Need help with wholesale $ figures - Posted by Shannon (WA)

import · January 21, 2003, 1:22am

Posted by Jennifer on January 21, 2003 at 13:24:23:

Shannon,

You are making this more complicated than need be. The average amount a wholesaler makes is 4k. OF course that varies with each and every deal and area.

I don’t think you need to reinvent a formula- the formula’s that are out work great.

If 133k is the number you come up with- then thats what the rehabbers will be wanting also. Get it for $128k and flip for 133k. Or close to that as possible.

You want the rehabbers in your area to know that you bring them good, money making deals.

Good luck to you and keep us posted!
Jennifer

import · January 21, 2003, 1:22am

Need help with wholesale $ figures - Posted by Shannon (WA)

Posted by Shannon (WA) on January 21, 2003 at 02:22:09:

The property comps at 240,000 and repairs at 35,000. Using Ron Legrad’s formula of 240,000 x 70% - 35,000 = 133,000. This gives the second investor 48,000 profit (20% of 240,000) and seems like a lot. This will be my first wholesale. Some people have advised wholesaling where they will recieve 20,000. This property needs a lot of work and I was thinking that 30,000 profit would be fair. Any suggestions? Also, the owner may be willing to sell subject to…his monthly pmts are 700 and he owes 75,000.

Thank you

import · January 21, 2003, 10:18am

Re: Need help with wholesale $ figures - Posted by Sean

Posted by Sean on January 21, 2003 at 11:18:46:

Let me see if I understand you, the house FMV after repair is 240k, it needs by your numbers 35k of repair and you can lock it up for 133k.

Ok, now you want to make 30k wholesaling? Making the rehabbers purchase price 163k… that’s nearly 70% of FMV before the rehabber puts a dime into the property. After he puts in 35k to repair it and I assume at least 2-3 months of holding it while rehabbing (35k is a lot of repair in my oppinion on a house) he’s in it for 198k+holding costs of lets say 1500/month so you are now at 200K and house is worth 240? So rehabber is now into property for 83% of its value. Not counting any additional holding costs to find a buyer, pay any sales commissions and/or transfer taxes etc…

Personally I think you are being greedy, needlessly. I really doubt a seasoned rehabber will pay you your numbers… the math doesn’t add up. You might get a rookie to pay your price, but most rehabbers don’t want to be looking at 80%-90% into the property which with your price will definately put them.

Also, just as an aside, I can’t speak for other rehabbers, but the more repair a property needs, the bigger the profit better be. To make 20k for 35k of repair isn’t really the best return on time and energy, can make that kind of return on houses that only need 10k in rehab or less.

I think you have potential here, won’t say its the best deal I have ever seen. But you could probably walk away with 5k safely, and maybe 10k… above that, I think you are pushing your luck. The rehabbers going to do 35k worth of work (real tangible work) to fix this property up to make his profit, while you located the property for him, with the numbers you have hear, that “finders fee” is nowhere near 30k worth. Don’t be greedy! Wholesaling is about finding and flipping making a few grand and moving onto the next one. If you start thinking you should be making as much as the rehabbers, you are going to be sitting with a lot of fixer uppers on your hands and no way to pay for them.

Focus on making your money, not worrying about what the rehabber is going to make! If you do, you will never get deals that will work, or price your properties correctly. If you want that big paycheck, then rehab the property yourself.

That’s my 2 cents.

import · January 21, 2003, 10:13am

Re: Need help with wholesale $ figures - Posted by Jim Kennedy - Houston, TX

Posted by Jim Kennedy - Houston, TX on January 21, 2003 at 11:13:36:

Hi Shannon,

As Jennifer has noted, don’t try to get too greedy. Find out the numbers that rehabbers in your area use to analyze a deal. Then calculate your maximum offer based on those numbers.

