I saw a deal recently from a wholesaler on BP and I wanted to run something by some of the more experienced investors. I'm well aware that most wholesalers tend to "dress up" their ARV numbers and "dress down" their rehab costs. In this case, I felt the rehab costs were very reasonable, if not spot on. The CMA he provided was really disturbing though... (or am I just ignorant? Help!)
Here is the search criteria he used to pull his ARV comps value:
- 12 months of sales
- Living area of +1,400 sqft of subject property or below (Subject is 1,200)
- 1.21 Mile radius from subject property
- Price range of $250,000 or above
WOW, I have a real problem with 3 of the 4 bullet points here. Here is what I was taught a good comp should be:
- 6 months of sales
- +/-200 sqft of subject property (1,000 - 1,400 in this case)
- 0.5 miles from the subject property
- same ba/br or close to it and adjust
- do not cross major boundaries such as a different city, freeway, major road, etc. because local markets vary significantly
I'm not happy with this person using 12 months of sales data, but okay I get it. He tried to fudge a little. It's the other two that #%[email protected] piss me off. That radius is VERY SPECIFIC, almost like the seller was trying to include VERY SPECIFIC COMPS to help his ARV values. Also, who in their right mind would EVER include a sale price range limit when finding comps?! If you have really high or really low numbers, you look at the pictures and geography and justify why. You see one for 30% less? Okay, it's probably a dump and NOT A COMPARABLE. You see one for 20% more than all the others? That doesn't mean you use THAT listing as your comp and boost up the "ROI" you are offering... Maybe the house has a huge lot, golden toilets, etc.
Can someone weigh in on this please? I would love to hear what you use for running your comps and if you encounter this crap often as well.
Yep, he's shopping for dummies. Using higher sf houses, and putting a minimum salesprice is just obvious manipulation/misrepresentation of values. Also, pending and contingent are irrelevant, the price shown is the listing price instead of the contract price, and they may not close or appraise.
@P.J. Bremner thank you for sharing how you evaluate comps, but I have a question doesn't Age of home play a factor?
Hi @P.J. Bremner ,
I do plenty of work out in the rural parts of town and sometimes have to stretch far and wide and make tons of adjustments (not saying that happened here). I usually close it up until I get 3 sold and then use those though. Personally I wouldn't have used the ones they did though. Mine starts wide and narrows until I finally get down to 3 solid comps. I also bring up active properties so that I can show competition (I don't use in numbers, just something I find useful for the seller/buyer to know).
Playing devils advocate on the distance thing, they could have drawn a radius on a map in the MLS, which went to the school district border or county border or some such which gave it the 1.21 distance. Maybe they were not specifically digging for one.
But my gut says you were pretty much on though.
If it smells like a rat, it's probably a rat. What you were taught is what you should be doing, and only expand the radius and/or date if you can't find adequate comps using the tightest criteria.
Yes I do consider age, I forgot to include it because all of the homes in the comp list were within 10 years if each other. Good point, thank you for reminding me!
I will typically look at the whole list of comps and find out which homes are closest in similarity. For example, in this specific comp list I came up with, the backyard butts up to an electric utility field. Other examples would be a major street, freeway or commercial property on the border of the property. I found one house that was two streets over, backyard was the same electrical field, had fewer sqft, was a flipped property that was bought fixed and sold in less than 6 months. I valued this comp over the comp 3 blocks south that didn't share the border with the utility field and was +$15,000 more. I prefer to err on the side of caution when in doubt.
@P.J. Bremner I too, air on the side of caution if anything the end buyer or if you are the buyer i believe will appreciate it.... as the saying goes better safe then sorry
@P.J. Bremner , I don't like the "trust your gut" idea of screening tenants, but I do very much like the "trust your gut" concept when it comes to vetting people with whom you do business. Or in this case, with whom you do NOT do business.
Playing devil's advocate, it is entirely possible that this wholesaler has no idea what he is doing. This is a prime example of why you should ALWAYS run your own numbers rather than relying on the wholesaler's numbers.
The wholesaler may not be intending to defraud you, but if you continue to review deals from this guy, you would be wise to pay extra close attention to your own numbers.
I also run comps 6 months or less, .5 miles or less. My target market is very dense, and very hot. I have no problem finding what I need.
And @Wayne Brooks is right. Pending and Contingent mean nothing. Look for solds only when trying to determine a value.
@P.J. Bremner I agree with everyone else in trusting your gut. I also often find that some of these wholesales are sometimes way off just to get the deal done. I think it's always best to have an experienced agent on your team to pull your own independent CMA and compare with what the wholesalers send you.
I see a contradiction to your comment about trusting my gut one way, but not the other. When I accept a tenant, I am entering into a business agreement with them. Aren't I vetting them much the same as I would vet any business partner? They are my tenants, but at the end of the day they are paying ALL of my business expenses and profits. That sounds like a partnership to me.
