How Do You Determine Your Wholesale Profit?

17 Replies

I haven't done any wholesaling yet.  I'm just starting to gather information.  My question is when you find a deal you want to wholesale how do you determine your own profit?  Do you start backwards with what rehabbers would want (30%ish margin or so?) and then determine your cut?  Or do you start with your margin goal and leave the rest for the rehabber?

You would start with the ARV from comps, then the investor discount which can be 70% of the ARV depending on your area, minus repairs needed, minus holding costs, closing costs and then your fee. Know your numbers.. that is how you establish your MAO or Maximum Allowable Offer for an all cash offer wholesale.

Here's a video that goes into it pretty well... and then there are various biggerpockets articles

https://www.facebook.com/Cody.B.Sperber/videos/1205559096199962/

Correct, start backwards with what the rehabber wants. Think "If I was a flipper, what price do I need to buy this at to make a reasonable profit after all expenses?". Once you have that number, you can figure out how much lower you want to offer to make your profit. 

IDK what the formula is, but the "wholesalers" that have sent me leads are asking about 90 pct of retail. Needless to say I haven't bought any of them. Perhaps they are just asking high and expecting a lowball offer. But I think a good wholesaler would be straight up and say Y is my price, X is the ARV, X1 is your closing costs, X2 is your holding costs, X3 is your profit

Work the property backwards as an investor who fix/flips. I think that most of the value that was provided by the other posts are right on the DOT! What i have found is that sticking to the typical wholesale formula (70% of ARV - rehab costs - assignment fee) doesn't always work and allows a lot of the deals to fall through the cracks. What has worked for me is really getting to know how my investors purchase properties, the amount of rehab they do, and if there are holding costs than what do they typically look like and also the typical spread they like to see. All this information allows me to work a formula based of what they are looking for!

@Nick Basye thank you for all the info and posting the video! I'm still learning to navigate this site and how to find the relevant articles for me.  I'll get there though.

@Pratik P. that makes sense now to offer a lower number to the seller in order to make it work for the rehabber and myself. Fortune Builders recommends wholesalers take no less than 10% but I don't know if that's of the ARV or the purchase price from the seller.

@Jeremy England I'm with you on that.  Make it simple, transparent. Makes the most sense to me!

YOU GUYS ARE AWESOME!  THANK YOU!!!

I wouldn't exactly stick to that rule. What you make depends on how well you negotiate the deal. If the flipper needs it at 200k, if you get it under contract for 199k, then you make 1k. If you get it for 150k, congrats you've made 50k. 

Like Jonathan said above, the 70% ARV rule doesn't really work anymore. Don't use it.

@Tennita Funmaker Great question! Everyone is different and the best way to find out is to ask your investors how they finance the deals. Honestly I spend alot of time networking with my investors, and figuring out what they look for (mainly because im also new myself). In a sense im almost like a personal wholesaler (:  Alot of the insight my investors give me help me analyze leads that have come in but at the same time they have provided so much more value in terms of real estate in general. 

Rehab costs are definitely not my expertise. Im still learning those numbers. Dont get me wrong your investor will always do his own due diligence on a property, but what i would suggest is attending a rehab seminar at a local meet up. There are a few that are held at open houses in my local market where they will show there no flip before it hits the market and explain the costs associated with the rehab. 

Your 3 most important numbers are going to be

1. ARV (comps)

2. Rehab Costs

3. Purchase Price 

@Pratik P. is right, the formula doesn't work anymore, so i would really try and stray away from it. Its a general rule dont get me wrong, but not one to follow to closely by. 

@Pratik P. I understand rehabbers would want all fees included and it's best for me to account for those when negotiating the purchase price but as a wholesaler, do you draw a bottom line for yourself as to how little you're willing accept in order to get the deal?  Like, what if you account for all the costs for the rehabber and you haggle with the seller.  Is there a point where you pass on the deal because the margin for yourself is too low?

@Caleb Heimsoth  thank you for the suggestion, I'm working on that.  I haven't come across anything that specifically deals with this question.  But again, I'm still in the gathering information phase so maybe I haven't come across it just yet.  It doesn't hurt to get perspectives from different people though because everyone does things a little differently and that's the purpose of these forums.