You wrote, “Some people have advised wholesaling where they will recieve 20,000”. (sic) I don’t know to whom you’re referring, nor do I know in what context they mentioned the figure of $20K. If I understand your post correctly, the $20K figure is the anticipated profit to the rehabber rather than the wholesaler. If that’s the case, they might have meant to say a rehabber would look for a MINIMUM of $20K.

You also wrote, “This property needs a lot of work and I was thinking that 30,000 profit would be fair”. Quite frankly, what you think is fair is virtually irrelevant. What counts, is what the “marketplace” thinks is fair. Or, to put it more accurately, what the market will bear.

The reason that LeGrand’s formula of ARV x 70% - Repairs = MAO works so well is that the “soft costs” can generally be calculated as a percentage of the ARV. By soft costs, I mean all of the costs related to the acquisition, holding, and disposition of the property. 70% is the reciprocal of 30%. 30% is the figure many rehabbers use to calculate soft cost plus profit. However, when you start dealing in houses that are significantly more expensive than the average homes in your area, the formula may not hold true. The acquisition and disposition factors remain constant as a percentage of the ARV, however, the holding costs can increase significantly. Why? Because more expensive homes tend to take longer to sell.

In my market, the median price of homes is about $130K. I focus my rehabbing efforts in the $85K to $150K price range. The most expensive rehab I’ve ever done had an ARV of $250K. The most expensive “pretty house” deal I’ve ever done had a FMV of $380K. Whenever I’m dealing with homes that are significantly more expensive than the median price for homes in my area, I look for a higher spread in order to cover higher holding costs due to a longer marketing time frame.

Shannon, you didn’t mention the average price of homes in your area. If $240K is within the average range (as it is in many markets), LeGrand’s formula may very well suffice. If, on the other hand, $240K is significantly higher than average for your market, you may need to adjust the formula.

Michaela has alluded to the “risk/reward ratio” involved in rehabbing. A rehabber is taking on a considerable amount of risk, not to mention the amount of work necessary to complete a rehab project. Most rehabbers establish a risk threshold that they find acceptable. As rehabbers, we are entitled to be compensated for both the risk and the work required.

Like Michaela, I too use 65% in my formula. Find out what the rehabbers in YOUR area look for and you’ll know not only what you can pay for properties in order to make a wholesale profit but also how to price them so that they’ll be attractive to your target buyers (rehabbers).

Hope this helps.

Best of Success!!

Jim Kennedy,
Houston, TX

“Life is a unique combination of ‘want to’ and 'how to,” and we need to give equal attention to both".
Jim Rohn

import · January 21, 2003, 9:04am

Re: Need help with wholesale $ figures - Posted by michaela-ATL

Posted by michaela-ATL on January 21, 2003 at 10:04:15:

Shannon,

to give you an idea - i’m used to major rehab. These are the points i would look at:

If a wholesaler tells me repairs are 35k, i figure they’re at least 50k, if i want to get top $. (In fact, if i calculate 35k myself, i usually end up spending 50k )
I don’t want to put any of my own money into it, meaning, my purchase price has to be below 65%, including repairs,

I also wouldn’t touch a major rehab with little profit(under 50k), but i know others thik differently.

On the first 2 points, i assume experienced rehabbers will think similarily, so keep those in mind.

michaela

import · January 21, 2003, 7:20am

Re: Need help with wholesale $ figures - Posted by Jennifer

Posted by Jennifer on January 21, 2003 at 08:20:25:

The second investor wants to see numbers like that…They use formula’s as well and if you ask too much, you won’t get much response.

This is however, a good chance to make a good chunk wholesaling. The key is not too get greedy.

What are you able to purchase the property at?

