Hey everybody! I'm new to the business and plan to do my first wholesaling deal soon! How did you all go about building your cash buyer's list?
Congrats on taking, or at least wanting to take the plunge! Wholesaling is very easy to do, and it is very easy to get buyers for the home. If you are going to enter into a contract and assign it to others to buy, just be prepared for what those buyers want. In many situations with wholesaling, you are getting a good deal on a home, and hope to sell it to someone else for more, before you have to actually perform as the buyer.
Your most likely buyer is another investor who sees a good deal. For this reason, it is important to know what these investors want, before you enter into any contracts to buy. I am looking for at least a 15% ROI. If you purchased a home for $250,000 and it needs $50,000 in work, and it will be worth $400,000 at the end, I would be willing to pay about $280,000. That is because I would have to spend $280,000 on purchase + $50,000 on rehab, puts me at $330,000 actual dollars invested and at risk. If I add a 15% profit, I get to $379,500, but I am estimating about 6% in commissions and closing costs to sell. ( I own my own RE company, so I pay about 4% in commission to sell which includes both sides and I estimate a 2% credit to the buyer).
With the numbers above, you could buy for $250,000 and sell to me for around $280,000 and make a nice profit. Many of your deals will be more narrow than what I have described here. Get to know the investors in your area and what returns they expect and want. Once you know those numbers, you know exactly how to structure each deal. In my area, I know flippers who will do a 10% ROI and others who want 20% or more, so knowing who to call makes it easier. Good luck!
Thank you so much. This was very helpful and informative!
@David Oldenburg so how exactly did you come up with the $280k max purchase price? I understand all of the numbers after the A->B purchase price, but I don't know how you got the $30k spread between 250 & 280. Ignore my ignorance haha. Thanks David
Hey never feel ignorant when you don't understand something in the world of investing! You asked, "How did I come up with the $280K max price in my example above?"
I base my ROI (return on investment) from what I actually invest and have to lose. This is different from how others may do it, but my way works for me! In the example above, I know that the home needs $50K in rehab and I already know the ARV (after repaired value) is going to be $400K. I also know that my selling costs are going to be 6% of the $400,000, price or $24K. This means I net $376,000, and this needs to be enough to cover my purchase price, rehab costs and earn me at least 15% on my initial investment of purchase price + rehab costs.
Yes, there are other factors that could be put in, like cost to carry the money etc..., but I wrap all that into me wanting a 15% return. These numbers can change if you are borrowing the money from someone else to buy the home, and you are paying interest and points. In that situation, you need to add the cost to carry the money into your total project cost and add it to your purchase price and rehab costs.
Ok, so I took out my trusty Texas Instruments BA II Plus calculator and did this the easy way! I had to pick a starting point and I guessed about $280,000. I took $280,000 + $50,000 + $49,500 ( my 15% profit of the amount spent with purchase and rehab) = $379,500. I know that if I sell for $400K and my costs are (6%) $24,000, I net $376,000, so those numbers are very close. I could use a spreadsheet or different calculation to get exact, but I am not trying to get this to the penny, as no flip will ever work out that way. I am just trying to do my best to get a 15% or higher return on my initial investment. If I had guessed say $260,000 as my purchase price, the ROI would have been higher, and I would have known I could pay more for the home. Likewise, if I had guessed $290,000 as my starting point, my ROI would have been too low and I would have to lower my offering price. The point here is that if you know your investors and what "yields" they want, you can quickly evaluate wholesale deals to see if they will be easy for you to sell quickly to investors you already know. I would never enter into a wholesale deal, unless I knew exactly what others might be willing to pay.
If i had borrowed the money to purchase and paid points and I needed the money for say 4 months, I would have to factor that in and my "buy" price would have to be less than $280,000. I hope that helps :-)
Yeah I had to write it out. Makes sense after working it out myself. Thanks for the tip
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