Real wholesaler or snake oil salesman?

Question

I'm very new to this aspect of the realestate world. And I am giving a good deal of consideration towards seeking out wholesalers for Leeds. At least until I am able to develop my own system of lead generation. My question is how would I know the best way of finding good wholesalers and then checking to make sure they are indeed good wholesalers with good leads.

Mitch Messer · Answer

Hi @Brian Judice and wecome to BiggerPockets!

Wholesalers should be judged mainly on the quality of the deals they put forth.

For example, if they are selling you a contract on a buy-and-hold property, the numbers should actually make good sense. Personally, I want to hold properties that can deliver at least a 10% cash-on-cash return on my investment. So, if I reviewed 10 deals from a wholesaler that are allegedly "great rentals," and I calculated that 9 of them would barely produce 5% COCR, I would stop looking at any more emails from that wholesaler and add them to my mental "snake oil seller" list!

Mitch Messer · Answer

@Brian Judice Sure! Many cash flow investors (myself included) use cash-on-cash return (CoCR) as their primary measure of the value of a buy-and-hold property. I look for deals with a CoCR of 10% or better.

The CoCR formula is pretty simple: Annual_Cash_Out / Annual_Cash_In.

Annual Cash Out is typically Rents minus Expenses (Maintenance, Management, Taxes, Insurance, Repairs and Capital Expenditures) minus any Debt Service.

Annual Cash In is Acquisition Cost plus Closing Costs + Rehab Expense).

So, when I'm presented with a possible rental deal, I assign numerical values to all these variables except one: Acquisition Cost. I set up my CoCR equation equal to 10% and then I solve the equation for Acquisition Cost.

If my calculated Acquisition Cost is greater than or equal to whatever price the wholesaler is asking, there might be a deal here for me.

If my calculated Acquisition Cost is less than the price the wholesaler is asking, there probably isn't a deal for me here.

To be clear, I use CoCR to determine my Acquisition Cost for all the buy-and-hold properties I analyze. The fact that there is a wholesaler involved does not change my calculations.

I don't care whether a wholesaler is able to extract a fee from my transaction: Either it's a good deal for me or it's not!

Mitch Messer · Answer

Thanks @Roger Pearce!

Yes, I look at wholesale deals to assess whether the numbers are accurate and actually make sense. I can't tell you how many "deals" come across my desk where fair-market rent is $1100, repairs are $20K, ARV is $170K, and yet some misguided wholesaler is asking for $150K and telling me this is a "great buy-and-hold opportunity!" Even if I believed their numbers (and I never do), right out of the box this "deal" FAILS as a rental AND as a flip!

What this tells me is that the wholesaler has ZERO idea what investors want. Hence, snake oil seller.

Regarding your other questions:

• Any wholesaler who can't produce interior and exterior photos of a property they're trying to sell needs to lie down and take a nap: They're just wasting everyone's time!
• I'll only send a contractor to estimate costs for deals I'm really serious about. For my initial, back-of-the-envelope analysis, I'll just make an educated guess-timate.
• I rely on my friendly agent/broker to help me with comparable sales info from MLS.
• Yes, I do use Rentometer in those areas where it has proven to be accurate, based on my past experience. Craigslist is another good source of active rentals for determining market rent.

The underlying goal here is to reach a point where your initial analysis takes minutes, not hours. That only comes from lots of practice, and that's why a steady deal flow is so important!

Brian Judice · Answer

@Mitch Messer thank you sir for the valuable insight. Could I come back to this thread in the future and run quick deal numbers by you to get your advice?

David Coyle Jr · Answer

@Mitch Messer I owe you a beer! I gotta hit you up when I'm in your parts... You just gave us a lesson... Thanks!

Mitch Messer · Answer

@Brian Judice Yes, if you're buying cash, your Acquisition Cost will be the same as the final negotiated Purchase Price + Closing Costs, but if you're financing the deal then your Acquisition Cost will be Down Payment + Financing Fees + Closing Costs.

Also, I can't just plug in a Purchase Price upfront because I don't yet know what it is. That's the whole purpose of this analysis: To determine what price I should pay.

My Purchase Price has absolutely nothing to do with the wholesaler's (or the seller's) Asking Price for the property.

Every investor has to decide for themselves what CoCR is acceptable to them. If your minimum CoCR is lower than mine, you'll always be able to offer a higher Purchase Price.

Rehab expense comes from someone laying eyes on the property and giving an educated estimate of repairs. Maintenance is more of a guess-timate that usually tracks closely with rent, so many investors apply a simple multiplier to account for it, for example 8% of annual rents.

Brian Judice · Answer

@Mitch Messer there is a lot to go over there. Is acquisition cost the same as purchase price? If so why wouldn't you figure that into your cocr right away?

Also when plugging in your numbers for rehab and maintenance, ext.  I suppose that just comes with experience and crunching numbers?

Brian Judice · Answer

@Mitch Messer would you be willing to share a "formula" so to speak, of how you quickly break down the numbers on a buy and hold property? If you use an app to help, could you recommend it please. Thanks. This have been very helpful.

Roger Pearce · Answer

Great advice, Mitch.

When you say that you would review his 10 deals does that mean you go to other resources to confirm whether or not his numbers were true?  Are there red flags in wholesalers' estimates that make you realize their deals aren't based in reality? Do you research houses that a wholesaler doesn't send you pictures of?  Would you go to each individual house with a contractor to see how much work they really needed?  Do you use sites like Zillow, Trulia, etc to confirm the prices of houses in the area in different conditions?  Do you use rentometer or other sites to confirm rent?

How much confirmation/research is enough and how much is too much so you don't create so much work for yourself that you find yourself avoiding it. I'm about to start looking for our 3rd SFH rental and it's been a year or so since we bought the second one so I feel a bit rusty.  We found our last one on the MLS and make nearly10% on it, and it was already in great shape when we bought it, but I'd like to do better this time by finding a better deal.

Are there other resources you use besides the ones above?  Any of the ones I mentioned that you couldn't live without?

Thanks,

Roger Pearce

Real wholesaler or snake oil salesman?

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