First and foremost, let me preface this post for this thread. This is not a perfect answer as there are too many variables to cover. With experience, you will be able to cut your time by more than half. So let's try to tackle a couple of basic themes on this thread. There are obviously more but the two I am interested in are as follow:
How do you analyze a real estate wholesale deal?
and
Can I make a viable living wholesaling real estate?
Finding the right property truly comes down to the numbers (location may apply)... For investors that is. Investors do not get attached to properties. They are attached to making money. LOL! Sounds simple, but is it not what the wholesaler is in it for? Of course, to most extent. We all don't like working for free.
Once you find the right owner/seller you have to build that relationship with them giving you a chance in the end, to make a profit. Without a contract, circumvention may be inevitable and either the deal dies or someone else snatches it up. Some may even go behind your back (circumvention) and steal the deal. This is a dog eat dog business. So obviously, it will take some time to build your buyer's list. Or at least a buyer's list you feel comfortable with.
Most deals may fall through from lack of proper due diligence and greed.
(Greedy Side-Track)
In the movie "Scarface", Tony Montana's motive is evident from the get-go, "In this country, you gotta make the money first. Then when you get the money, you get the power. Then when you get the power, then you get the women."
In another famous "Scarface" scene the most important quote in the movie is provided when Tony Montana has just earned a spot at the table of Frank Lopez at his usual hang out. Frank begins to preach to Tony about the rules of engagement when dealing in their Hot Shot Delivery of... Shall we say, the Import and Export business. Frank proceeds to share his top three lessons but we need not go further than lesson number one: "Don't underestimate the other guy's greed!" [laughing]...
(Okay, back on track)
So know who you are doing business with. And even then, make sure you lock up the deal in advance before trying to market your property. By the way, I hate Ghost Marketing. That is for another subject and post but let me say, it can ruin your reputation.
As a wholesaler, you have to be honest and have integrity. It doesn't take much to get black-listed by other investors because of unethical practices or again, greed. More so, incompetence.
Let's move on.
Let's say you have a variety of half a dozen good buyers. You should search for properties in areas you are familiar with and properties your buyers will buy in. This is important because it will cut down your work load. Especially, if you are reviewing many properties. Not to mention, more successful in closing those deals. Sometimes, your buyers are your competition. But we'll assume you got the jump on a decent property before they did and now want.
Now assume we have the buyers and the seller on point. Let's estimate a generic deal by using generic methods. We will use a subdivision example. In regards to Comparative Market Analysis (CMA), there are areas, zip codes, wedges, grids, etc. But we'll keep it simple.
EXAMPLE: The Monticello Subdivision sells up-to-par homes at an average sold price of $100 per square foot. Also the average single family home in this subdivision is a 3 bedroom, 2 bath, and 2 car garage (3/2/2). An average single story at 1,500 square feet places this home at an average price of $150,000 per home in this specific subdivision the last three to six months of activity history.
Now besides sold properties, we need to also look at cancelled, expired, active, and pending (Price Changes may apply at times) properties in this subdivision.
Why?
Let's take a look at the following info. Assume these are apples to apples and the last three to six months have produced six properties per category below. Let's also assume we have a home you found which meets these specs, 3/2/2 @ 1,500'' (subject home). Keep in mind we are using averages. Prices and square footage may be lower or higher. I usually use a +/- 20% for square footage. In this example, I would not go below a three bedroom but may go as high as five. It truly depends on the amount of CMA's I have available. In this case, four bedrooms would be the highest at six comps per category.
Let's review - CMA Summary:
·SOLD: 3/2/2 @ 1,500'' @ $100/sq. ft.= $150K, Avg DOM - 30 days.
·CANCELLED: 3/2/2 @ 1,500'' @ $115/sq. ft.= $172K, Avg DOM -120 days.
·EXPIRED: 3/2/2 @ 1,500'' @ $112/sq. ft.= $168K, Avg DOM - 90 days.
·ACTIVE: 3/2/2 @ 1,500'' @ $110/sq. ft.= $165K, Avg DOM - 15 days.
·PENDING: 3/2/2 @ 1,500'' @ $105/sq. ft. = $158K, Avg DOM - 60 days.