@Jonathan Messri a personal wholesaler! How cool is that?  I really appreciate your time and effort!  You gave me some real gems to kick around in my brain. I'll continue attending all the local meetings I can.  Thanks for your suggestions!

@Tennita Funmaker most wholesalers probably want minimum 3-5k per deal.

Now on top of what others have stated I would also add make sure you’re conservative in your numbers.

If a wholesaler comes to me and says the purchase price is 60k, the repairs are 8k and the arv is 120k I can guarantee you that’s not a deal or the case.

If the comps are 120 and you can get it for 60k, that’s a good starting point, but to get it retail ready will take 20-30k minimum usually.

So if you find your repairs are less than 10k you’re probably missing something. That’s not always the case, but it often is.

@Caleb Heimsoth gotcha.  I wasn't sure if wholesalers look for a percentage per deal or if there's a minimum or average.  I'm sure it's probably a personal decision on how much value they place on how much time they've spent on getting the deal (after all the other numbers have  been configured) and like Pratik P. said, how well I negotiate the deal.  I know we're all in this to make money but I don't want to lowball a seller either since I'd already be offering way under retail.  Ideally, I would want it to be wins all around.  

Hey Tennita, you're at the right place getting info. Good luck on your projects. 

I read alot of these wholesale and investment property posts and one thing I don't understand is the part where the wholesaler or seller lists the repair estimate? What investor would pay any attention to that? 

I'm not saying that determining repair cost isn't great exercise for the wholesaler/seller to know when pricing their product, but as a buyer I wouldn't really pay attention to it. I think for a wholesaler putting together the repair estimate for the buyer is a waste of time and energy. 

Just figure out the estimate on your own and market the property at your target price... Am I wrong? I'd much rather someone make a straight offer to me without smoke and mirrors. 

Hi Tennita,

In our market, the big flippers will pay 80% of ARV minus repairs. So what you'll need to do is find out who the big flippers are. Find their criteria, then calculate your profit. For example, for me to wholesale it to a flipper here, I'd have to offer 80% of ARV - rehab - my wholesale fee.

Good luck!

@Mike H. thank you and good luck on your projects too!  I was wondering too, the buyer is going to do their own numbers naturally because I don't think any rehabber would go off of a wholesaler's repair estimate.  Maybe just to include at least some type of accounting for those costs but yes, that's a good point too.

@Steve Trang Wow! 80% of ARV. Thanks for the tip. It seems like a lot of people wholesale for specific people. Here in Milwaukee it seems like anyone who has a good deal can mass market it to their network and someone will pick it up. Maybe once I get more experience I'll have a specific set of reliable buyers who I will work with.

Another good way to find out what investors are paying for properties is to look at cash/HML sales within the last few months and work backwards. Estimate what the repairs are and figure out what the ARV is from there.

For example, let's say you're in a hot market like Phoenix and you are trying to buy at 70% ARV minus rehabs minus your wholesale fee. You'll quickly find out that this is next to impossible so you start to look at some recent MLS sales. You're looking in your box and find a property that sold for 200k cash to XYZ Properties LLC. It's a 1500 square foot house with a 2 car garage, you see that it needed a new roof/AC and a full cosmetic update, and medium level finishes from looking at the comps, let's say you estimate rehab at 43k. You determine from the comps that the ARV is around 300k. Going backwards you have

$200k + $43k = $243k / $300k = 81%

You look up that same LLC and saw that within the last 6 months they made 2 other purchases at 80% and 82% using the above method. You know that they will buy properties at roughly 80-82%.

Obviously this isn't fool proof but it'll give you an idea of what investors are willing to pay in an area. Not all investors will have the same rehab numbers; some may be working with contractors and partnering, some may be doing the work themselves, some may be using an expensive contractor, so rehab numbers will vary. Not all investors will come up with the same ARV either; there are people who will stay conservative and there are people who will want to push the comps in certain areas. Just do your research and try to be as accurate as possible and you'll get some deals it just takes time.