4 Common Wholesaling Myths DEBUNKED

Stephen Chatto · 2015-03-10T19:25:24-07:00

Real Estate Myths. I am glad my Mentor @Karl Krentzel is willing to tell me the truth so I can get deals DONE. Her are a few myths he helped me DEBUNK1) Myth #1 Realtors mess up deals and are a waste of time.False - Karl has always encouraged me to work with Realtors. I am working with one now on a deal and she has been great. She found my ad on craigslist, called me up, listened to what I have to say and brought me a buyer. Now that She's involved she is keeping everything moving forward quickly and efficiently.Extra Credit Question: Who do you think was using a higher ARV. The Buyer with the Realtor who gets to list the house after rehab or the average fix and flip investor?2) Myth #2 - MAO = ARV *0.65 - Repairs . What a joke. I love this formula because it helps me be competitive in my market. My competition used that formula on this deal and his offer price was 50k less than mine. Plus to top it off. ARV and Repairs is completely made up. Your taking two numbers that are completely arbitrary and up to massive interpretation and then popping them in a formula to determine your offer price. COME ON. At the end of the day you need to know your market to learn where the prices should be.3) Myth #3 - State contracts are stupid. Wow, I have learned the hard way that things run so much smother if on a state contract. As a wholesaler you are selling CONTRACT not houses. So it is fair to say that a better contract is worth more. We determined above that realtors can bring buyers. Strong buyers in fact. Do you think it is easier to sell that buyer with a Realtor a State Contract or a 2 Pager? Use a state contract and your buyer pool opens up tremendously.4) Myth #4 - You need to know how much the repairs are, and the ARV so you can advertise your deal. What a joke. You think buyers agree with your repair cost estimates and ARV? Why waste your time. When advertising this deal I didn't include either. Here is the property. Here is What I know, Here is my Asking price. Don't think for your buyer.I can think of multiple examples in my business when these 4 myths have been debunked. It feels good to know the truthHope some of you can benefit from this insight.

Christian Marin

Real Estate Broker · Orlando, FL · Member since 2014 · 153 posts · 73 votes

11y

This is probably one of the best post I've read on BP. I work with Realtors all the time. There is nothing easier then getting a phone call saying "my buyer wants the house, let's work out my fee and get a contract", I hear that and it's money in my pocket. Regarding the formulas - they suck!!!!!!!! I go into multiple offer situations on almost every home I offer on here in Orlando and I can honestly say I win about 80% of them. Why? Because I know the market in the area I buy in and I know what my max price is on a house. If the seller is asking too much then I just wait and let the other investors make a mistake and eventually bail on the home, then I come in like Superman and save the day. Realtor is happy and I'm happy because I just got a great deal I know I'll easily sell.

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Greg H.Pro Member

Moderator

Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes

11y

@Richard C.

84 videos and 400 podcasts in 2 days ? Now that is impressive !!

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Stephen Chatto

OP

Rental Property Investor · Yardley, PA · Member since 2012 · 436 posts · 198 votes

11y

@Richard C.

I don't think that anyone is saying lock up any deal at any price. What I am saying is that if you rely on MAO your are really Low Balling People, and that is not fair if not worse. It will be harder to be competitive in the market, and you are wasting a lot of time.

No one is saying Lock it up at any price. Know your market, know the cash sales, know what the cash buyers want, and lastly use common sense when making and determining the price that will work. What I am saying that MAO is is very rarely the "Max Allowable Offer".

FYI - I have had 3 deals that for some reason I was not able to move in as a wholesale over the past year. Who knows why. Guess what I closed on all three of them.

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Dell Schlabach

Investor · Canton-Akron, OH · Member since 2012 · 917 posts · 477 votes

11y

Originally posted by @Stephen Chatto:

@Richard C.

@Richard C. What I am saying that MAO is is very rarely the "Max Allowable Offer".

MAO = Maximum Allowable Offer

What you are saying is your maximum allowable is not your maximum allowable offer.

Can you explain that?

You make your offers based on emotions rather then determining what your MAO is?

People may argue the best formula %, 65,72,75,80. I personally never use a %. I use real numbers. But I would never try to confuse new people or train somebody and tell them that the need to determine MAO is a myth.

Its as bad as saying you dont need to determine ARV, just bad advise

The ability to determine both with reasonable certainly is absolutely essential if you want to stay in business for any period of time.

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Stephen Chatto

OP

Rental Property Investor · Yardley, PA · Member since 2012 · 436 posts · 198 votes

11y

@Dell Schlabach

- You can see my response to this above. It is towards the top of the 4th page of comments.

