Figuring out wholesale prices to give homeowners

30 Replies

So Im going to assume this has been asked a million times, but I was just struggling to figure out the ARV and the costs.

I have knowledge on what  and how much X should cost and stuff, but when people explain calculating the costs its more elaborated through writing.

I was wondering if someone could kindly explain it in math form.

Im more of a math guy just fyi. 

For example. I know a house thats on the market for $350,000 and the comps of the neighborhood/area is $325,000-400,000 depending on size, sq ft., etc. 

How would I determine a price I could offer

P.S. This is a distress home as well as a friends home. I dont believe it will sell on the market for that amount.

65 percent of market price minus estimated repair costs.

This post has been removed.

@Rene Martinez

@Justin Drappi 

Thank you both. Now to make the question more complicated. Whats the rule behind the percentage? 55%-80% How do you determine which percentage to do? 

Here is some real time numbers, I set up an excel spreadsheet so I can just punch in the ARV, the Sq. Feet, and the type of fix (i.e $25 Sq. ft. for Kitchen/bath, paint, floors)

ARV - $350.000

Private $ - $280,000

Private $ Fees - 7% - $9,800

Fixing Costs - $55,000

Holding - 3% - $10,500

Closing - 3% - $10,500

Realtor - 6% - $21,000

Profit - 14% - $49,000

Max Offer - $194,200

That's what I use, my fixes are based on a general formula I perform my due diligence prior to making a real time offer but it's close enough to let me know if I should be interested or not.

Mike

@Mike Bradley Thank you, thats more along the lines of what Im looking for. 

If you dont mind, can you briefly explain the fixed percentages you have?

@ Christopher Langan

Here's what I use, again this is a ballpark until due diligence is performed to take into account all the repairs and or liens etc...

Light Fixer (paint,floor coverings, landscaping) $10 sq. feet

Medium Fixer (Same as light, PLUS new kitchen & baths) $25 sq. feet

                   $20 - 2000 sq. ft. or larger               

Heavy Fixer (Same as Medium, PLUS 2 heavy items...HVAC, Roof etc.) $30

Super Heavy Fixer (Same as Heavy, PLUS 4 heavy items) $40

I hope that helps.

Thank you for that explanation which indeed help, but I do believe you misunderstood what I was asking, and ill take the blame because I wasn't clear enough.

I was asking about what the numbers you provided, First how are the percentage established for each one 3% for holding and closing, 6% for realtor, etc. Second, the numbers you provided don't add up...unless you was just putting fake numbers to show the formula only.

Very Good, the numbers I sent you were based on a 6 month loan, 2200 Sq. ft. home with a $25 fix. 

The percentages used are a very close if not a little high on the actual based of the a percentage of the ARV, that way you are covered.

For instance, Holding ( PITI, loan payment) for six months = 3% of the ARV

Closing (any fees, inspections etc.) = 3% of the ARV

Realtor commission here is always = 6% of the ARV

Profit of course = 14% of the ARV

We had been taught that you need to make 20% profit for it to be a good deal, which is true but the Realtor's Commission always came out of the 20%...so I've separated them to know exactly what to expect.  Of course if you can sale the property yourself and not use a Realtor that would be better.

I hope I was able to bring some clarity to my method and that in some way it helps...

Thank you Christopher,  for posting this question, and Mike, for your explanations. I found it really helpful!

I understand the private $ fee of $9,800 is for a 6 month interest only loan at 7%. Are these loan payments included in the 3% for holding costs or do the holding costs account for other expenses?

@ Andrew

The 3% should cover the monthly payment, once you've worked enough deals with particular lender they may opt to take a balloon payment at the end, forgoing the monthly payments.

Thank you for the clarification

What a bunch of predatory horsefeathers! Christopher has done some double dipping on discounts over other costs, banging the seller twice.

None of this is a basis at an offer, that 70% BS is for two closings and holding costs, wholesalers don't hold the property!!!!

If you are wanting to be fair to your "friend" it would be the ARV-costs of repairs-transaction costs if you take title-your selling transaction costs if you sell-10% as your transaction fee. If you assign the contract take out the transaction expenses as you won't be paying them.

I believe your comp analysis is pretty foggy as sq. ft has nothing to do with a residential estimate of market value, that is used under the REPLACEMENT COST valuation which is the least reliable approach for residential, the MARKET APPROACH is preferred and secondary consideration may be the INCOME APPROACH.

