Hello all!

Thanksgiving is just around the corner and I’m getting excited.  I love the holidays… there’s just something about how the holidays make you feel that I can’t get enough of.

Anyhow, this morning we got a great question from a reader about wholesaling real estate.  Just like I was when I was first looking for real estate investing information… this reader is frustrated and confused with the whole process.

I could tell this reader needed a little push… so I sat down this morning and typed up a response (way longer than I initially intended). 

If you are at all looking at wholesaling real estate or just getting going in real estate investing, you’re going to want to read this post. 

Enjoy!

————————————

The Reader’s Wholesaling Real Estate Question:

“hi my name is latasha i’m a new real estate investor and every time i think i’m on the right path way i have to go back and re look thinks. i need to know what is arv and how does it play roll in making the numbers work i viewed your formula and i still don’t get it alot of people do give the formula with out an example; say for example u have a property worth 100.000 and the ho owe 50.000 and the have 7,500 unpaid mortgage, 4,000 paint in and out, 2,000 update kitchen, update bth 2,500, closing cost 3,000, reh 13,000, my fee 10,000=8,000

how do we know how much to sell to the reh and to buy from the h.o.? and how do u determine the market value of the property? do u go by  what there asking for? i’m working on a deal and it’s a reo and there asking for 69,000 how do u determine the market value.

thank u i hopefully you’ll be able to help”

Our Response:  (to the real estate wholesale formula post she read)

Hi Latasha,

Excellent question.

Let me try to clear it up a little for you.

I’ll start from the basics and work my way up to give you a full picture.  Some of it might be review, but… hey… a little review never hurts.

Okay… first off, you are not the only one who gets derailed from the path to success every now and then.

I have been derailed many times… but it is all in your mindset and how you choose to blast through the wall and get back on track.  For me, what gets me back on track every time is to go back to the basics and remember just how simple real estate investing is when you look at the basics.

So, here are the basics that you need to remind your self of when investing in real estate and wholesaling.

Wholesaling real estate is the simple act of buying a property low, selling it at more than you bought it (or put under contract for). 

I know, that is obvious.  But, let’s now break it down a bit further.

Start with buying a property low:

To buy a property low you must find a homeowner who for some reason is willing to sell it to you for less than what it’s worth.  There are many reasons people sell assets for less than what they’re worth.

 - Bad tenants
 - Divorce
 - Rundown property
 - Inherited the property
 - Foreclosure
 - Not to foreclosure, but can’t make the payments
 - Death in the family
 - etc. 

The catch here is that you must first know about what it is worth before you can tell if you are buying low. 

How do you know if you are buying low?

First, you need to find out what the property is worth.  To do that, you need to find what other houses with similar traits (# of bedrooms, square feet, baths, condition, etc.) in the same area have sold for recently.

To do this you can either go down to the county courthouse… or even better… get buddy buddy with a realtor and have them help you out on getting “comps”. 

ARV is simply what the house will likely sell for after all repairs are done.  There is no exact science to this… but there is a close science.

Regarding one of your questions…

NO, ARV is not what the homeowner is asking for the property.  Most homeowners have no clue what their property is worth.  Most guess way too high and base it on emotion.

The only way to get an accurate ARV is to get accurate comps on comparable properties in the area that have recently sold (within the last 3-6 months… or sooner if possible)

Simply, go back to your realtor friend (or do it yourself), find a comp with very similar traits in good condition.  If there are big differences in the properties, simply account for them (i.e.- if the property you are looking at has 500 less square feet than the closest comp., ask the realtor what 500 less square feet will do to the price).

Once you’ve got a good comp and a close estimate of about what the house will sell for after it is fixed up, that is your ARV.

Now, let’s figure out what you should buy the property at:

Okay, now you know the ARV (what the house will likely sell for after it is fixed up).

You need to find out how much repairs need to be done… and what they will cost. 

If you are wholesaling, you aren’t the one who is going to make the repairs… but you need to know how much the repairs will run so you can find out a good price to buy it for that leaves room for the rehabber to repair and still make a good profit.

So, next find a reputable contractor to walk through the property with you to determine the rehab repairs that need to be done to get it to sellable condition. 

Look at everything…

  – Foundation
  – Heating system
  – Plumbing
  – Electrical
  – Roof
  – Paint
  – Floor coverings
  - Kitchen (cabinets, floor, appliances, etc.)
  – Bathrooms
  - Landscaping

and on and on. 

