The Truth about Wholesaling!

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I'm probably repeating myself, but wholesaling can be much easier if you have a good grasp of basic RE first before picking it up as a speciality. One of the most profitable areas of RE is set in the concept of highest and best use, identify properties being under utilized, buy it for cheap and wholesale it to a flipper/rehabber/owner who changes the use and is willing to pay the prenium, especially if you simply go to the zoning board for a slam dunk change. Basic RE concepts must be in your tool box!

Will, great thread, here is 199 I believe, I'll pass the honors back to you for 200 (LOL) if you'd like to address higher and best use approaches in this area. :)

Great post Will. I'll admit to not reading most of the 11 pg thread but you mentioned 70% all in would be a home run. What is a ballpark figure (sorry) that you'd consider a single or a double?

Originally posted by Russell Ponce:
Great post Will. I'll admit to not reading most of the 11 pg thread but you mentioned 70% all in would be a home run. What is a ballpark figure (sorry) that you'd consider a single or a double?
Good question. Keep in mind that a 70% all-in is a homerun ONLY if the exit value is $300k-$600k. A good single would be 75% all-in with the same exit value and a double would be that all-in figure with a very easy and quick rehab.

What some fail to realize is that even if you hit these rules of thumb, there are other factors that come into play.
Here is a perfect example. Lets say you and I both have two deals each with an exit value of $400k. My rehab is $40k so my 75% all-in purchase price is $260k. With $260 purchase and $40k rehab, my all-in amount is $300k.
Your deal has same $400k exit, but your rehab is $100k so your purchase at 75% all-in is $200k. Who has the better deal? We both are all-in for $300k and have the same exit values, but your rehab will take more than twice as lng which increases your holding costs, and increases your mental and physical work load, therefore, the two are not equal just because they have the same All-in %.

The best starting point is to pick a strategy they would like to do (buy and hold, flipper, etc.) and then find a partner who is already doing it and partner with such an investor.

If you don't have start up money but are interested in starting in flipping then moving to buy and hold, how do you partner with someone already doing it? If they are bringing the money to the table, what could I offer to bring to the table that would make the partnership win win?

Originally posted by Sean Price:
The best starting point is to pick a strategy they would like to do (buy and hold, flipper, etc.) and then find a partner who is already doing it and partner with such an investor.

If you don't have start up money but are interested in starting in flipping then moving to buy and hold, how do you partner with someone already doing it? If they are bringing the money to the table, what could I offer to bring to the table that would make the partnership win win?

Great question Sean. The problem with this scenario is that an investor with capital already doing it does not need the rookie partner. To make a partnership a win win, both parties must bring value to the table, thus, your best bet is to learn the proper way to do perform the strategy and then find a money partner who does not have the knowldge or does not have the time (perhaps a full time job). Thus a win win as the partner brings the money and you bring the deal and knowldge to run it.
That is how the best partnerships work.

Thanks to the seasoned investors on Bigger Pockets, I've invested in some time to do my research on wholesaling; how to get accurate comps of the property, how to estimate repairs on a property, how to get a property 30 to 40 percent under market value; so that my end buyers can have a nice spread on their numbers. My goal is to satisfy my end buyers.. If I run into a deal, and I'm not making that much, it's okay with me.. Longs my end buyers get a great return on the deal.. Thanks to @Will also, for putting me on point about different factors in this game.. (and others) But I'm a real estate investor who finds properties way below market value, ours it under contract, and reassign the contract to another investor.. And im honest about what I do, on both ends..

I have a property in escrow right now that was sold at 85% of ARV less repairs. They know my wholesale fee and have no problem with it because the deal is worth it to them.

I will share more details upon close, just wanted to mention because some of these rules just do not apply to each market.

Ever see a deal sell and you just say to yourself "Wow! Why would someone pay $XXX for that?? I wouldn't!" Well, you aren't the customer are you, they are and that should let you know that in your market people are willing to pay that for a property for whatever reason. So if you are capable of reaching those buyers in a timely fashion you can sell deals at that price to them.

The reason I bring this up is because I have recently seen a member here post about missing a deal due to pricing it based on the 70% rule only to lose it to another local wholesaler who priced it properly and sold it fast.

No matter what, you must know your market and what is going on. While this is fantastic advice and I agree on the discussion of ethics and professionalism many of the opinions given here are based on what a person would buy themselves and we are all forgetting they aren't necessarily the customer you are trying to reach.

My other thought for the day on Wholesaing. I posted this in reply to a blog post I saw about wholesaling earlier today.

You must own a house to be a landlord.

To be a rehabber you must have completed deals or have some underway.