Whether wholesalers are screwing people out of ignorance or intentionally, you're still screwing the public with the thinking in this thread, saying you "bring value" to the deal is pretty much LOL based on demonstrated knowledge of RE described here. 10% is plenty in putting a buyer and seller together without touching the property. Take more than that and you're stealing equity from your "friend"! Good luck :)   

@Bill Gulley  Thank you for that, so if I have this correctly. The formula youre saying a wholesaler should use is 

ARV - Repairs - 10% Transaction Fee and when you say 10%, 10% of what? The ARV? Or a different number?

If you are buying this property to wholesale then you do need to know the 70% rule. It is what a buyer, investor, flipper is going to pay for that property. Using Mike's example above his Max Offer to a wholesaler is $194,200 so that means you need to get the house for $194,200 (minus-) your profit. 

@Bill Gulley  , just curious, who put you in charge of approved profit margin?  You seem to be self appointed.

Yes, 10% of ARV.

No, I didn't appoint myself as the pricing cop, thank you. That comes from my legal and economic understandings of predatory dealing, what functions and services of all kinds are priced at, how values are compared, be it doing a tax returns as a service, or repairing a car, doing brain surgery or facilitating a sale of real estate. What's the intent of the Fair Trade Act, what would the Federal Trade Commission say? If you were a publicly trade company, how would the SEC look at your sales, think it's just based on big dollars?

Since this was a rental, I assume, 10% is a bit on the high side but very acceptable for a "no touch" deal. If you fix something, title, repairs or some survey botch, then you have a basis to add that value as well.

Those getting into any business need to understand business first, most really don't but think they do. By that, I mean they don't really understand their product, the valuation of services by comparable services, or ethical and even legal requirements of doing business.

Seems many here think of being in RE like a predatory moving company might operate. Give a bid for a job, haul the stuff across country, then hit the client up with fees that triple the bid price and keep the property in storage, for additional fees, until they get paid. BTW, those types get sued and lose.

Attitude check needed. Just because there is money on the table it doesn't mean it's yours to take, you have to justify EARNING it, not just TAKING it.

Consider learning pricing, a bit of managerial marketing, business law, comparable unit pricing. There are various areas of managerial accounting that can be read without knowing debits and credits or FIFO and LIFO.

Wholesaling to a flipper certainly has to be priced allowing a profit for the flipper, not necessarily at 70%, you need to put a pencil to it beginning at the ARV, then back off to a probable sale price, then subtract his profits, costs of repairs, holding costs, transaction costs to get to you number of what you sell for, take out your fee and follow the same costing approach to get to an offer. Problem is, wholesalers try to grab too much for what they are doing (which is comparable to the services of a Realtor). If your offer includes more than that means the owner is getting less or the flipper gets less or the end buyer pays too much.

If your fee is excessive, then the owner turns you down or the flipper won't buy, so your fee needs to be reasonable. If you are successful obtaining excessive fees, then someone is getting screwed. The other guy may or may not find out, they may or may not care, point is, they got screwed by you from taking more than you're ethically entitled to and perhaps legally entitled to as to dealing equitably.

This all goes to part of the issue of why other real estate professionals have problems with wholesalers and "investors" or rather real estate operators.

A good education in real estate and business will cure many of your problems as a wholesaler. Learn to compute values related to your business instead of taking the lazy, uneducated, uninformed methods of using rules of thumb, then you'll see where profits and pricing intersect. It's not that hard, just takes some time and average intelligence. :)    

Originally posted by @Bill Gulley :

Yes, 10% of ARV.

No, I didn't appoint myself as the pricing cop, thank you. That comes from my legal and economic understandings of predatory dealing, what functions and services of all kinds are priced at, how values are compared, be it doing a tax returns as a service, or repairing a car, doing brain surgery or facilitating a sale of real estate. What's the intent of the Fair Trade Act, what would the Federal Trade Commission say? If you were a publicly trade company, how would the SEC look at your sales, think it's just based on big dollars?

Since this was a rental, I assume, 10% is a bit on the high side but very acceptable for a "no touch" deal. If you fix something, title, repairs or some survey botch, then you have a basis to add that value as well.

Those getting into any business need to understand business first, most really don't but think they do. By that, I mean they don't really understand their product, the valuation of services by comparable services, or ethical and even legal requirements of doing business.

