Most people in the real estate industry have heard the awful things being said about wholesalers in general. And most of those snide comments center around the bad deals that wholesalers are known to offer. The consensus is that wholesalers are greedy and never need enough margin for investor-buyers to make any money on the deal.
All your buyers are looking for is a reasonable profit after they complete their part of the process and resell it. So to gain favor and credibility with your buyers, you need to look at each deal from that next person’s perspective.
Making A Good Choice
Making good choices is the only way that your business will survive. You need to learn and perfect running comps and analyzing deals. This is the only way that you will be able to create deals that make you money and are still appealing to your buyer. If you can’t master these skills, you will quickly develop a reputation as the person who never has a good deal. And that will quickly kill any dreams you have of making money as a real estate wholesaler.
To avoid this career-killing mistake, follow this step by step process to get a good handle on flips, so you can make money while still leaving something in the deal for your buyers.
The 65% Rule
This rule is the wholesaler’s adaptation of the flipper’s 70% rule. It bakes in a 5% reduction so that we can make a profit and still allow our buyer also to enjoy a profit. The formula is:
Purchase Price = ARV x .65 -Rehab
The value that wholesalers add is locating the discounted properties for our investor-buyers. This decreases their workload, makes us some money, and everyone is happy. But if you are not finding good deals, then your buyers are not satisfied, and you will not be in business very long. The 65% rule keeps you from eliminating the flipper’s profit and killing your business.
ARV And Comps
The after repair value is what you could sell a property for in retail condition. To get this number, you will need to run the comps to determine what the market will bear and how much the fully renovated property will be worth. In most cases, locate three to five properties close to your property. The general rule is that they be within .25 to .5 miles from your property. And they must have sold within the last six months. The closer the comps are to the size, type, and age of your property, the better. Now that you have the ARV, you need to determine the rehab cost.
No two contractors are going to rehab a property at the same cost. Every item can be a variable, so it is best to work with price ranges. This gives your buyer a high and low end when formulating a rehab budget. If you are not well versed in rehab, it is best to work from contractor bids.
Now that you have all of the value, you can plug them into the 65% equation to determine your purchase price.
Now it is time to sharpen your skills at negotiating. Make an offer that is low and will make you a nice profit if accepted. If there is pushback, you have room to negotiate while still hitting your numbers. Don’t be afraid to get into a back and forth negotiation to save some money and get the property at a price that you know will make you some money.
Over the years, wholesalers have become notorious for bad deals that leave no room for investor-buyers to make any money. But by learning to apply the numbers and evaluation processes that flippers use, you will be able to create deals that will appeal to your buyers. Legitimate deals will make buyers happy and keep your business thriving.