A little sidetrack from the topic of this post, but I want to make sure my position isn't misunderstood. I vet all tenants, even if it may not be the traditional vetting process. My business model allows me to approach tenant vetting very differently than a traditional rental. Who are generally the problem tenants? Professional squatters, people who know landlord laws like the back of their hand or working mothers and fathers who have to decide between paying for food for the kids or paying rent, etc. My student tenants have not been "jaded" by life yet and learn how to cheat a landlord out of rent. They study their subjects, not the landlord/tenant laws. They have to feed themselves only and generally get their money from student loans (we both know how reliable the government is when it comes to throwing out trillions in student loans) parents or part-time work. Plus, all of my tenants rent month to month so that if there is any issues, I simply do not renew their lease the following month and they are out.
Would you believe that i've been running my business for over 4 years without running a single background check, credit check, income verification or landlord reference? You know how many formal evictions I have had to file? 0. When I show the house, when I'm texting the tenants to setup the showings, when I am making my decision behind which person to choose to rent to, I am doing my vetting process. I can read people reasonably well and I can spot a bullsh!t story from a mile away. So yes, my "gut vetting" has served my business well. Please do not confuse my business practices with traditional business practices. We both know a round peg doesn't fit in a square hole : )
Btw, I hope this conversation isn't construed as being contentious! I just wanted to get my side of the story out there and offer an alternative to discuss. It's the only way we can learn from one another!
Ditch it and move on, smart wholesales should...
1) dress "down" their numbers
2) over estimate rehab costs and under estimate ARV.. that way the buyer will get more profit and want to do business with the wholesaler again.
@P.J. Bremner , I totally see what you're saying. What I meant was that trusting your gut rather than screening isn't recommended. Trusting your gut when it's saying "this isn't a good thing" would be fine.
If you have been running your company for 4 years this way, I'm glad you have not experienced an eviction. I hope your luck continues.
I see what you mean. To replace a vetting process by simply looking at someone and going with the gut would be a mistake, I agree 100% and I just wanted to make sure people reading this understood the very distinct difference between my business and a traditional rental property management approach. There's no chance I would follow the same process renting a home or apartment out to a family. I appreciate your input :)
I would just straight up ask him to defend his criteria.
- 12 months- Maybe there were no sales recently? (Devil's advocate here- but if he had a reason hey, let him tell you)
- SIze only being larger. This is sketchy to me- maybe the house in question has 300 sq feet you'd obviously turn into finished space to make it comp?
- 1.21 miles- maybe this hits a county line or city line?
- The price doesn't make sense. This is literally not allowing you to get an ARV below what the number is he wants to hit.
I would just ask him to explain each. If he can't stand by his numbers you know never to glance at a deal from him again.
I did ask him as well as asking for a price concession. He has yet to respond in several days so I have since then unsubscribed from his "wholesale deal offerings" if you can call them that lol Thank you for your input!
Also, as for 1.21 miles hitting the county line, I don't think this is a valid reason to expand the comps range. Personally, I don't even look at anything beyond 1/2 mile unless I don't have enough comps. I value comps on the same block over the ones 3 blocks over, etc. In this case, I was able to find a comp ON THE SAME STREET that was bought, rehabbed and sold within the same 6-month comp period. THAT is a perfect comp (it was a tiny bit smaller). I don't see how anyone can refute a comp like that. This kid was reaching for ridiculous numbers in order to make his bad purchase price work. The house sat on the market for 124 days at $190k, then he gets ahold of it and tried to pitch it as a wholesale for $198k. Sleeze bag. I made sure not to throw him under the bus on here and keep his name and company private. I just hope other BPers are very cautious before they do any deal, BP or not.
Jeezeeeee I can't imagine tossing a MLS property to someone as a wholesale deal unless you happened to knock it out of the park.
People forcing deals where they aren't is so unethical. Going to lose his reputation real quick that way.
@Christopher Rodriguez: I did not get a chance to review your feedback because the Post was removed. Appreciate you reviewing my take on the 200 K, Zero Money Down ! Analysis.
I'd still like to hear, What are your thoughts are about the Cleveland, OH investors offer.
I'm enjoying this conversation because I actually see value in all opinions, views and practices shared. I personally use all of the above. Strategic decision making is what has brought me success and when strategy reached its maximum potential I had to use what most would call "my gut" or "intuition." Like Donald Trump said it the best "Go with your Gut." If you are clear headed and non emotional about a situation you will almost always make the RIGHT decision. I have rehabbed hundreds of homes and trust me some were very close in numbers because at the end of the day "sh--" happens, right? I have been very fortunate when I relied on my gut and was in tune with what the market was saying and doing. True risk takers aren't afraid! My hat goes off to you all.... It takes guts to do what we do. Carry on!
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