Seems many here think of being in RE like a predatory moving company might operate. Give a bid for a job, haul the stuff across country, then hit the client up with fees that triple the bid price and keep the property in storage, for additional fees, until they get paid. BTW, those types get sued and lose.

Attitude check needed. Just because there is money on the table it doesn't mean it's yours to take, you have to justify EARNING it, not just TAKING it.

Consider learning pricing, a bit of managerial marketing, business law, comparable unit pricing. There are various areas of managerial accounting that can be read without knowing debits and credits or FIFO and LIFO.

Wholesaling to a flipper certainly has to be priced allowing a profit for the flipper, not necessarily at 70%, you need to put a pencil to it beginning at the ARV, then back off to a probable sale price, then subtract his profits, costs of repairs, holding costs, transaction costs to get to you number of what you sell for, take out your fee and follow the same costing approach to get to an offer. Problem is, wholesalers try to grab too much for what they are doing (which is comparable to the services of a Realtor). If your offer includes more than that means the owner is getting less or the flipper gets less or the end buyer pays too much.

If your fee is excessive, then the owner turns you down or the flipper won't buy, so your fee needs to be reasonable. If you are successful obtaining excessive fees, then someone is getting screwed. The other guy may or may not find out, they may or may not care, point is, they got screwed by you from taking more than you're ethically entitled to and perhaps legally entitled to as to dealing equitably.

This all goes to part of the issue of why other real estate professionals have problems with wholesalers and "investors" or rather real estate operators.

A good education in real estate and business will cure many of your problems as a wholesaler. Learn to compute values related to your business instead of taking the lazy, uneducated, uninformed methods of using rules of thumb, then you'll see where profits and pricing intersect. It's not that hard, just takes some time and average intelligence. :)    

Talk down to people much?  You speak as though nobody but you has any business experience (I've been self employed my entire life thanks). I don't have a dog in this fight, I've never wholesaled and don't plan to unless I come across a deal that only makes sense to wholesale.

You seem to be very comfortable questioning other peoples ethics and morals having never met them or dealt with them in a personal or business sense.

I'm in no way encouraging or ok with people taking advantage of people (lying etc),It's one of the most disgusting human traits.  but If a wholesaler is completely honest with a home seller, Gives them an offer and backs that offer up with real numbers, where is the dishonesty?  If they then pass on the deal to a rehabber or retail buyer and that person crunches their own numbers and is happy with the price, what does it matter what the wholesaler got it for?  It's irrelevant.

You're making the comparison of "profit margin" to "dishonesty", two completely different things.

Someone can charge anything they want for a service (as long as a price is not regulated) and as long as they do it honestly and ethically, it's up to the consumer to make their own decision.  RE investors are not monopolies, the consumer has infinite choices. 

Are you telling me a Ferrari is worth 10-50x what a honda civic is worth?  Is Ferrari Predatory?  Porsche has the highest Gross Margin in the auto business, they must be a bunch of predators since their GM is 3x higher than Ford and GM. How do you value worth?  Has Bill Gates really added Billions more "value" to mankind than you or me?  How about Peyton Manning? Tom Hanks? Donald Trump? a school teacher?

How about eating at your standard local chain restaurant vs the fancy 5 star place?  Show me the value add.

I invest in the stock market, I can click my mouse right now and buy a stock for $100 and if I get lucky, I can sell it in a short period of time for $150 -$200.  Where is my value add? How did I earn that? (hint: risk vs reward)  Is a house in California really worth 10x what a house is worth in Ohio?  Does this mean that every home seller in California is predatory?

If a wholesaler is trying to mark up the price too much then they won't find an end buyer, it's called supply and demand.  As long as they didn't lie to the seller, they are only screwing themselves.  Yes, they may delay the seller from getting rid of their property.

The problem that people have with "wholesalers" or "real estate investors" has nothing to do with "wholesalers' and "real estate investors" and has everything to do with the individual doing dishonest things.  These same individuals would be dishonest no matter what business or profession they were in.  Name a profession, I'll show you someone that did something illegal or unethically within that profession with a quick Google search.  I'm embarrassed to be associated with others within my trained profession because of their dishonesty.  It seems you feel the same way about people within RE investing and are choosing to make a blanket statement/accusation because of that.

