There is a property I am interested in wholesaling. It's in a great neighborhood and the seller is asking for $189,900. The ARV is $270K. Repairs are estimated at only 15K as the property only needs some cosmetic work. My wholesale profit will be 6K. Tell me if I have structured this correctly. According to my calculations below, we would be offering 168,000 to make this deal work. Is it worth making an offer this much lower even though they'll still be making about a 62% return on their sale? Is this what you would consider a "good deal" for my seller and buyer? The person who put out the ad said they are real estate agents and wholesalers. He said the sellers are motivated to sell ASAP. Please correct me! I'm very coachable. Be nice :) Thanks!
ARV: 270,000 (X .70)= 189,000
Repair Costs: $15,000
Wholesale Profit: 6,000
189,000 - 15,000 - 6,000 = 168,000.
Chances are the property is worth nowhere near $270k, it probably has some deficiency that makes comparison with seemingly comparable properties invalid.
It would be e trembly rare for a $270k real market value property, even needing $15k rehab, to sell for $189k. You say the people advertising are wholesalers; if so they would be flipping or selling it for as much as they could get, not this huge a discount.
I sold a high rise condo I owned in Phoenix last year for $260,000, while the same layout the floor above sold for $310k. Why? Because mine was overlooking the rooftop of a parking garage, and about 50% of the view was obstructed. Of course I knew this going in, which is one of the reasons I got it for a huge discount.
Some of the differences with SFR that make them less valuable than otherwise similar comps are location on a busy street, smaller lot, bad condition, structural defects, higher tax area, different school zones, different deed restrictions, access to main roads, rush hour traffic, obsolete or unpopular architectural style, inferior finishes, time since remodeling, age of roof, flooring, and others too numerous to mention.
To get the discount to fit your formula, you’d probably need to find a house needing significantly more than $15k of work. The truth is $15k covers a cosmetic makeover, not rehab, not updating, and certainly not remodeling.
I think you're a bit low on your offer here so long as your repair number is right. The 70% formula is a bit out of date and really not specific enough when it comes down to it.
I think you're better off itemizing each expense and formulating your offer off of that. The big variable will be how much buyers in your area are willing to accept as a a return on their money. I think 10-15% is a pretty good barometer but it's going to be up to you to peg that one.
Here's how I see the numbers:
$270k sale price
-$13,500 sale commissions (5%)
-$2,700 in purchase closing costs (1%)
-$2,700 in sale closing costs (1%)
-$2,000 in holding costs
-$6,000 wholesale fee to you
-$33,750 profit to investor (12.5%)
=$194,350 Max allowable offer
This is higher than the asking price which leads me to believe you might be off base on the repair number. Did you find the deal on the MLS? Deals with this kind of profit built in including a $6k wholesale fee aren't usually falling off the trees these days.
If you're sure you have your repair number pegged correctly, then you have room to up your wholesale fee IMO.
Thank you for your responses!
@Matmorgan, I am having trouble using the wholesale calculator because I don't know where to get these numbers from:
sale commissions (5%)
purchase closing costs (1%)
sale closing costs (1%)
I'm not familiar with the wholesale calculator myself. The numbers I gave were just examples based on transactional costs where I live, but they should hold up pretty well in your market too. You'll get a better idea of what those numbers look like as you do deals.
Did you have specific questions on the numbers I allocated for each expense?
@mattmorgan I suppose my question is, how did you come up with the number for sales commissions, closing costs, holding costs, etc.? I know that a lot of it comes with time as you do deals but how do I get these figures for my very first deal. I have no idea what holding costs and closing costs would be say on a $168K home.