Why not buy from a wholesaler in Houston?

Question

I was at a large networking event recently and the Speaker/Guru investor told everyone not to buy over 75% of ARV in Houston.  I understand that those who can spend 10-20k per month on advertising have to buy at those % to make sense.  Why not let the wholesalers do the research, spend the $ on advertising, and buy from them.  If an investor only has to analyze the deal and buy as many properties as he/she can afford then why not pay the extra %.  10 deals per year @ 80% are better than 3 deals a year @70%.  Any comments on why someone would not want to use a wholesaler would be greatly appreciated...

Doug McLeod · Answer

Did the guru mean purchase price at 75% ARV or all-in (including rehab and financing/closing) at 75% of ARV?  Hard to do well with a purchase price that high unless it really is rent-ready (usually isn't) or very close to it.

6 of 8 purchases I made in Houston were from wholesalers. My first 3 of the 6 ended up between 90 and 95% of ARV all-in but good cash flow. The next 3 ended up 78-82% of ARV all-in because I broadened my geography and tightened up on my number criteria (targeting deals below 85% all-in, 3/2/2 or 4/2/2, 1200-2500 sq ft).

I have not seen any deals where using  conservative sales comps (3 recent and similar actual sales in the same neighborhood) you could be all-in at 75% of ARV. You really may need to do your own marketing to find those. If 80-85% with good cash flow works for your strategy, a few wholesalers are offering those occasionally. Go for it. (Many others are ridiculous with their comps and rehab estimates, though - always do your own comps if possible).

Matthew Schroeder · Answer

In a lot of markets, wholesale deals are not plentiful.  Remember, they are often properties which were sourced off-market.

Even if there are "deals" (properties), most good wholesalers have several regular cash buyers waiting to pounce on good deals.  Said another way, even if there is inventory, there is no particular reason why it might go to you.  A lot of wholesalers keep their best deals to themselves and/or give their preferred/regular customers a first look.

Lastly, you need to make sure that you are very familiar with comps and the 75% ARV calculation.  You will need to determine if you feel with the calculations.  In other words, if someone tells you the ARV is x, it doesn't necessarily mean that it is x.