The thin line of profit vs. not taking advantage.

17 Replies

What percentage of a ARV - repair costs would just be considered a steal? I know for flips you try to go for 70 % arv - repairs. But what is the best scenario to quickly flip the property to another investor? 60? 50? As a wholesaler if my estimate for repair costs is accurate and I'm getting properties for just dirt cheap compared to ARV how do I determine my commission? If I can make ten thousand dollars plus on a SFR does that mean that I should? I know most guys try to make "a few grand" on deals. Is there a certain time where the "moral" side of things is involved and I should be paying more for a property?

I think a smart buyer or investor will do their ARV and make offer from there.


Joe Gore

There is no "moral" factor as long as all parties involved enter into the transaction voluntarily and with congruent, veracious information. Try to make as much money as you can and don't think twice about it when you do, there is nothing wrong with doing well!

Find your deal first, that will help determine how much % or wholesale fee to achieve.  

@Ryan Dossey  

If you approach someone who has lived in a house for thirty years who heard of the RE crash and thinks their property is not worth much and you play on that to get a lower price then you might be on the border of theft, morally if not legally. That is my take on it.

I think it comes down to "informed decisions". Does the seller know the actual value of the property? If you start with a real ARV and discuss costs and the fact that you are in the business to make a profit, then any price you negotiate on both sides of the deal is reasonable. It can and does work if you have an honest discussion about things like not having to pay realtor commissions, that they do not need to invest any time or money in repairs, that you can pay cash, that there will be no contingencies that would cause the deal to fall through and in fact you can have closing as soon as they are ready. All of those things will help you bring the price down to where you need it to be for a profit, while being honest and up front with a seller.

The other part of that is knowing their motivator. If they are in a "must sell" situation, they are likely to take a lower price, and the more critical that motivator, the lower the price they will take. But again, if it is an informed decision and you are making that issue that motivates them go away, then you are not in the wrong if you walk them through the deal and they decide it is worth it.

Once you have a marketable deal, from there your commission is determined by what your buyers will pay. If you can make $10k and they are happy with your price, as long as you obtained the deal honestly then by all means charge that, you will have earned it.

I guess a little background on this question may clear up some of the confusion. I am curious in general if I bring you a property that is priced at 50% arv - repairs will you buy it faster then something say at like 65%. Curious where it goes form being a good deal to something you just cant pass up. 

I have a client I am speaking with who has a home she bought 3 years ago for her son to live in. He never paid rent got a divorce and moved back in with her. She is 74 years old and both of her 30 year old sons work odd jobs and don't pitch in. She is on ssi. She has her own home which her husband (who passed last year) did an int only mortgage and now it is time to pay principal. The property we are looking at is costing her $700.00 a month in taxes, insurance, and utilities. She was working a job and quit last week. She is in a position where she just wants out of either one or both properties. The house we are looking at has foundation damage on an addition that was put on where someone didn't handle drainage issues. It needs work that she can't afford to put into it and most likely wouldn't sell to a regular individual. We are just deciding what the max we will pay for it would be. We haven't decided whether we will fix or wholesale the property but are meeting with her next week. We try for everything we touch to be "mutually beneficial". Us taking over will solve her financial situation as well as give her the ability to start fresh. 

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Every market and every buyer is going to be different. In some markets, you can probably wholesale deals closing in 75-80% of ARV these days (very competitive markets with higher ARVs and lots of competition). In other markets, buyers are still looking for 60-65% ARV. You need to know what YOUR market and YOUR buyers are demanding, and offer them that -- or better than that.

Most markets are competitive enough these days that the difference between, "Okay, I guess I'll buy it..." and "I HAVE TO HAVE IT!" is pretty small.  Many investors are desperate to find properties and aren't being choosy -- if you find something that meets their criteria, they'll buy it.

So, my recommendation is to start networking with those who could be your buyers and ask them directly what they're looking for...

@J Scott is right. Talk to buyers and ask them what a deal to them is, what their formula is.  You'll have to get properties at a little (or a lot) less in order get a cut. 

Ryan D. to respond to the moral issue I commend you for struggling with it. I do too. And I don't have an easy answer for you. 

You're running a business and providing a service. That is worth something. A realtor charges 6% to find a buyer. I'd basically look to get a base hit not a home run. And don't string sellers along.  I actually buy houses so I also factor in the fact that I am taking a risk. And I get it wrong sometimes.  Wrong might not mean that I lose money but that I don't make much and tie up funds.  Risk is worth something too. 