Here is a Copy and Paste:

---------------------------------------------------------------------------------------

19 Northcourt Lane - The ARV is 225k - Solid number because the house JUST SOLD after my buyer got done the rehab. 225k * 0.7 - 157.5k. Now I need to Minus out my repairs. Again I don't know what the heck the buyer is going to do to it. I know know that the rehab is complete he spent about 60k on repairs. so 157.5k - 60k =97.5k. NOW I need to take out my fee. 10k sounds great. so now my MAO is 87.5k.

I offered this man 115k. We made 10k on the deal and sold it to a cash buyer for 125k and CLOSED in 3 weeks.

So IMHO the formula is BS. Plug in the ACTUAL rehab value and the ACTUAL ARV and the MAO is not correct. That's a 25k Swing OVER MAO.

-------------------------------------------------------------------------------------------

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Eric Narciso

Real Estate Investor · Austin, TX · Member since 2015 · 37 posts · 3 votes

11y

So.. 65% of ARV isn't good? Or is getting the ARV right more important? It sure seemed like super low ball offers, but then again, I've never done it before (getting prepped).

Then, how do you find the ARV? I was looking at sold comps within the last 90 days, no good? I know figuring repairs is tough too. Where can I get started to figure these numbers out?

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Stephen Chatto

OP

Rental Property Investor · Yardley, PA · Member since 2012 · 436 posts · 198 votes

11y

@Eric Narciso

- Point is the ARV is a Guess at what the value will be to a retail buyer on the open market at some time in the future after all repairs are made.

You may say the ARV is 240k from your best guess. And each buyer that looks at the house will have a different guess.

SOLID COMPS are great. They help you make a better Guess. Of you get a deal at 65% "ARV" chances are you have a smoking hot deal on your hands. But you are going to miss out on a lot of deals that you could have offered more.

Moral of the story. Get to know what your buyers want. Get to know what the CASH Sales are in the area.

1 Reply

Eric Narciso

Real Estate Investor · Austin, TX · Member since 2015 · 37 posts · 3 votes

11y

Originally posted by @Stephen Chatto:

@Eric Narciso

- Point is the ARV is a Guess at what the value will be to a retail buyer on the open market at some time in the future after all repairs are made.

You may say the ARV is 240k from your best guess. And each buyer that looks at the house will have a different guess.

SOLID COMPS are great. They help you make a better Guess. Of you get a deal at 65% "ARV" chances are you have a smoking hot deal on your hands. But you are going to miss out on a lot of deals that you could have offered more.

Moral of the story. Get to know what your buyers want. Get to know what the CASH Sales are in the area.

Thanks for the response stephen

What do you determine to be a solid comp vs a bad comp? I read that cash sold comps wothin the last 90days, good?

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Dell Schlabach

Investor · Canton-Akron, OH · Member since 2012 · 917 posts · 477 votes

11y

Originally posted by @Stephen Chatto:

@Eric Narciso

- Point is the ARV is a Guess at what the value will be to a retail buyer on the open market at some time in the future after all repairs are made.

Moral of the story. Get to know what your buyers want. Get to know what the CASH Sales are in the area.

Can you clarify, you are telling a new person it is more important to know what cash sales are in an area, then being able to determine ARV?

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Dell Schlabach

Investor · Canton-Akron, OH · Member since 2012 · 917 posts · 477 votes

11y

Originally posted by :

Where did you read that, and why do you think that is important.

Assume you want to wholesale a house to me as a rehabber, why would this be important? Based on what kind of logic?

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Eric Narciso

Real Estate Investor · Austin, TX · Member since 2015 · 37 posts · 3 votes

11y

Originally posted by @Dell Schlabach:

Originally posted by :

Where did you read that, and why do you think that is important.

Assume you want to wholesale a house to me as a rehabber, why would this be important? Based on what kind of logic?

Because a rehabber needs a quick turn around time. No?

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Christopher Rodriguez

New York, NY · Member since 2015 · 173 posts · 33 votes

11y

-Theory Vs Practice-

Theory of ARV is determined by using comps

Comps is generated by doing the following: lets use property A as an example.

Property A

345 side street

Theory county, Book Smarts ( in the USA)

