Figuring out wholesale prices to give homeowners
Burtonsville, MD · Member since 2014 · 13 posts · 1 vote
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.
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.
I do understand you logical ranting, even if I didn't read it all in detail.
No, it's not my opinion nor do I set any ethical, moral or legal aspect other than what has already been adopted in the industry or by statute.
The problem is, very few (if any) "investors" on BP even understand the differences between real property and personal property. One prominent poster, who is well educated formally, must have missed some law courses and ethics in business school, as he keeps referring to car dealers or transactions in private property to compare to those in real property. So, while any are dealing in real property, they don't even understand what they are dealing in at the most basic level, or why laws and society set different expectations for transactions dealing in real or personal property.
If you want to know the differences, take an educational course outside the world of gurus, who present real property as widgets off an assembly line. Don't take my word for it, ask a real estate attorney, the Dean of Business at Harvard, Yale or your local State University, I'm sure they all know. It's also taught, usually in Chapter One to all licensees in real estate. There, it's usually glanced over, it appears to be one one those, "yes, I all ready know that property is important to the city and state, yes, I already know it can't be reproduced, yes, I know it's scarce, yes I know it is important to the economy and that property rights are mentioned in our abused constitution". It's one of those chapters that isn't really studied nor remembered. Which is why 99.999% don't get it. But judges get it, attorneys get it, regulators get it, but never mind, you just never need to understand that part of your business.
Next, we have federal law, various consumer laws, Fair Trade and Services Act takes into consideration pricing of good and services. Most contends with unfair dealing between businesses and mergers, unfair competition, but there are also aspects of competitive pricing and fair pricing for services. This crosses all industries, setting guidance based on services performed being in like type, quality, area of expertise, of service providers having education, knowledge, experience and skills that are expected at any price point.
Much of that is intended to keep some dumb azz from representing themselves as experts in some area and overcharging the public when they do not meet the standards within that industry expected, in other words, some dumb azz charging $500 an hour for consultation when his experience, education, qualifications only support $15.00 an hour. It absolutely is not lawful to go out and misrepresent yourself at any price you think you can cut out of someone's pockets!
Consider this, I'll use personal property as an easy example. You're at a Farmers Market and you walk down the isle, one farmer has red apples for $.50 each, the farmer across the isle has basically the same red apples but wants $5.00 each. Not going into economics of having only $5.00 apples left at the end of the day, but that doesn't apply when there are plenty of apples.
The only way you can sell $5.00 apples to to show or explain the difference in the product, but there really isn't any difference! Implying there is a difference or saying there is when there is not, gets into fair trade issues, deceiving the customer.
What wholesalers do is no different than a Realtor, those services have an established value for facilitating sales of real property. When you do nothing more than provide that like service, but you charge 5 times as much, you're dealing in a predatory, unfair manner. Now, if you touch the property, cure problems beyond what a Realtor does, you can begin adding value to your services, like a contractor or a title clerk or maybe a social worker or an attorney so long as you're not crossing the line of practicing law or any other area that requires a license.
To value your services look to what you actually provide and stay within the realm of pricing of competitive services based on your level of experience, education and qualified expertise, but in no circumstance in RE are you worth 5 times more, just isn't reasonable.
And, if you're not satisfied within those pricing constraints, then do more and earn your damn money, don't just expect to peg some price out of the lue because your kid needs braces next week!
I swear, some people can get an education in business and walk out without a clue. If you can't deal fairly, then please, go sell shoes and get the h3ll out of real estate!
:)
I didn't read all of this, not sure why you're responding now to a post 9 months ago but that's ok. I don't want to go back and read my rant either lol. I get what you are saying here and I've come to respect your opinion on most things real estate since I made that post.
I know my intention wasn't to defend wholesaling because it's not something I'm into, It makes more sense to me to just get a license which I have done. I would much rather just buy any deal I can find than to pass it along for a small fee.
I do feel there is a lot of "talking down" to people on the forum, not naming names, but I also understand that this could come from being burned out on dealing with the same issues.
I probably got a vote that brought me here and thought it was a recent post, otherwise I wouldn't respond.
Thank you and glad to hear you're taking the high road, you'll find that it's just as quick and more rewarding, in dollars and professionally. Good luck :)
Doing it the right way following the regulations I think is a great way to start your business. Specially in the Republic of California, don't "poke the bear"
Doing it the right way following the regulations I think is a great way to start your business. Specially in the Republic of California, don't "poke the bear"
All this happy talk........ I work may tail off looking for just the right deal. Found a guy last week selling his mother's home after her death. He asked if I would pay 125k, I told him I would pay 150k plus 5k for his family's cost. He is over the moon for the extra cash and the 5k I released when he signed the agreement for his expences, 2 weeks before our escrow closes
Now the facts..... it will be a minumum rehab maybe 30K and I will sell this home for 335k have I done "WRONG" in the eyes of real estate "educators" the extra 30K is "preditory" please help me..... I guess I just don't know what I'm doing.
I operate within the consumer laws and the sellers have the same responsible to understand there rights. The best thing that ever happened to the major banks was the 25 billion dollar settlement of 5 yrs ago. They had lawyer after lawyer manuvering for them and the consumer got screwed. By the way Bill Gates would love to pay $50,000 for his accout in services
Brian we don't have to "poke the bear" it will starve itself the way he is going.
That's nice. But it doesn't pass the sniff, so you're say 125-150K profit, on one simple rehab house, yep, that's rippin a good one! Bet you're proud to.
Bet most RE investors spend at least 2 or 3 hours a day keeping up with consumer laws, another to see if anything changed last night.
Most think they are from what the hear every 2 or 3 years, it would be fun to have a contest to see who really knows what, most have forgotten and never stayed current, just human nature, folks have better things to do. So, in their minds, everything is great! Good luck. :)
Again, Happy Turkey Day.........now, go shop!