To be a wholesaler you just suddenly are one and tell people such. This isn't really the case but even I did it when starting out.

So, you have people with no experience making mistakes (which is okay!) breaking pots and possibly giving folks a bad feeling about wholesaling.

At the end of the day, if you are moving deals and your buyer is satisfied with your deal you are doing your job.

I have a property in escrow right now that was sold at 85% of ARV less repairs. They know my wholesale fee and have no problem with it because the deal is worth it to them.
Tim, while I agree that all rules do not necessarily apply in every single market, and that most of the points of view come from us and what we would or would not pay, I would still say that ant rehab flip opportunity that is purchased at 85% all in is so thin, it leaves zero room for error and a very small profit if any at all. Just because you found a buyer at that price in your market still does not make that deal a good one for the buyer or any other buyer.
There are buyers who over pay all the time, usually they are rookie errors and have little clue how to evaluate deals.
At 85% all in, you have 6% minimum in closing costs, 2% or so in holding costs like taxes insurance, utilities, etc, and only 7% remains at best. If you use leverage, that will eat most if not all of the profit and if all cash, it is a tiny ROI.

Originally posted by Will Barnard:
I have a property in escrow right now that was sold at 85% of ARV less repairs. They know my wholesale fee and have no problem with it because the deal is worth it to them.
Tim, while I agree that all rules do not necessarily apply in every single market, and that most of the points of view come from us and what we would or would not pay, I would still say that ant rehab flip opportunity that is purchased at 85% all in is so thin, it leaves zero room for error and a very small profit if any at all. Just because you found a buyer at that price in your market still does not make that deal a good one for the buyer or any other buyer.
There are buyers who over pay all the time, usually they are rookie errors and have little clue how to evaluate deals.
At 85% all in, you have 6% minimum in closing costs, 2% or so in holding costs like taxes insurance, utilities, etc, and only 7% remains at best. If you use leverage, that will eat most if not all of the profit and if all cash, it is a tiny ROI.

You are making the assumption that it is a rehab. This is a hold.

I don't deal with rookie buyers, I don't have the patience nor the risk tolerance. I've learned not to look at deals with my buyers glasses on as I'm not buying it. I'm watching deals sell all day long that I wouldn't ever touch but they meet the criteria of other investors. So if you can reach them fast enough you can wholesale deals just like that.

WOW!!! It truly is refreshing to hear seasoned investors discuss this topic so honestly. I have been reading for over an hour and I must say it is amazing that this is so relevant and such an incredible resource years later! @Will You have earned my respect undoubtedly with such excellent content. I have learned so much from just the comments posted.

I don't ever give any rehabber an estimated cost for rehab. That's like shooting myself in the foot. You can't assume that you know what kind of rehab job he does. What if he does crappy work? What if he's a band aid rehabber? What if he hires a GC? I always tell them they need to go the house and look at it themselves.

Any smart rehabber wouldn't listen to anyone's opinion of rehab costs anyway.
And you shouldn't offer your opinion of what it's going to cost them.

Originally posted by Tracy Caywood:
I don't ever give any rehabber an estimated cost for rehab. That's like shooting myself in the foot. You can't assume that you know what kind of rehab job he does. What if he does crappy work? What if he's a band aid rehabber? What if he hires a GC? I always tell them they need to go the house and look at it themselves.

Any smart rehabber wouldn't listen to anyone's opinion of rehab costs anyway.
And you shouldn't offer your opinion of what it's going to cost them.

I agree with this point. Many of them would ask "how much are the repairs? I can give you an estimate but unless you do your due diligence as a buyer and actually get in there you just may be cheaper than the estimate I was given from a contractor I work with.

Some will claim "I’d rather not waste time/ money sending someone out if the deal isn’t going to work anyway." Which is bollocks if you cant send your guy to "check it out" Well too bad and you missed out

Thank you for the kind words Jason.

Tracy and Jamaal, while I can agree that any experienced rehabber will do their own numbers for rehab estimates, I will say that if I get a wholesale offer without the expected rehab budget, there is no way I can calculate if a deal exists or not and I refuse to waste my valuable time traveling to every wholesale deal sent o see what the rehab is only to find out that once calculated, it was never a del for me. At minimum, a good wholesaler should provide photos and an itemized list of repairs. That way, the rehabber can plug in their own numbers based on the photos and itemized list.

Originally posted by Will Barnard:

To be a true wholesaler you need these 3 main ingredients:
1. The ability to contract RE at great discounts.
2. The ability to build a real buyer's list (larger, the better)
3. Ability to evaluate your market and ability to peg rehab numbers. Both of these require a vast knowledge of the local market conditions and the know-how to quote repair items.
Without ALL 3 of these items, you CAN NOT be a true wholesaler.
To add a 4th item, you should be honest, provide accurate numbers, and provide as much due diligence to your potential buyers as possible. This will allow you to keep yoru buyers coming back for more deals.

