Originally posted by @Shaun Reilly:
@Stephen Chatto
Exactly my point, it is important to know your buyer pool. In your case you apparently have a lot of them with cash or cheap financing and are willing to pay more. In which case it would be stupid to lose out on 5 figure profits to conform to a rule of thumb.
However that does not show the 65/70% "rule" is a myth. It shows that it is a guideline that will not always be perfect for your situation. In your case it is not, but if all the buyers were only willing to pay $100K for that property then you would not do very well getting it under contract for $115K. ......
***(To avoid my long winded response, skip to final sentence. For explanation, please read!! Thanks!**)
Subjective Vs. Objective Pricing
Here's where I jump in! I'm saying that in 99.9% of the cases, you can AVOID using MAO Theory. Why? Two reasons. Value (of a home or anything) is always SUBJECTIVE. Not objective.
In the wholesaling world... (Not residential real estate resale) It is only worth what a buyer is willing to pay. We can try mental gymnastics all day to justify why we are coming in low, but at the end of the day, there is no logical reason why it is 65% or 70% of ARV.
Why is it 70% of ARV? Why not 63? The reason is clear. It is the same things that have been regurgitated since 1970 when you needed 30% down to get a Investment loan.
The Second Reason why MAO is of little value.
Since you cannot truly determine what ARV actually is... (What it is worth to you will be different than that of your buyer, or an appraiser, or an end use buyer after the rehab) then simply stop trying so hard.
Blasphemy at the Gates.
I realize that many of you may see this as complete apostasy. However, if you hear me out for just a minute, I think I might explain.
What is most important, is getting the Seller who is motivated to sign a contract with you.
There are thousands of ways to dispose of the property once you have it under contract. You can wholesale it, double close, lease option, lease purchase, rent to own, sandwich lease option, Club Sandwich with Cheese option (*MY Favorite!).
But the key is... You gotta get it under contract! THEN you can figure out what's the best strategy. 99% of the time, you already know what you are going to do, it's just the 1% you gotta rule out.
Now this is not a license to just go out and be stupid with contracts. Of course not. You must have an idea of what others are paying for similar homes, (hence sold comps). Contract relative to pricing.
So What Do We Do Now? Ignore Price?
So the key then, is not to get too tied up on values, which are subjective at best, and focus instead on their motivation.
You get so tied up on price, ARV, MAO, and all the various repair costs that COULD be...
That you never actually call them. You never actually see them. You rule them out if their price seems a little "Iffy"
I know this because I've taught tons of you. I know there are many of you who have never heard of me, and have done "Just fine... thank you very much." However, you know this is the truth.
If you have been in the business for any longer than 10 years, you naturally know what I am saying is true.
Without actually sitting down, and hearing the story, and ignoring these made up rules about price... and getting into the nitty gritty of what it takes to get a deal done; then how can we possibly expect to educate them as to the reality of the market, and why our deal is such a great solution for their problem?
The Alternative Reality
Of course, people have done fine without my advice. However, I believe I am on the crux of a new way of thinking. A lot of Agents who Invest listen to my podcast, New wholesalers, as well as the "old dogs" of the business.
The truth is, I don't know everything. But I am smart enough to know that I question everything. I don't always just "buy into this MAO Theory" because that's the way everyone has always done it.
I've sold too many homes personally to Investors far above the MAO, and yes, there has been PLENTY of meat on the bone. Chances are, you've had that same experience offering MORE than 70% on a HUD property!
What ARV Really Is
ARV is best described as a rolling mountaintop. I don't know if you hike, but if you do, then you know that sometimes, just when you think that you've reached the top of the Mountain, you look over a small valley, and there is a higher peak.
ARV is much like that. ARV is not a static number. Even appraisals (Professional ARV Estimates) are ONLY good for ONE day.
The thing that affects ARV at any one point in time is TERMS.
A 750k home can be sold for 1M if the terms were right.
Therefore, ARV is only a estimate of what something may be in time. Subject to too many variables.
Therefore, it's best to focus on motivation, and once a highly motivated person is secured, THEN qualify for price in terms of ability (equity) and Value (Comparable SOLD properties).
This estimate you obtain then, can be called ARV... but you must understand that is spoken with a HUGE grain of salt. As you do not generally know the situations, conditions, etc.
In The End Does It Really Matter?
If you told your end use buyer..."Check it out. I have this property under contract at 123 Main street. I think its worth 100k. I'm offering it out at 65k." Do you honestly think that the buyer you are going to interact will do any of the following?
a. Believe you.
b. Ignore checking the comparables themselves.
c. Take your word for it on the repairs
The answer is "Of course not."
But what if you told them this... "Check it out. I have this property under contract at 123 main, and I think its worth 100k. Check it out yourself, because I may be wrong. But no matter what... I am selling this home on Saturday to the first guy with $2500 in a Non Refundable EMD check."
Let them know you might be wrong. Who cares? they are gonna check it out anyway. But when you have a HIGHLY MOTIVATED Seller (which is what I teach you to focus on finding for free) then win lose or draw on the price, you are going to be close enough.
In short, you don't need a machete... you need a scalpel.