This does not give you the authority to pick arbitrary profit margins and call anyone that doesn't stick to your number's unethical or predatory. If it's not arbitrary, please show me the equation you use to come up with your % numbers, show your work please. I'm not talking about % ARV, Please show me your equation that told you that 10% ARV is the ethical number and why 5% or 15% isn't. I'm sure everyone on the board can learn from this. Hopefully we can all then use this equation to value any work we do within any profession/business from this point forward, you seem to have it all figured out. Maybe some on here can take this magical equation into their current jobs and leverage a nice raise with it. People refer to CEO vs employee pay differences, depending on what study you reference, the difference is 5 to 331x. We can fix all of this with your magical equation.

Every comment I see on here regarding "finding the deal" is it is the most valuable and difficult part of investing. If you can find the deal, you can do anything with it (wholesale, rehab, retail etc). Why is the wholesaler responsible for the flipper's profit? Again, the wholesaler will only be screwing himself if he is asking for too much, just like any other product it will sit on the shelf. I have an idea, if the flipper doesn't like the wholesalers deal, don't buy it and go find your own deal! I see houses listed on the MLS locally that I feel are 50-100k over what I think they are worth retail, should I call up the seller and RE agent and call them names? Maybe I'll let the eventual buyer determine the value of these houses to them, I think that is called capitalism right?

While your at it, lay out a deal you have done (never seen you talk about your personal investing, you seem to focus on belittling others), then show  your "ethic's equation" on your profit margin.  Going by your theory, if you have done any buy and hold you better have paid retail because you added no value.

WOW, you sure have a lot of apples and oranges in there.

You said, unless pricing is regulated, unlike selling fish at the dock, there are pricing determinations in real estate transactions. Called predatory dealing.

No, this is no longer the wild west where you get what you can get some fool to agree to, might do that in a shoe store, but not in real estate.

Obviously you've never been to court over a real estate transaction where some owner cried foul of misleading valuations. I think the flippers can protect themselves.

And, unlike selling cars, real estate carries social responsibilities, mostly not understood as investors/operators begin their education with gurus instead of learning about real estate, just my opinion, they have no idea how real estate relates to a community, economics, health and welfare or why restrictions are in place.

What you are hearing in my posts is not distain for investors but frustrations of pointing people in a direction to learn and getting folks who think that if they succeeded in selling corn, they can do real estate. Real estate isn't taught in law school really, neither is finance, so even attorneys have to start out at the beginning, but they do catch on much quicker, they already understand ethical issues, torts and violations of law.

Okay, so when I get you in court for messing over my granny, I'm going to have you explain every detail and step you took in effecting a wholesale transaction. If you simply wholesale as it is generally accomplished, you will not have done anything that a real estate agent doesn't do, it will be almost identical in facilitating a sale. So, what is the usual and customary, ethical, accepted fee generally paid for that service.....it's 6 to 10%! That's where your base line is in defending charging more, with a great deal less experience and knowledge in the industry to show you were not acting in a predatory manner, taking advantage of granny.

My CPA can't send me a bill for $50,000 for doing my taxes, his services must be justified in line with other similar returns at reasonable rates.

Selling or dealing in real estate is not dealing with unregulated widgets. Those with business degrees will probably get that. If some guy has been selling suits for 50 years, he may not understand the concepts of value or comparable pricing.  Scalping, overcharging for services or products can be an illegal practice. What may be unreasonable will likely be in the eye of the one ripped off and a judge. In wholesaling, facilitating the sale of RE, usual and customary will be very close to what a Realtor might charge, go over that and a judge may not agree that you are worth that kind of money. In assessing that too, your knowledge and experience as well as education and training will be considered too, is a wholesaler more qualified than a real estate broker? I really doubt it.

Now, there was a commercial wholesale deal, large project, the guy was a broker, long experienced developer, etc, etc, that pulled a few million as I recall off a multi-million dollar project. I'm sure he, along with a room full of attorneys and sophisticated buyers pulled off that deal just fine. Understand, he was no beginning wholesaler and he wasn't dealing in houses!

I believe my last wholesale deal was just under 6K for a 120K contract flip, that was 5%, well in line to a commission, which as a listing and selling broker I would have done as well. That even flies as being ethical and legal. With my experience, education and knowledge I can not justify charging more than another Realtor in such a transaction who just started last year doing their 4th deal. It was practically nothing.

