Granted, this is a no-brainer but it’s worth repeating—and repeating and repeating:
As a wholesaler, you MUST evaluate every single wholesale deal that crosses your inbox.
Don’t assume you can always find a cash buyer.
Don’t assume SOMEONE will want THIS property.
Don’t assume you can wriggle out of a deal if you can’t find someone to assign the contract to.
To support all of those points, DON’T be irresponsible and just scoop up every wholesale deal that comes your way. That’s a recipe for disaster and the surest way to end up with LOTS of unprofitable, unassignable properties in your portfolio.
But that doesn’t mean wholesaling is a no-go—far from it. Done right, wholesaling is the fastest way to generate significant revenue as a real estate investor. It’s also one of the easiest ways to make money without investing a dime. That one-two punch is why so many first-time real estate investors start with wholesaling. With so many new people swimming around in the wholesaling waters, though, it’s no surprise those waters get a little murky sometimes…
Evaluating Wholesale Deals Like a Pro
The first step in the process? Evaluating a wholesale deal to ensure it makes sense for the end buyer—likely, the rehabber who’s going to roll up their sleeves, then renovate and flip the property for a bigger profit. Your job is, essentially, to set the stage for that person. You need to think like them and be their proxy in the negotiation and contract process—even if you haven’t found them yet.
That’s a big mental shift for many wholesalers. Often, they think of themselves as the central player in the wholesaler deal equation. Yes, you need to ensure this is a profitable deal for YOU and that YOU can find a cash buyer to reassign the contract to. But neither of those things will happen if, at the end of the day, the deal doesn’t make sense for the rehabber getting that contract from YOU.
Again, think like a rehabber. Do that and you’ll be in business.
To help you understand those ins, outs and other wholesale nuances, here’s what an in-progress deal looks like—this is a real deal that we’re working on right now. There’s a lot to it, as you’ll see, and a lot that needs to be considered. But we’re all-in and all moving forward—and that’s thanks to this robust foundation we laid early on. Check it out…
STEP 1: The motivated seller
The best real estate investing deals start with a motivated seller—the more motivated, the better. In this case, a motivated seller came through our website and clearly stated she needed to sell. The property was in pre-foreclosure and she could no longer afford payments anymore since her divorce. She also mentioned owing $112,000 on the property.
Hoping to avoid the trauma and embarrassment of foreclosure, she was trying to figure out how to get out of the property quickly and easily, before the bank got involved. To her, our promise of buying properties fast and for cash seemed to be a saving grace. Throughout the conversation, she was open, engaged and eager to answer our questions so we could pursue next steps. In other words, she was the epitome of a motivated seller.
STEP 2: Listening for the REAL story
While this seller was very motivated, very engaged and, seemingly, very transparent, we still listened closely to some key details—specifically, details surrounding repairs and renovation work needed. Virtually every seller you talk to will overestimate the condition of their property. Usually, they aren’t trying to deceive. Usually, they love their home and it’s hard to see some of the issues fresh eyes would spot. Be mindful of that during your conversations.
If you’re hearing a property is “all good,” “move-in ready” or “just needs a coat of paint,” dig deeper. Here are some questions you can ask to, hopefully, get a clearer picture of the property and what’s really needed:
- How long have you been in the property?
- IF MORE THAN 10 YEARS: Have you replaced the roof/water heater/HVAC during that time?
- IF LESS THAN 10 YEARS: Do you know when the roof/water heater/HVAC were replaced?
- Have you made any repairs or replaced anything plumbing- or electric-wise?
- What work have you done since you moved in?
- Have you done any work in the last year or two?
- Are the kitchens and baths original? Have you done any work in them?
- If you were going to stay in the property for the next 10 years, what work would you want to do?
- If you were going to stay in the property for the next year or two, what work would you want/need to do?
While, again, you probably won’t get 100% of the story, you will likely learn a little more about potential renovation and repair work needed. For example, if the seller says they’ve been in the property for 40 years and haven’t replaced the roof or water heater, there’s a good chance the rehabber is going to have to deal with it. Sure, a roof could last for 50 years in some cases, but most have a lifespan of 20 to 30 years or so. Worst case? During the inspection, you find out the roof is well-maintained and good to go another decade, and you can knock that cost out of your rehab estimate.
STEP 3: Estimate repairs
Based on your conversation, estimate the repairs a rehabber would have to do to flip the property. Do yourself a favor and go a little higher—this isn’t the time to estimate everything on the extreme low end.
It’s also important to remember most properties need a cosmetic upgrade, too—paint, cabinets and hardware, for example. To get a good estimate, here’s a simple trick:
- Add in all MAJOR repairs—i.e. a new roof, HVAC repairs or replacement, plumbing, electric and windows
- Assume a set cost per square foot to cover everything else
So, for example, we knew this property needed a new roof, 15 new windows and a general once-over:
- ROOF: $9,000
- WINDOWS: $7,500
- OTHER: $20/square foot x 2,000 square foot property = $40,000
In this deal, we initially estimated rehab costs to be $56,500 total. In our area, $20 per square foot is a fairly standard estimate. Depending on your market, though, this could change dramatically. We’ve seen some markets use $10 per square foot and others use $250. More expensive urban and suburban markets tend to be closer to $175 to $250 per square foot, while smaller, more affordable markets can be as low as $10 to $15. Do a little online sleuthing to determine a good estimate for your market.
STEP 4: Pull comps
We looked at the comps and found that similar properties in the area are coming in around $375,000. We’re using this as the ARV—after repair value. This is the amount the rehabber will likely get for the property once renovated and flipped.
STEP 5: Run the numbers
If we could simply get the deal under contract for the amount owed—$112,000—there would be a great profit margin even with the extensive repair work. But, in this case, she needs enough to cover her mortgage plus get her other bills settled while still leaving her with sufficient funds to easily find a new place to call “home.” Add everything up:
- MORTGAGE: $112,000
- REPAIRS: $56,500
- BILLS: $25,000
- SELLER PROFIT: $25,000
- TOTAL: $218,500
In other words, the seller needs to get this property under contract for at least $218,500.
This is where many wholesalers get it WRONG. While that seems to leave us—and the rehabber—with a good profit margin, it’s still important to run the numbers and make sure it all makes sense. Here, we calculated the WMAO—the wholesale maximum allowable offer. Rehabbers will calculate the MAO—the maximum allowable offer. This is essentially the same—the only difference is, we layer in OUR profit as well.
WMAO = (ARV x 70%) – Estimated Repairs – Assignment Fee
WMAO = ($375,000 x .7) – $56,500 – $7,500
WMAO = $262,500 – $56,500 – $7,500
WMAO = $198,500
We use 70% of the ARV to ensure the rehabber has a 20% profit margin and 10% for closing costs. Our fees are a bit flexible—in some cases, we can make $20,000 on a wholesale deal while, in others, we make closer to $5,000. In this case, we budgeted $7,500.
After running the numbers, we weren’t hitting the $218,500 the seller was looking for. In this case, we had a few options:
- Pass on the deal
- Renegotiate with the seller
- Lower some of OUR estimates
We wound up doing a combination of #2 and #3.
- We lowered our fee to $5,000
- We discussed our calculations with the seller and got her to lower her ask
The new calculation:
WMAO = ($365,000 x .7) – $56,500 – $5,000
WMAO = $201,000
The seller’s new ask? $200,000. Perfect.
STEP 6: Find a cash buyer
Going in, we knew we were thinking like a rehabber and that’s helped us engage rehabbers looking for a great deal—a great deal they can clearly see we’re delivering because we’ve already taken into account their costs, their profit margins and their overarching needs. The final step? Flip the contract and GET PAID.