How much are you buying on the dollar?

27 Replies

So everyone knows CA has a hot market. What are wholesalers and rehabbers buying on the dollar? I just listened to Tim Gordon's podcast and he said his buyers are paying up to 80% of arv and that was about a year ago. What are you buying at?

And are you increasing your estimated ARV based on your estimated completion date?

(ie 6 months adds value in a hot market)

Originally posted by @Jonathan Guerrero :

I just listened to Tim Gordon's podcast and he said his buyers are paying up to 80% of arv ...

For what purpose? Buy and hold or flipping?

I don't know who Tim Gordon is but if I were in the business of selling properties, I would want everyone to believe that sensible buyers are overpaying as well. Consider the source.

No flipper in their right mind should pay 80% of ARV. Do the math. If you assume rehab costs in the 10% to 12% of ARV ballpark, you're really paying over 90% of ARV. This doesn't include sales commissions, insurance, HML fees, utilities, etc. That is, you will lose money paying 80% of ARV. Instead of relying on percentages, you should always estimate the actual numbers. Since they are related though, it's easy to talk in percentages.

Realistically, in the southern California, you'll gross about 12% to 15% of ARV if you limit your project cost (Purchase price plus Rehab cost) to about 75% of ARV.  Once your project cost reaches 80%, your gross return will be less than 10% and closer to 5% for lower priced properties. No one can predict costs and values that close and small variations will kill you. At a project cost (not purchase price) that's 90% of ARV, you will lose money.

None of this is to say we don't get requests to fund 83 to 90% deals multiple times each week. When I give these (normally new) rehabbers a cost breakdown showing how little, if anything, they will make, they often get mad at me for bursting their bubble, as if it's my fault.

I understand the frustration with not finding viable properties. The goal is to make money Jonathan, not to buy homes.

As a wholesaler I try and shoot for .65 minus repairs. 

Originally posted by Jeff S Na:
 

Thanks for the responeTim Gordon was a guest on podcast 67.  He mentioned he tries to find the buyer who would pay the most so he can get a higher fee. Some payed up to 80%.  My purpose is to wholesale but I need to do my numbers like a rehabber then subtract my fee. I'd love to buy n hold but my focus now is to wholesale and maybe partner up in a rehab. 

Originally posted by @Micah Copeland :

As a wholesaler I try and shoot for .65 minus repairs. 

 Thanks for your response. Who are you targeting?

@Jonathan Guerrero

Not a whole lot has changed in the market from a year ago. Distressed inventory is still low and demand for that type of property is still high. But one thing I love about this market is you will always be able to find a deal if you look hard enough.

Depending on how hot the neighborhood is, investors are paying between 80-83% of ARV for your standard 3-4 month cookie cutter flip (purchase+rehab/ARV= 80-83%).

So if you come across a potential deal with a $550k ARV and it needs 40k in rehab, as a wholesaler you need to run it like this:

$550,000*.83= $456,500 - $40,000 - $your fee$= your offer price.

Good luck!

Originally posted by @Matthew Nixon :

Thanks man. I have a question. How do you determine your fee?  I've heard these podcasts where they're getting 50k+ wholesale fees? How do you get a big spread and still leave enough meat on the bone for the investor? Is it just finding the right deal? It's unbelievable you can find such a deal. 

Originally posted by @Jonathan Guerrero :
Originally posted by @Matthew Nixon:

Thanks man. I have a question. How do you determine your fee?  I've heard these podcasts where they're getting 50k+ wholesale fees? How do you get a big spread and still leave enough meat on the bone for the investor? Is it just finding the right deal? It's unbelievable you can find such a deal. 

 That all depends on how motivated the seller is and how good of a deal you can negotiate.  In the above scenario I would say you only have room to add on ~5-10k for your fee.

Michael Quarles is one of the best negotiators around. He's from your area so I'd definitely look him up. 

Originally posted by @Matthew Nixon :
Originally posted by @Jonathan Guerrero :
Originally posted by @Matthew Nixon:

Thanks man. I have a question. How do you determine your fee?  I've heard these podcasts where they're getting 50k+ wholesale fees? How do you get a big spread and still leave enough meat on the bone for the investor? Is it just finding the right deal? It's unbelievable you can find such a deal. 

 That all depends on how motivated the seller is and how good of a deal you can negotiate.  In the above scenario I would say you only have room to add on ~5-10k for your fee.

Michael Quarles is one of the best negotiators around. He's from your area so I'd definitely look him up. 

 Thanks for everything man.

@Jonathan Guerrero California is a HUGE state, with many different markets, economies, etc. The market that is important for someone is the market you are working. Get to know everything about your market, and what makes sense. 

The reality is that the coastal areas, and large cities in California have hot markets, the rest of the state, is still lagging behind, but beginning to see small increase in prices.  

How is Bakersfield doing? 

Medium house plansKaren Margrave, Parlay Investments | [email protected] | http://www.parlayinvestments.com | CA Contractor # 680782

Originally posted by @Karen Margrave :

@Jonathan Guerrero California is a HUGE state, with many different markets, economies, etc. The market that is important for someone is the market you are working. Get to know everything about your market, and what makes sense. 