Ever hear "pay an honest day's wage for an honest day's work" that also goes to charge an honest wage for honest labor. The issue is that those who don't understand value and deal honestly for what they do are eaten up with greed or don't have a clue. We can thank the RE gurus for that approach, since they don't teach business or real estate, they teach how to flip widgets with some system.

This has been gone over before on BP in more detail, another source of frustration when people don't search and get a better understanding of what they are asking. But, that's okay, we'll just type it all out again and again and again and again! :) 

Originally posted by @Bill Gulley :

My CPA can't send me a bill for $50,000 for doing my taxes, his services must be justified in line with other similar returns at reasonable rates.

What if you sign a contract indicating your acceptance of such a fee from your CPA?

LOL, I wouldn't. As I said, I'm not worried about the flipper or investor buying from a wholesaler, they should be sophisticated in such dealings. I doubt anyone would be worried about sophisticated parties, it's the unsophisticated.

As I've said before, by the time a wholesaler actually learns all they really need to know to be a good wholesaler they probably won't be wholesaling any more.  

@Bill Gulley  I don't doubt your knowledge on the subject of RE, I've only been here a couple of months and i'm somewhat new to RE investing and trying to educate myself.  What I have a problem with is your delivery.

What exactly is an honest days wage for an honest days work in your book?  I made this example above, is that Bill Gates or the local School teacher?  I'm thinking the teacher's work is more "honest" and I don't mean that in a criminal way.

You seem to believe that you get to set what everyone else receives for their honest work, i'm trying to clarify how you're setting everyone's rate?  In addition, who's social standard are we going by?  Take a walk through WalMart and let me know if you want everyone to live by that social standard, or something higher?  If higher, what gives you the right?

Why does a flipper get 30% and a wholesaler 10%?  Don't most flippers (including J Scott I believe) hire contractors to do the work?  If so, how much more work are they actually doing than the wholesaler?  I'm not arguing they don't deserve more, but why do they?  What about the guy swinging the hammer, seems pretty honest to me, maybe he should get 10%?  There are obviously some very intelligent RE agents and brokers out there that deserve what they make, and then there are the rest of them.  Not sure comparing a wholesaler to agents and brokers is a fair comparison.  From reading all the stories on BP, there are some horrible wholesalers too, i'm not denying this.

You are also arguing two different things.  You are accusing wholesalers of ripping off granny, but are they only ripping off granny if they take 15% and leave 25% for the flipper?  If they take your allowed 10% and give the flipper 30% then they are honest?  Doesn't seem to make a difference to Granny.  Does a flipper really deserve to make 100's of thousands a year by simply organizing rehabs and financials?  That poor guy with the hammer is only making $20 an hour!

This again comes down to the individual, I personally would not feel comfortable dealing with an elderly person if there was any question in my mind they were not competent.

It is true that people will leave money on the table just so they don't have to deal with it, I do this all the time in other aspects of my life.  I traded in a car last year because it had some minor fixable issues that I didn't want to fix and I also wasn't willing to dump it on a private buyer.  The dealership will give me .30 on the dollar,fix the issues and double their money. Predatory!  When you are young and broke, you will slave away to save a buck, once you are older and don't need that buck, your time becomes more valuable.  I'm not interested in working for less than $100 an hour and even at that price I feel like I could be more productive doing something else.  I'm not working harder than the guy making $20 an hour, just smarter.

I pose this question again, give us some of your deals with the #'s and justify your profit margin.  If it was a simple buy and hold with no rehab, there was no value add. I expect you to have paid retail.   If you didn't, someone along the chain (seller, wholesaler, flipper) either left value on the table or added value that they didn't get to cash in and you took it from them.

Originally posted by @Christopher Langan :

So Im going to assume this has been asked a million times, but I was just struggling to figure out the ARV and the costs.

I have knowledge on what  and how much X should cost and stuff, but when people explain calculating the costs its more elaborated through writing.

I was wondering if someone could kindly explain it in math form.

Im more of a math guy just fyi. 

For example. I know a house thats on the market for $350,000 and the comps of the neighborhood/area is $325,000-400,000 depending on size, sq ft., etc. 

How would I determine a price I could offer

P.S. This is a distress home as well as a friends home. I dont believe it will sell on the market for that amount.

 Hello!  Allways remember that business is business and you can't help a friend unless you are willing to lose money.  The market that the house is in will determine what it is worth.  Beleive your gut is telling you what you should do.  Good luck!  Just keep on going and find a good project that will offset your loss.

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