I have a question. I understand a TRUE wholesaler needs to have the ability to contract RE at great discounts. That comes with the ability to negotiate, which gets better with time. Building a buyer's list is something that gets better and stronger with experience and time. However, the last detail...ability to put together a good rehab estimate. This is what I'm having a hard time figuring out. I can go to Home Depot and put together a list of SKU numbers and cost. That doesn't seem too challenging but I hear that's the easy part of the rehab estimate. The LABOR....how do I figure out what the cost will be? I am assuming, forgive me for assuming, that not all contractors charge the same and the quality of work differs from contractor to contractor. Also how do I estimate how long it will take to perform certain task for example replacing a full kitchen or gutting a 1800 sq ft house down to the studs? Can you suggest a book or website I can find my answer in?

Great question Brian. I have some posts n BP regarding this, you may want to search for them. In addition, while it is true that some contractors are cheaper or more expensive than others, the key here is to get close, not exact. The exact number is up to the rehabber.
As far as time, a good rule of thumb for an experienced rehabber with a good crew is that it will take a week for every $10k in rehab. Now, that needs to be adjusted at times depending on rehab size. For instance, if the total rehab is only $10k, it will likely take longer than just one week, but should not be more than two. Regardless, there is no need to provide a rehab timeline for a wholesale buyer, just an amount OR an itemized list of repairs. If you don't have the time or ability to perform your own estimations, simply provide an itemized list of repairs with photos. If you gave that to me, I could easily calculate my own repairs. That said, without having a decent idea of costs, you will not know if your offer amount will make for a good deal or not.

Lastly, my advice is to learn how to break down the home into sections and know the average costs for each section. For example, I know that a new kitchen which includes gutting existing, new cabinets, new granite, new stainless appliances will be around $7k for me on a standard cookie cutter home in CA. A full bath remodel complete with new vanity, new toilet, new tub, new glass tub enclosure, new tile on walls of tub, etc runs $2,500 per bathroom. So if the home has two baths and a kitchen, I know I am instantly at $12k. Then I move on to paint costs, flooring costs, windows and doors, stucco or siding, landscaping (a typical home will be $1k per front yard, $1k per backyard) HVAC, roof, and finally electrical and plumbing fixtures.

At Home Depot and Lowes, many of the items have installation prices on them. Just know these individual prices are high.

This is something I say aloud and to myself(while smh) often and I am a wholesaler myself. Many people protesting to be real estate investors aren't and often get away with it because they assigned/wholesaled a property or two for profit so they figure they've won the title. Yet many know nothing about how to do a CMA nor accurately perform other due diligence and will offer all sorts of ridiculous pricing for purchase and/or rehab. Its becoming more and more vastly an issue around the country and certain SEC rules & regulations may qualify which can land them in a court of law or worse prison.

Kudos,
Mary

i have read some of the beginning comments in this thread about bad wholesalers... and I agree with them but lets look at the little things rehab investors do as well... to be fair!! :-)

First, they always over estimate the repairs. I would say I am right about 80% of the time and the only things I don't know about I cant see. That is why I have 5-10 days for the investors to come look and do their own estimates. I ask every investor who shows up, how much are you estimating, mainly because I want to see if i'm correct and mainly I want to separate the "clueless rehabber want to be's" from the real ones. Remember, there are guys who play the rehab game but have never done one because they are afraid of pulling the trigger. Aka.. they have no balls. Plus, I always leave room to negotiate with my seller so I can get a better deal, which takes a little work but well worth it.

Second, everyone has a different opinion of what a rehab should be. I just did a deal in my city which needed about 15-20k of repairs. I bought it for 30k, sold it for 36k. I had many investors tell me it needed 30k-35k worth of work... knowing that the home was worth 80-85k fixed up. Now... where they went wrong is how much they planned on putting into it. Why would anyone put 30k into a home that is worth 85k tops, unless they are going to increase the square footage of the home to raise its value, which you would have to do with this one because its only 800sqft ranch and full basement. Just stupid on their part if you want my opinion.

Anyways, after laughing at the 30k guys I finely found a guy who brought in a contractor who agreed with my assessment that 15-20k is all he would do based on it being a city property. Sold that day and got a deposit for $1500 and closing in 2 weeks. The guy should make 17-22k on it and will come back to buy more from me. Not a bad payday for a low priced home right?