The reality is that the coastal areas, and large cities in California have hot markets, the rest of the state, is still lagging behind, but beginning to see small increase in prices.  

How is Bakersfield doing? 

 Bakersfield is doing well. Home prices are still rising but they are to remain somewhat stable. It's not as hot as LA or San Diego or any of the big cities.  New Construction entry level homes are starting in the 200s.  It's quite affordable for new home owners.  

@Jonathan Guerrero  As in many areas, new construction doesn't look like it makes much sense. I don't even know how you could build anything new with those price points, unless it was something like manufactured housing. 

However; with those types of conditions, there's probably a high demand rental market, due to so many homes having been foreclosed on and pushing a large number of people into rental housing. The next thing to look at is the cost of rental housing, is it cheap or top of the market? Knowing that gives you an idea of whether or not the market for new construction is getting ready to break out. Once renting isn't any cheaper than buying, and now that some time has gone by and people are re-establishing credit and getting scores up, they may move into becoming buyers again. 

What are vacant lots going for? 

Medium house plansKaren Margrave, Parlay Investments | [email protected] | http://www.parlayinvestments.com | CA Contractor # 680782

@Jonathan Guerrero

I target a mix between absentee owners, probates, and vacants. Slowly adding on more lead funnels as I go.

My ears are ringing! 

Yes I am still selling deals at the numbers mentioned above. Most cases we are aren't working with anyone who uses hard money. It just adds another set of hands in the pot, working with buyers who have their own funding (big dogs) eliminates an added cost to rehabbing (hard money) and allows them to pay more for the deal. Thus netting the wholesaler a higher fee. 

Either way, me saying this does little to help you. 

WATCH your market. WATCH what deals sell for, WATCH what they list for on the back end. Become an expert in your market and you'll get a good feel for what you can charge for a deal. The difference between a $5k and a $50k wholesale fee is who you sell the deal to. Those $50k fees are a rare thing these days but do still happen from time to time. 

Happy hunting. 

Originally posted by @Tim Gordon :

My ears are ringing! 

Yes I am still selling deals at the numbers mentioned above. Most cases we are aren't working with anyone who uses hard money. It just adds another set of hands in the pot, working with buyers who have their own funding (big dogs) eliminates an added cost to rehabbing (hard money) and allows them to pay more for the deal. Thus netting the wholesaler a higher fee. 

Either way, me saying this does little to help you. 

WATCH your market. WATCH what deals sell for, WATCH what they list for on the back end. Become an expert in your market and you'll get a good feel for what you can charge for a deal. The difference between a $5k and a $50k wholesale fee is who you sell the deal to. Those $50k fees are a rare thing these days but do still happen from time to time. 

Happy hunting. 

 Thank you for responding Tim. My question is as a newbie how do I find these "big dogs"? Courthouse steps? How do I even approach them? Im still learning and getting ready to start my first mailing campaign. 

I explained exactly how I do it on the podcast my friend. 

Gotta be stoked to get the base hits or the grand slams. 

Originally posted by @Karen Margrave :

@Jonathan Guerrero   

What are vacant lots going for? 

Don't knowuch about vacant lots but the ones I've looked at are up there.  Depends on the location.  200k+

Originally posted by @Tim Gordon :

I explained exactly how I do it on the podcast my friend. 

Gotta be stoked to get the base hits or the grand slams. 

 I need to listen to it again and take notes this time. I usually listened to them when I was at work. 

It makes perfect sense that in some areas investors may pay more % than in another are. 70% in Costa Mesa is not the same as 70% in Watts. For example, the median in Watts is around 265K. The median in Costa Mesa is 650K. Let's look at some numbers.

265K * .3 = 79.5K spread. I can see why investors would want to do 70% or lower.

650K * .3 = 195K spread. That is much larger spread. Investors can pay 80% and perhaps a little more and still make money.

I've started generating leads from PropertyRadar.com and don't use % to determine what price to offer. Instead, I determine what types of nominal profits a rehabber wants to make and plug that into my formula instead. I'll see how well this goes when I get my first property under contract.

Originally posted by @Carlos O. :

I never looked at it that way. It makes perfect sense now. 




 

Originally posted by @Carlos O. :

It makes perfect sense that in some areas investors may pay more % than in another are. 70% in Costa Mesa is not the same as 70% in Watts. For example, the median in Watts is around 265K. The median in Costa Mesa is 650K. Let's look at some numbers.

265K * .3 = 79.5K spread. I can see why investors would want to do 70% or lower.

650K * .3 = 195K spread. That is much larger spread. Investors can pay 80% and perhaps a little more and still make money.

This is the sort of nonsense we see from potential borrowers all the time. They look at a gross spread and get stars in their eyes.

Really Carlos, you should write a decent spreadsheet to estimate all the expenses associated with a flip and run them both in dollars and percentages. A gross spread means nothing if you don't calculate the associated expenses.

Here are the two deals you presented. I assumed rehab costs approximately 12% of ARV, 12%/3pt financing for 80% of the purchase price, and a 6 month term.