Basically, you want to have all of your basis covered.

Come up with an estimate for the repairs, and add 10-15% for unforseen expenses.

If you don’t have a contractor friend, there is an excellent and pretty darn accurate manual of rehab repair costs.  I think its under $30 too. 

Check it out ==>   rehab repair costs

Now you have your repair costs…

It’s now time to figure out what you should pay for the property:

Okay, we have the ARV and now the repair costs. 

Now you need to find out what the wholesalers you plan to offer the property to are looking for as far as % below ARV. 

Most rehabbers are looking to buy a property for no more than 60-70% ARV minus repairs.  So, don’t go to them with a property at 80% ARV expecting to make an easy sale. 

This step is extremely important.  Find out what your buyers are willing to pay, so you can craft your offer to make sure you can get it sold quickly.

For this example, let’s say the rehabber buys at no more than 70% ARV minus repairs.   That is your goal sales price to the rehabber. 

Now, of course you need to figure out what you want to make on the wholesale.  On your first few deals don’t get too greedy.  Treat the first few as more of an education than a profit making potential.

I would try to get a couple thousand out of the first few if there is room. 

Once you figure out what you want to make out of the deal… now all you have to do is your math and you have a price that you can’t go over to purchase the property.

Let’s go over an example with your numbers:

Rehabbers Requirement:

 (ARV) $100,000 @ 70% ARV – repairs/your profit/carryingcosts

Your Purchase Price Calculations:

ARV = 100,000 (this is from comps in the neighborhood… never guess)
Repair Costs 4k+2k+2.5k = $8,500
Closing and carrying costs 3k+2k (carrying costs) = $5,000
Your Profit = $10,000

Now do your math:

  $100,000
  x       70%  (the rehabbers max ARV %… ask them for this)
—————–
 = $ 70,000

    $ 70,000   (now subtract expenses and your profit)
  -     8,500
  -     5,000
  -   10,000
———————
=   $46,500   This is the most you can pay for the property with the numbers provided.

After that simple calculation, you now have a rock solid number that you cannot go over.  This is your roof.  If you can’t get it for this price or under, find another deal. 

In this example, I think your fee is way too much.  You should shrink it down to a couple thousand for your first few to get the hang of it… then start to squeeze a bit more profit out of it.

I probably wrote way more than I needed to… but I wanted to be thorough. 

The essence of it is very simple.

1.  Find a property
2.  Find out what similar properties in that area in good shape have
     sold for recently
3.  Find out how much $ it will take to repair the property to sellable
     condition (make sure you aren’t simply guessing)
4.  Find rehabbers and ask them what ARV they purchase at
5.  Choose how much you want to make on the deal
6.  Take the rehabbers ARV % and subtract repairs, your profit
     and other expenses.
7   That is your max offer price

Very simple when you break it down.  Buy low… sell higher.

When you are just starting out it really helps to have a realtor who can figure comps, a contractor who can help to calculate repair costs, and 5-10 rehabbers who you have already spoken to and know their requirements.

If you find a property and go through the calculations, make your offer 20-25% less than your max offer price.

Then, you have room for negotiation if the seller comes back. 

Remember, you can always offer a higher price… but you look very silly if you start with a high offer… and work your way down to a lower offer.

Well… I hope that helped to clear things up a bit.

Before I go, with that REO you are working on where they are asking $69k… you need to get comps on the property.  If you don’t already, find a good realtor who can help you out with these comps until you get the hang of it.

If you are planning to wholesale this REO, just be sure that you have several buyers already in place who have cash to buy (you don’t want a buyer who has to go get financing… not reliable enough). 

With the REO game… if you get an offer accepted and end up not being able to close on it… the banks will hesitate to accept an offer from you next time because their confidence in your ability to close is shot.

So, with REO’s, either be able to purchase the property yourself… or have several cash buyers lined up who are willing and able to purchase within 15 days.

Anyhow, I’ve got to run. 

Have a great thanksgiving and good luck on that deal!

Cheers,

Trevor Mauch
Founder
The REI Brain

Here's A Few Related Articles...

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• Real Estate Investing Repair Checklist – Free Real Estate Form
• Real Estate Flipping – Is Flipping Real Estate the best way to start in real estate investing?
• 3 buyer types to stay away from
• The low-down on inspecting before you buy – that good ol’ checklist

Categories: "How to" tutorials, real estate investing techniques, rehabbing, wholesaling
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