. If it’s a single-family home, compare it to other single-family homes.
Once you’ve found the purchase price of similar properties, you’ll get a solid idea on the retail price of the property. Now that you have your ARV, you must determine the rehab costs, which can be one of the most challenging steps if you don’t have any experience in construction.
Step 2: Determining Rehab Costs
One of the biggest mistakes wholesalers make is trying to determine the exact rehab cost, which isn’t quite possible because rehab costs are subjective to the contractor. For example, someone may replace a brand new bathtub for $500, and another contractor may replace the same exact bathtub for $700.
That’s why as a wholesaler it’s good to work with price ranges, which will give your investor-buyers a good idea of how much rehab is going to cost. Then during the inspection period, the investor-buyer can determine the rehab costs based off their own business model, network, and experience.
Now, if you don’t have any construction experience, I would recommend using contractor bids to help calculate rehab costs. During the inspection period, ask three to five contractors to bid on the scope of work of the property. Then take the lowest and the highest bid provided by the contractors and make that your rehab cost range.
It’s that simple!
Step 3: Purchase Price
Now that you know how much the property is worth at retail and the cost to rehab, let’s revisit the 65 percent rule by multiplying your ARV by 65 percent and then subtracting the estimated rehab cost.
Now you have your purchase price!
Submitting an Offer
Since you’re comfortable with your purchase price, you’ll want to sharpen your negotiation skills as well. If you submit your offer first, I highly recommend starting $10,000 lower than your ideal purchase price. This allows you a little to negotiate if the seller pushes back on your initial offer.
Before submitting your offer, make sure you get the seller to make an offer first. This allows you to get a feel for how much they want for the property. Once they throw out their number first, ask them, “If I were to buy your house right now with all cash, what’s the lowest that you could go?”
You’d be amazed at the response you’ll receive. I’ve had people literally drop their asking price significantly—by $20,000-$30,000, just by asking that simple question!
Now, if the seller doesn’t accept your initial offer, be sure to follow up with them. Following up is crucial to making deals, and I’ll be the first to tell you that a lot of our deals have come from simply following up!
I hope this post cleared up some of the confusion that comes along with analyzing deals. We have to work on cleaning the tainted reputation that’s out there about wholesalers, and it starts by learning how to analyze deals the right way.
Analyzing deals is the single most important aspect in real estate wholesaling, and once you master this, investor-buyers will come knocking at your door.
What are some methods you use to analyze deals?
Share with a comment below!