Paying 70% of ARV results in a project cost of 82% of ARV for Watts and a $12.4k profit. This is a whopping 4.7% of ARV and is easily eaten up by rehab overages, reasonable counter offers, deals falling thru a few times, etc. What happened to the $79.5k spread? Sensible rehabbers don't put in the type of work and risk it takes, over this period, for this kind of return.

Worse yet, the project cost jumps to 92% for Costa Mesa when you pay 80% of ARV for that deal, as you advocate. Though this becomes an eye opening $130k spread ($195k if you pay 70% of ARV), the loss is over $35k.

A reasonable and safe return on ARV is closer to the mid to low teens. This is achievable when the project cost is no more than 75% of ARV. Most here advocate 70% as a rule-of-thumb, though I recognize this is almost impossible to do in southern California. Just because some pay more doesn't mean they are successful. There's a lot of desperation and rationalizing out there; and also a lot of one-time flippers.

Note as well, that if you zero out the financing costs, per Tim Gordon above, and pay 80% of the ARV for Costa Mesa, you are lucky to come out even. I call BS on this strategy. See below:

We don't loan to anyone without experience. We do real deals with real borrowers, many of whom would be called "Big Dogs," and are sensible enough not to buy into this rubbish. All can, and usually do obtain 100% financing, which leads me to wonder about this claim.

No "Big Dog" would ever pay 70% or 80% of ARV. Not even close. All also laugh at the hugely overpriced deals, as these, offered to them by "wholesalers." You'll completely discredit yourself by presenting any deal like these to any experienced rehabber, yet alone a "Big Dog."

You guys need to run the numbers, make your own decisions, and be careful where you get your advice.

"I'll see how well this goes when I get my first property under contract."

Why am I not surprised?

Boy this sure is a hostile thread. 

No need to talk down to someone, we are all doing business differently and will encounter different ideas, methods and rules that suit our model. Its okay if we don't agree. 

Originally posted by Jeff S Na:
Originally posted by @Carlos O.:

It makes perfect sense that in some areas investors may pay more % than in another are. 70% in Costa Mesa is not the same as 70% in Watts. For example, the median in Watts is around 265K. The median in Costa Mesa is 650K. Let's look at some numbers.

265K * .3 = 79.5K spread. I can see why investors would want to do 70% or lower.

650K * .3 = 195K spread. That is much larger spread. Investors can pay 80% and perhaps a little more and still make money.

This is the sort of nonsense we see from potential borrowers all the time. They look at a gross spread and get stars in their eyes.

Really Carlos, you should write a decent spreadsheet to estimate all the expenses associated with a flip and run them both in dollars and percentages. A gross spread means nothing if you don't calculate the associated expenses.

Here are the two deals you presented. I assumed rehab costs approximately 12% of ARV, 12%/3pt financing for 80% of the purchase price, and a 6 month term.

Paying 70% of ARV results in a project cost of 82% of ARV for Watts and a $12.4k profit. This is a whopping 4.7% of ARV and is easily eaten up by rehab overages, reasonable counter offers, deals falling thru a few times, etc. What happened to the $79.5k spread? Sensible rehabbers don't put in the type of work and risk it takes, over this period, for this kind of return.

Worse yet, the project cost jumps to 92% for Costa Mesa when you pay 80% of ARV for that deal, as you advocate. Though this becomes an eye opening $130k spread ($195k if you pay 70% of ARV), the loss is over $35k.

A reasonable and safe return on ARV is closer to the mid to low teens. This is achievable when the project cost is no more than 75% of ARV. Most here advocate 70% as a rule-of-thumb, though I recognize this is almost impossible to do in southern California. Just because some pay more doesn't mean they are successful. There's a lot of desperation and rationalizing out there; and also a lot of one-time flippers.

Note as well, that if you zero out the financing costs, per Tim Gordon above, and pay 80% of the ARV for Costa Mesa, you are lucky to come out even. I call BS on this strategy. See below:

We don't loan to anyone without experience. We do real deals with real borrowers, many of whom would be called "Big Dogs," and are sensible enough not to buy into this rubbish. All can, and usually do obtain 100% financing, which leads me to wonder about this claim.

No "Big Dog" would ever pay 70% or 80% of ARV. Not even close. All also laugh at the hugely overpriced deals, as these, offered to them by "wholesalers." You'll completely discredit yourself by presenting any deal like these to any experienced rehabber, yet alone a "Big Dog."

You guys need to run the numbers, make your own decisions, and be careful where you get your advice.

"I'll see how well this goes when I get my first property under contract."

Why am I not surprised?

 Thanks for taking the time to do this numbers I appreciate it.  I agree it is critical to run your numbers and get the details down.  It's a numbers game. But Tim is right as well, everyone does business different and not everyone uses HMLs.  

I didn't intend for this thread to get hostile. Just wanted some info. 

Jeff S Na

Thanks Jeff, I appreciate the response. I do have a question about the rehab costs in your calculations. Why is the number calculated off a %? Do costs really scale in proportion to ARV? I'll have to defer to your expertise, but I would think that, as an example, $10K for labor in Watts wouldn't double to $20K in Costa Mesa for the same amount and type of work done.