Good luck to ya!

import · January 21, 2003, 11:09am

Re: Need help with wholesale $ figures - Posted by Shannon (WA)

Posted by Shannon (WA) on January 21, 2003 at 12:09:01:

Thank you for your reply, but what I was trying to state is that using the formula I would sell the property to the rehabber for 133,000. From the comments it sounds like $20k profit for the rehabber is minimum and that it should increase with the risk. What do you think about after $20k increasing it dollor for dollor with the repair cost, ex: If the estimated repair costs are $10k then make the profit $20k; If the repair costs are $40k then make the profit $40k.

import · January 21, 2003, 11:24am

Re: Need help with wholesale $ figures - Posted by Shannon (WA)

Posted by Shannon (WA) on January 21, 2003 at 12:24:14:

Thank you for your reply. I was trying to be generous with the rehab costs. I was using Ron LeGrand’s rehabbing figures and increased some of the numbers. I also put in 20% for misc. and another 20% for possible contractor fees.

The house is 1580 sq ft, 3/1.5, built in 1968, and the neighborhood is nice. The house has been vacant for the last two years (the neighbors have been mowing the lawn) and the roof has been leaking for the last 1.5 years (living in the Seattle area makes this a problem ) The floor boards are all warped and there is a lot of wrotten wood. I was thinking everything would need replacing (kitchen, baths, etc.).

How do you figure your repair costs? I really am looking to be fair, if not a bit better than fair. I would like to earn a rep where rehabbers will know they can trust my numbers.

import · January 21, 2003, 9:08am

Re: Need help with wholesale $ figures - Posted by michaela-ATL

Posted by michaela-ATL on January 21, 2003 at 10:08:58:

Just want to clearify: if i say little profit/50k, then that means, that there’s a whole lot less profit once you consider 6 months holding costs, commission (yes, we all think we can sell without agent, but a buyer may come with an agent - are you going to throw them out?) closing costs etc. By the time all of those numbers are taken off, it might be 20k-30k profit and that’s too small for a major rehab, that i have to put 50k into, in my opinion. It’d be ok on a cosmetic job (10k-20k rehab)

michaela

import · January 21, 2003, 12:28pm

Re: Need help with wholesale $ figures - Posted by Sean

Posted by Sean on January 21, 2003 at 13:28:23:

Shannon,

Sorry I misunderstood you. I would say as a rule of thumb 20k-25k is probably the minimum most rehabbers are going to accept on a property. I personally won’t touch a rehab where I can’t see an after repair profit of at least 25k. (and I am buying properties post repair that are valued at around 60k)

Profit should definately increase with risk, the more money I have to put down, and the more repair I have to do, the better profit I need to see. If I got a house that needed 35k of repair, I would have to see a lot of profit at the end of that repair probably in the 50-70k+ range before I would even think about it… its not worth doing 35k of repair for 35k or profit, when there are so many other houses out there needing 5-10k in repair and can make 25k-35k in profit.
(At least to me personally its not worth it)

It boils generally down to percentages over a set amount of cash. However it is reasonably safe to think that in most markets to really get a rehabbers interest (unless they are a rookie) that the profit should be at least 25k and that would be on no more than 10k to at the most 15k in rehabbing needed.

Now don’t get me wrong, you may get someone to rehab it, after all 35k is still 35k… but it not a plum deal.

General rule is as your original post stated, no more than 70% of the after rehab value into a home. Now some very high markets where 1200 sq ft shanties are selling for 400k-500k obviously 70% is not realistic… but because of the higher values, you can still make good profits at 80% or maybe even 90%… however most markets 70% is a good number.

Other general rule, the more risk the more reward, the more rehab the more reward. IE can get the house for 10k, but needs 60k of work and will be worth 100k when done… that meets the 70% rule, but likely won’t have any takers. Rehabbers generally are looking at a 3 month return on their money, if work can’t be done in 90 days… they will likely pass.

So, I guess in summation, 70% is a good general rule. However the return should go up with risk, the more rehab a house needs, the more a rehabber wants to see in profit. There really aren’t any HARD AND FAST rules, because all markets are different… but those are general ones that cover MOST areas. Get out and talk to some rehabbers and other investors in your marketplace… they will give you the real deal on what works where you are.