@Larry T. I appreciate you addressing the moral side. My though process is I am solving a problem that they can't solve themselves. You are also correct that I have finances at risk and that my time is worth something. 

@J Scott You are absolutely correct I need to be working on growing my buyers list. I assume CL, Bp, and local REI clubs are going to be my best bet for that. Any tips in that regard are appreciated.

There is no moral issue but I think you are asking the wrong question. For me the real question is what do I do if I can't sell. If your resources are limited and holding a flip or 2 is going to be a stressful problem then the quality of your deals needs to be better.

If you have deep pockets then you can go slightly skinnier and no problem if it takes a while to sell. I personally have 5 to 10 houses I am usually holding that I don't want to but as they are newly rehabbed and now rented and cash flowing it doesn't bother me if I have to hang on to them for a while.
So decide what your risk appetite is first then set your rules.

As far as numbers go I find it way easier to work on a fixed minimum margin than percentages. In other words my minimum gross profit per deal is 5 or 7 or 9K regardless of the purchase price. Then I can work back to see if that will work. I have sold hundreds of houses now and am yet to lose money on a deal ever using this method

@Dean Letfus I appreciate you giving your advice. The property in question we can afford to hang onto for awhile. It just won't rent in its present condition. Being a little newer to the game we are still working on developing capital. The HML we use for our flips will only let us do one at a time till we have done a certain number. I know that most people use the "set commission" method like you described. On this particular property we could possibly make 15k+ and just wanted opinion on that.

Ryan D. like others have said here, just run the numbers from start to finish. 

Start with a true ARV, minus realtor fees, minus two sets of closing costs (for buy and sell sides), minus rehab costs, minus holding costs, minus fudge factor for unknown repairs, minus profit. That's what your maximum offer should be. Run down those numbers with the seller - it will demonstrate to her why your offer needs to be low.

If you are having a moral dilemma on this then you're probably not justifying your price to yourself or the seller accordingly. If you (or anyone else) are going to hold this property for the 3-6 months to rehab and resell, a $15k profit margin is not much at all. 

The seller has the option to list on the open market if she wants to. You're not forcing her to sell to you. You are offering her a convenient sale, no hassle, taking all the risk for repairs known and unknown. You should make a good profit. 

In terms of how much you can wholesale it for - the market will tell you. Start high, you can always come down. If you can't sell it within a few days to solid buyers then your price is probably too high and you can reduce it. 

Remember, as long as you are straight with people about the costs and risks associated with your business, you're not using deceptive techniques, and you treat sellers with respect, then you shouldn't feel guilty about making your offers low, and earning a solid profit. 

Good luck! Sounds like you have a good deal on your hands :D

If after you resell you still feel there is a moral issue simply send them a check.  Chances are your profit won't be as much as you thought ... if it is, great, cut them a check with a nice little note.

Originally posted by @David C.:

If after you resell you still feel there is a moral issue simply send them a check.  Chances are your profit won't be as much as you thought ... if it is, great, cut them a check with a nice little note.

 All joking aside, I've actually done this with a wholesaler.  I got a deal at a great price (wholesaler brought it to me specifically instead of shopping it around) and then I decided to re-wholesale it...I made a good profit and kicked the original wholesaler a couple thousand extra.

Originally posted by @J Scott:
Originally posted by @David C.:

If after you resell you still feel there is a moral issue simply send them a check.  Chances are your profit won't be as much as you thought ... if it is, great, cut them a check with a nice little note.

 All joking aside, I've actually done this with a wholesaler.  I got a deal at a great price (wholesaler brought it to me specifically instead of shopping it around) and then I decided to re-wholesale it...I made a good profit and kicked the original wholesaler a couple thousand extra.

 It wasn't a joke. I really feel that way. I can't say I've ever cut a check but I've gone above and beyond. I once bought a pre-foreclosure where I really felt for the seller, I gave them a seller carryback note and stored a bunch of their stuff when I didn't have to. It's an unusual situation but it can happen. I totally believe your story, not only is it fair, it's good business.

@Account Closed    That is perfect. Thank you very much. I think that solves the mental conundrum I've been having.  

@Chris Kennedy You are absolutely right. Depending on the time, effort, and sale price is definitely worth something. 


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