I'm new to wholesaling and I'm worried I got into a deal that I may not be able to wholesale. ARV = $285k, repairs are only paint & carpet (3200 sf house), rents are $2100 and I'm asking $236,500. (not a big profit for me) I got into this thinking someone would buy it as a rental not a flip but all the marketing I put out there has not drawn a single bite. I'm worried the seller is now counting on me to buy their property & is planning to move out and I won't find a buyer. Closing is on Sept. 1st which is more than a month away but I'm worried I've not gotten any interest. Do I have a bad deal on my hands? Any advice??
How are you marketing the property?
What are the rents in that area? Nobody wants to pay 235K (plus rehab costs) for a house that's only going to rent for $2000.
Joe, I marketed to my buyers list via Constant Contact, posted it on Craigslist & also posted it on several LinkedIn Groups.
Thomas, can you be more specific? How do you calculate what they will and will not pay?
You aren't getting any replys because the numbers aren't even close to making sense for a buy and hold investor. According to the 50% rule investors should expect $1050 in monthly expenses including repairs, property management, and expected vacancy. That leaves $1050 to cover PITI. PITI on this house is $1764/mth (assuming 30 yr fixed 4.022% APR 2.9% property tax $828 anual insurance) meaning investors would expect negative cash flow of $714 per month. This is nowhere close to an attractive proposition from an investors standpoint. What made you select this property in the first place to attempt to wholesale?
In most markets, you'll need at least 1-1.25% per month in rent for it to make sense as a buy and hold.
@Ellen Poth the first thing I would do is find out market rents in the area. If they aren't getting *at least* 1% then it's not a deal. ($2500 in rent on a $250,000 house). In my area it's more like 2-5%.
I agree with most of the other posts. The numbers aren't attractive to a buy and hold investor..... And pretty tight for a flip...
@Ellen Poth Alvarado The rule of thumb is that a buy and hold scenario is typically the worst case scenario of most types of investments, so if the numbers don't work there, they typically won't work anywhere. A buy and hold investor typically wants AT LEAST 1% of purchase price for rent, for flips the buy price has to be no more than 70% of ARV. Again these are just rules of thumb, but most investors use these to evaluate properties at a quick glance...
There's several ways you can come up with the value. Take NOI(net operating income) devised by cap rate = this will give you the offer price that your buyer will be willing to pay. A great book that goes over this is " the abcs of real estate" from Ken McEroy Chapter 7. Good luck.
Have you thought about discounting the sales price?
I must say I'm blown away at all the great answers I got on my BP Forum post. Thank you for all the great feedback. I'm pulling out of this deal because I've obviously made a serious miscalculation & had no room to discount it any further without losing money. Thanks everyone!
@Ellen Poth Alvarado - you might be able to salvage it if you were able to wholetail it. That is, find a retail buyer that can purchase the property. You weren't able to get much of a discount because your sellers aren't motivated enough and the place doesn't need much work.
If you can locate a buyer that wants a home needing a little work, you might be able to offer enough of a discount to get them off the fence. You might try targeting that type of buyer this weekend and see what you get. If no bites, then get out like you said.
If you've already marketed to that audience with no success then your price and ARV is too high.
If you did find a buyer what would have been your profit from the deal?
My profit would've been $6k.
Thanks, Bill S. Good advice!
I agree with everyone else's responses that say AT LEAST 1% rule. I'm a rookie buy and hold "wanna-be" investor, and even I wouldn't look at it. I guess I just dissed myself, but trying to prove a point.
+ $3000-5000 for painting (I'm assuming a fair bit of detail work, and using Northeastern prices)
+ $10000 for 3000sf of carpet, installed.
+ $8000 closing costs (that's what it would be here, I realize this is very state-specific)
$259,000 all in on an exceptionally modest rehab.
Lets assume that actually gets you to $285,000 (which is a not great assumption.)
$285,000 - $259,000 = $26,000
Now your flipper needs to sell it. Leaving aside most of the usual costs, concessions, etc., you at least have to assume $17k for a broker commission.
Something close to an absolute best-case scenario, $9,000 in profit. For all that work, all that money, all that risk.
A couple things, then. First, clearly not worth it. Second, should you be making 2/3 of what the person providing virtually all of the money, most of the work and shouldering all of the risk is?
And what happens to the seller? What if they made major life decisions, based on a "sale" to someone who was not an actual buyer and had no intention of closing? Quit their job because, "Our house finally sold and we're moving to Tuscon!"?
I don't need to go on another anti-wholesaler rant, but can't you see why people have a problem with this?
But after all that is said, thank for caring at least enough about the seller to pull out early when you realized you were not able to perform.
Forget about the stupid 2% rule. That is as useless as (pick your own Useless Metaphor here).
The obvious problem here is the LTV. You're at 83% LTV plus the paint and carpet. On a 3,200 sq ft house, you're talking 5 or 6k. That brings you to 85% LTV.
There's just no room there for a flip. And for buy and hold, the numbers just aren't that good. As a buy and hold investor, I typically won't do a deal unless I'm getting all in for 70% LTV or better. Every once in awhile, I might stretch it to 75% and come out of pocket the additional 5%. But thats about it.
You're at 85%. Thats basically retail these days for something that isn't absolutely perfect.
To me, your best bet is to try to sell this to another owner occupant. But I think that may run the risk of turning yourself into a realtor and I'm not sure what kind of laws are involved with that.
I think your only option is to try listing it for less (come in at that 70 or maybe 75% number) and see if you find any interest. Then go back to the sellers and try to re-do the number. No sense going back to them at a lower number unless you have some interest there. As it is, going back to them is going to be tough.....
Hopefully, when you agreed to this number, you let them know that you would only be interested in tying this up to wholesale it and would not be the one closing it. And that, if it didn't generate any interest, you would not be able to buy it. If not, I'd let them at least know that right away.
Its still going to be painful. But I think you're going to want to correct the mistake sooner rather than later.
Just curious. But is there any reason in particular you thought this would be a good for an investor? The ARV is 85% and I've never seen that suggested as a deal. Sometimes the numbers can still work as a rental at a higher LTV. But I'm not sure this is the case here either. Was wondering if another investor told you to take this down and that you'd sell it there. Maybe your market is different from most others and that could be a deal there. I'm just not seeing how though....
But I wouldn't be too dsitraught over it. Real estate is a humbling experience. And its easy to look back at some of our decisions and question them (i've got a house that I have no idea what I was thinking when I bought it). Just move on to the next and remember the mistake so we don't repeat it.
Agreed with Bill S. This looks like a pretty good deal for an owner occupier. They get a 40k discount after the rehab is done and they come out with carpet and paint of their choice. See if you can get an owner occupier to bite.
For flipping, I don't really see the 70% rule working with 300k properties. You can't really expect a 90k profit on every flip.
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