+factors that are taken into consideration+

1400 square foot

built in 2005

1/2 mile radius

comp props at no more then 20% of subject prop square footage

_________________________________________________________________

property B

123 main st

theory county,book smarts

1680 square footage

built in 2008

1/2 mile

sold for $125,000

_________________________________________________________________

property C

789 screw this

1120 square footage

built in 2003

1/2 mile

sold for $130,000

________________________________________________________________

property D

012 stress point

1540 square footage

built in 2006

1/2 mile

sold for $119,000

________________________________________________________________

all the above is retail price not foreclosure price

see following post

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Christopher Rodriguez

New York, NY · Member since 2015 · 173 posts · 33 votes

11y

by the way all have the same bedrooms and bathrooms 3/2

add all the homes sold divide by 3 and this is your average per square foot

then multiple by subject property square footage and this is your MAO

this is also your technical ( by method of theory) your After repair value

example

prop B ______$125,000

prop C ______$130,000

prop D ______$119,000

==================

$374,000

now divide by 3 ( $374,000) =$124,666.67

++++++++++++++++++++++++++++++++++++

amount per square footage

125,000/1680 =$74.40

130,000/1120=$116.07

119,000/1540=$77.27

=================

$267.74 /3= $89.25 is your average over all

++++++++++++++++++++++++++++++++++++++

now multiply 1400 sq ft X $89.25= $124,947

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Christopher Rodriguez

New York, NY · Member since 2015 · 173 posts · 33 votes

11y

then proceed with the rest.......

this is too tedious ( in my opinion)

but i included this because you never know who is interested in what are Good Comps

how do you get to MAO

and what is after repair value (ARV)

and then they can deduct whats necessary

_______________________________________________________________________________

remember when i put at the topic of my first post called THEORY Vs PRACTICE

because this is just to give you an outline. but this is by no means what actually happens. Like they taught me in my real estate school. i just want to show you how the rules (not to get arrested.) most of what you learn, you will not use.

as is with everything in life how things are taught is not how things move in practice.

i will say this we can be Dolphins and flip around all we want with how things should go because of theory.

then there are things done the right way as a shark does.

when you gain experience you will move as a piranha in the field.

______________________________________________________________________

sorry for hijacking your forum post. but this is real life.

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Christopher Rodriguez

New York, NY · Member since 2015 · 173 posts · 33 votes

11y

ignore the following from my 2nd post

-------- >add all the homes sold divide by 3 and this is your average per square foot

-------->then multiple by subject property square footage and this is your MAO

----------->example<----------

prop B ______$125,000

prop C ______$130,000

prop D ______$119,000

==================

$374,000

now divide by 3 ( $374,000) =$124,666.67

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Stephen Chatto

OP

Rental Property Investor · Yardley, PA · Member since 2012 · 436 posts · 198 votes

11y

Originally posted by @Eric Narciso:

Originally posted by @Stephen Chatto:

@Eric Narciso

- Point is the ARV is a Guess at what the value will be to a retail buyer on the open market at some time in the future after all repairs are made.

You may say the ARV is 240k from your best guess. And each buyer that looks at the house will have a different guess.

SOLID COMPS are great. They help you make a better Guess. Of you get a deal at 65% "ARV" chances are you have a smoking hot deal on your hands. But you are going to miss out on a lot of deals that you could have offered more.

Moral of the story. Get to know what your buyers want. Get to know what the CASH Sales are in the area.

Thanks for the response stephen

What do you determine to be a solid comp vs a bad comp? I read that cash sold comps wothin the last 90days, good?

___________________________

If you have 3 solid cash comps within the last 90 days that is great. Yet I think that there is some confusion on what they mean vs the guesstimate of "ARV"

Here is another real world deal that might help you explain what I mean.

I had a property with the general consensus being that it would be worth about 165k fixed up. We were just getting started at the time and went into the appointment armed with that number to plug into the infamous wholesaling formula.

So we looked at the place and determined that it needed about 35k in repairs to look like the 165k properties. We do the quick and dirty math (165k x 0.70 -35k -1k assignment fee) and we proudly offer $70,000 for the house. Of course he said no, and that he already had an offer for 85k which was too low. He would not take less that 90k.

We leave thinking that there is no way we could make it work at 90k, or 85k for that matter.

Then a funny thing happened over a few drinks with at the bar with one of my buyers. We were talking business, and he said he would be willing to pay 90k for something like what I saw. I couldn't believe it. Really? hmmm...

So we went back and looked at CASH SALES in the area. The cash sales represent what CASH BUYERS are willing to pay for a deal. Low and behold there were 3 CASH SALES recently at 100 - 110k.

So now the 90k the seller wanted didn't seems so crazy. Every other investor was out there plugging into the ARV Formula and offering him less that what he wanted.

I called him back the next day and we agreed to 89k.

Fast Forward 3 weeks and the house was sold for 97.5k to a cash buyer.

Not all cash buyers want to fix and flip. MANY want to buy and hold. So he didn't need to do 35k in rehab and prep it for a retail buyer. He did about 20k to make it a nice rental and it's a long term play for him in a neighborhood with appreciation potential.

That's why cash sales are important. They are another tool to help you determine what the value of a property is on an as-is quick cash sale.

Determining offer price is an artform to say the least. But there is a lot more to it that plugging the "ARV" Guess you came up with into a formula.

:)

Happy investing.