So just because rehabbers have a hard time with wholesalers, and I don't blame them because most are new and naïve, doesn't mean that they can't be wrong too! I end up SELLING the deal in a way that is best for the rehabber because even they may not see it. I can't tell you how often I hear a rehabber tell me... "I make the house perfect" for the reason why they overpriced the repairs. All BS so I move on. If the home is valued at 130k plus in my city, an investor can think that way, but, for a dinky home in a very nice area of the city... the plan has to be sold to them so you can tame their grandiose ideas of getting their own TV show.

So before all you rehabbers cry about bad deals brought your way, maybe how you are looking at the deal is WRONG as well. Out off the 10 investors that came through my house last week, 6 were clueless and 3 were too stupid too see the profit.

That's my opinion at least. But if any of you rehabbers want to do business with me.. Let me know!

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Just another quick example before I go.. I had a house under contract for 100k. Its value when finished was 175k and all they had to do was paint the inside, because the colors were horrible, and finish the laminate flooring which the owner already bought and paid for and was leaving with the house. He also installed 80% of it but couldn't finish it because he got sick. He was also leaving all appliances. It took me 30 days to sell this house because most investors thought the deal was TOO GOOD to be true. Finally, I had two guys show up on the same day and sold it for 112k cash. They were fighting over the house in front of me because these deals are rare. So sometimes when a deal sounds too good to be true.. It may actually be a great deal but your skepticism has gotten ya.

I am an agent who is just entering the wholesale world. But just like saying all investors are out to screw you and all agents are bad is just too broad a term. While I am sure there are wholesalers out there just as you describe, I have been an agent for 12 yrs, I am 52 years old and have bought, sold, and repaired my own homes. While I am not proven as a wholesaler, I do have common sense, good knowledge of real estate prices, areas, etc...and I will be asking the buyers on my buyers list what they are looking for and search for properties that fit the buyers. I ain't sayin', just sayin'... : )

but lets look at the little things rehab investors do as well... to be fair!! :-)

First, they always over estimate the repairs. I would say I am right about 80% of the time and the only things I don't know about I cant see. . . . I want to separate the "clueless rehabber want to be's" from the real ones. Remember, there are guys who play the rehab game but have never done one because they are afraid of pulling the trigger.

I understand your points, but lets be clear here, shall we! Your first line quoted here states "what rehabbers do" then you go on about the clueless ones and wannabies which I would NOT classify as a rehabber, just as I don't classify those who call themslves wholesalers and do all the things they shouldn't (which this entire thread is about). Perhaps I should create a topic on the truth about rehabbers next!! In there I could certainly point out the mistakes those who claim to be rehabbers but are not yet.

As far as your numbers posted on the first deal, you sold at $36k with a $20k rehab and a top sale price value of $85k which would be at 66%. On exit values under 100k, I suggest that a rehabber be all in for 65% rule, so your 66% is close enough and I would consider it a deal if sent to me. To get that type of spread (and in your case, it was purchased at $30k so your all-in if you were the end rebahher would have only been 59% which would be fantastic) you really have to know your area, your numbers and have the ability to locate a seller motivated enough for that spread. Kudos to you. You made a quick and almost riskless profit of $6k, while passing on a $25k plus profit if you took it down yourself.

The key, in my opinion, between the wholesale and rehab decision here is this: Can you consistently find deals to match that in your area each month to generate an annual income at least close to equal to the rehab of just a couple deals (say 3 at $25k profit)? It would take 12 wholesale deals at $6k profit to equal 3 flips at $25k each. Just some food for thought.

By the way, I have said it before and will repeat here, the ONLY reason I was able to wholesale in the past was due to my previous experience as a rehabber! This is not to say this is the only path, just my path.

Unless one is planning to do the repairs themselves, it makes sense that to get an accurate estimation of rehab costs, it would require obtaining bids from a licensed and bonded contractor.

With that said, should it be the wholesalers' responsibility to bid out the repairs of a project in order to obtain accurate repair costs, or does the responsibility rest with the rehabber?

Also...

Since every rehabber is an individual, and every individual has their own idea of what they would like to do in a rehab project, then wouldn't it be in the rehabbers' court to define the "Scope of Work" in to obtain a more accurate estimation of repairs?

Thanks,

I would not bid out repairs myself on a deal. Maybe a slab repair at most but that would be pushing it.

If you have a solid track record your buyers will come and view the deal and real buyers can walk a deal and have an answer within the hour. Okay if its a funky deal thats falling off a cliff maybe not but your standard deals are very point and shoot.

Really though, who cares what I do. It's what is takes to sell your deal. So, if you think its needed. Do it.