·NOTE: I usually look at List Price/Sold Price Ratio %
Once you have located the property, try determining the average price for the After Repair Value (ARV) conservatively. This is a safe method so you are not too low or too high on pricing your product. What do these numbers tell us about this subdivision? It tells us that if the average price does not fall in that sweet spot, it could take longer to sell subject home as the subdivision may only bear a certain price range or ceiling. Could it sell quickly for $140K? Absolutely, if property is up to par. Could it sell for $160? Absolutely, however it may take longer to find a certain buyer or unless the home has special or updated amenities to reflect a higher price. Not to mention, length of time to sell may be affected due to FSBO or a low/high producing Realtor.
If I am wholesaling this property. I know without a shadow of doubt my After Repair Value is roughly $150K. Now in this example, my subject property/home is a pre-foreclosure. The owner has an existing mortgage which has 10 years left before it is paid in full. No liens and the note is $65K (an additional $5K - includes all costs, fees and arrears, etc) = $70K.
Seller or Owner wants out and we want to buy... Or in our case, wholesale/assign.
Let's assume you have estimated either from bids or second opinions from partners/contractors that the repairs + other costs necessary to bring this home up to par will run at $15K, $20K or $25K (bids contingent on level of renovation).
As a wholesaler, I would use the highest bid at $25K plus another $5K = $30K (includes labor, material, holding, and closing costs). This is a conservative approach for a buyer I am potential targeting.
Now without getting into whether the buyer can do a "Subject To/Quit Claim Deed/FSBO, etc..." by paying what is in arrears ($5K) and taking over the note, not to mention our assignment fee or wholesale profit. Let's just say this is a clean sales transaction.
So now we have a total purchase price of $70K and the repairs + at $30K, equaling $100K
Now we have to determine the buyer we are going to sell to. Normally, there are three types of buyers (could be other types) with three types of costs to their money.
·Buyer #1 (Hard Money @ avg. range of 12%-18% plus points) - 65%-70%
·Buyer #2 (Private Money @ avg. 10%-14%) - 70%-80%
·Buyer #3 (CASH) - 65%-85%
Let's just be safe and use the 70% Rule.
$150,000 (ARV) X 70% (LTV) = $105,000
Our Wholesale Profit on this specific property should hover around $5K. Does it mean you could not get $7K-$10K? Absolutely, you can. You just have to know your buyers and their numbers.
Be real with your numbers and use a conservative approach. Don't take sold comps which are at a price of $160K-$165K (in this example above) and low repair bids (i.e. $15K) to push your price up trying to create a cushion for a bigger profit.
Would you rather make a one-time fee of $10K or would you rather make several sales at $5K or more for deals to come while building your reputation.
It is about being honest and about building relationships. Connections mean nothing if you are greedy or are trying to get one over on someone. Even worse, you try the shotgun approach (zero/half "A" due diligence) and throw up any deal with any number hoping one sticks. We call these Joker-Brokers in the business. They usually hover over the internet and regurgitate info while padding each deal. As if we cannot stumble upon the truth.
Finally, let's say you have a greedy investor who rebuts your numbers. Then he will have to either back it up with evidence or scratch him off the list and move onto greener pastures and better investors.
Secure a contract for at least 90 days or keep that expiration date blank. This way it gives you time to do your due diligence or find a buyer. Of course, you may not have time or may even have to create time by stopping foreclosure or other.
I've stopped foreclosure auctions through a TRO or even paid what's in arrears to buy me more time. Some auctions have been stopped the day of.
Anyways, I hope this helps. It is generic. No one can post all scenarios on this forum. I could probably write a book on this but this is just to help those who are new or want a basic view of analyzing a deal. Most info may be tied to the MLS but lack thereof doesn't negate your ethics and due diligence.
Remember for you (the wholesaler) it is about the relationships and for the buyers (the investors) it is about the numbers. Walk both lines on an even keel and you can close a few deals a year or more to help supplement other deals or pay bills.
Could you make a living at this? Possibly. It depends on your your cost of living as well as the time, effort and sacrifice you put into it. There are many cautions with all the above but I thought I give this post some hope into analyzing a wholesale deal in a specific category without bogging it down with the flashing yellow lights of terms & definitions. Not to mention, keeping a simple honest approach.
That's my two pesos.
If it sucks respond.
If you stressed your eyes or fell asleep, my bad.
If it helps a little, then VOTE MY POST! ;)
But in the end, I hope this truly helps.
Big Henry