3 Reply

Stephen Chatto

OP

Rental Property Investor · Yardley, PA · Member since 2012 · 436 posts · 198 votes

11y

Originally posted by @Dell Schlabach:

Originally posted by @Stephen Chatto:

@Eric Narciso

- Point is the ARV is a Guess at what the value will be to a retail buyer on the open market at some time in the future after all repairs are made.

Moral of the story. Get to know what your buyers want. Get to know what the CASH Sales are in the area.

Can you clarify, you are telling a new person it is more important to know what cash sales are in an area, then being able to determine ARV?

Dell. See my post above. Cash sales are an important part in determining OFFER PRICE. And ARV is a guess, but another tool to consider when determining an offer.

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Stephen Chatto

OP

Rental Property Investor · Yardley, PA · Member since 2012 · 436 posts · 198 votes

11y

And now that it's on my mind... Township and School district are huge then looking at comps.

I know in my area neighborhoods overlap townships and two houses across the street from each other could have VERY Different values all else being EXACTLY the same just because of the township they are in.

1 Reply

Christopher Rodriguez

New York, NY · Member since 2015 · 173 posts · 33 votes

11y

Originally posted by @Stephen Chatto:

And now that it's on my mind... Township and School district are huge then looking at comps.

I know in my area neighborhoods overlap townships and two houses across the street from each other could have VERY Different values all else being EXACTLY the same just because of the township they are in.

I like this ! And an immense help in clarifying why ARV is an art form versus taking it as a rule....

Would you say ARV offers would be more inclined to a buyer's market versus the upswing that is occurring in the real estate cycle?

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Eric Narciso

Real Estate Investor · Austin, TX · Member since 2015 · 37 posts · 3 votes

11y

@Stephen Chatto thanks for the clarification

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Karl Krentzel

Real Estate Broker · Tucson, AZ · Member since 2012 · 410 posts · 337 votes

11y

Perfect explanation!

1 Reply

Mark Ferguson

Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes

11y

I am a little confused. On the first deal you said it was move in ready, but then the buyer made 60k in repairs. That seems like an awful lot of money to spend on a move in ready home. After you sold the house, how did you know the buyer spent that much on repairs? Is it a guess or did he tell you for some reason?

On the second deal the buyer only ended up spending 20k when you estimated 35k. I understand flip versus rental, but maybe the problem is not the formula, but that you are plugging in the wrong over estimated repair number into the formula? that shows why it is so important to be able to estimate repairs correctly.

I see wholesalers send me deals and most of the numbers are so far off it is a joke. The ARV is over estimated and the repairs are under estimated which are big warning signs. While it may not be important to have those numbers when shopping deals you need to know the numbers to know what to buy.

It is very dangerous to base a purchase simply off cash sales. You don't know what condition those homes are in or what the circumstances are.

1 Reply

Stephen Chatto

OP

Rental Property Investor · Yardley, PA · Member since 2012 · 436 posts · 198 votes

11y

Originally posted by @Mark Ferguson:

I am a little confused. On the first deal you said it was move in ready, but then the buyer made 60k in repairs. That seems like an awful lot of money to spend on a move in ready home. After you sold the house, how did you know the buyer spent that much on repairs? Is it a guess or did he tell you for some reason?

On the second deal the buyer only ended up spending 20k when you estimated 35k. I understand flip versus rental, but maybe the problem is not the formula, but that you are plugging in the wrong over estimated repair number into the formula? that shows why it is so important to be able to estimate repairs correctly.

I see wholesalers send me deals and most of the numbers are so far off it is a joke. The ARV is over estimated and the repairs are under estimated which are big warning signs. While it may not be important to have those numbers when shopping deals you need to know the numbers to know what to buy.

It is very dangerous to base a purchase simply off cash sales. You don't know what condition those homes are in or what the circumstances are.

1) On the 1st Deal The property was move in ready. How do I know the repairs were 60k. I asked the buyer after all was said and done. He decided to add square footage on the second floor. He decided to change the floor plan on the 1st and second floor. He decided to put a new roof and new siding. Etc. That's why I do not estimate repair cost. I don't know what you are going to do to the house. As a rental it could have been rented as is. It was a Nice well maintained house... A little dated. Most of the guys in the area would have spruced it up for 30-35k... This guy went all out and paid 60k in rehab.

2) On the second deal. There are a lot stuff that is left as is for a rental grade property, and a different grade of items put into it.

The repairs are all made up guesses. Really. They are. Have 3 contractors bid a job (Without giving them an exact scope of work) and you will get completely different numbers. Some will budget for new heater and windows and roof. The other guy won't. Heck even with the scope of work the numbers will vary.

Again. That's why I state the facts when selling a deal. Not guesstimates of ARV and Repair costs.

And no. Cash sales are not the be all and end all of pricing. They are another tool to use when determining a purchase price. And if you're lucky there are pics to compare condition etc.

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