Possible $100K Wholesale?

Question

Hello BP Members,

Here is the scenario. This one is close to home as it's a friend of mine who has decided he is selling his home "As Is" in the Bay Area and moving. The circumstances surrounding it aren't the greatest, as he was essentially screwed by his wife's sister after she agreed to use her credit to get them into a house that they paid down for $400K over 10 years, she didn't pay the down payment, or taxes an insurance, and now she is demanding more than half the $500K equity after saying multiple times in 10 years she wanted nothing in return. The sister won't let up on the amount she wants, and since the house is in her name, she holds all the cards. Terrible lesson in getting things in writing and never trusting family. The sister was literally a saint before this all went down. Nobody saw it coming. So unfortunately the sister can't even get approved for a $50K loan, let alone refinance to pull the money out, and my friend can't qualify to get his own loan once he pays off the greedy sister.

So here are the numbers...

House current value - $1 million

ARV (every room needs updating) - $1.35-1.4 million

Update/Repair estimate retail finishes - $150K

Update/repair estimate rental grade finishes - $30K

They both don't have money to update the home to sell for top dollar, so they are willing to take the $1 million and move on.

My thoughts are if they sell with a realtor they walk away with about $950K after 5% commission fee.

My offer -

$925-950K  (no realtor involved)

Closing in 30-60 days

I get it under contract, put about $30K into it for cosmetic fixes so its rental quality ready, and then assign the contract for $100K to an investor or family willing to put in sweat equity.

Do a double closing and pay the sister $500K equity with the proceeds from the end buyer, I take my $100K fee, and sister pays my friend his portion of the $500K equity they agreed to.

I know I am missing something here, but it seems like this could work and I could profit $75K for engineering the whole thing.

Thoughts?

Johnny Kang · Answer

@Curtis H.

I did a 6 figure assignment, and I'm in a high priced area as well, so take my reply for what it's worth.

A few things:

- I understand your view on a family looking at this as a bargain, but to assign a contract, you need a cash buyer. Most families looking at a property as a bargain they can put sweat equity in, won't be able to pay cash for a property like this.

-Why spend $30k of your money? Then your $100k assignment is really a $70k assignment. It'll have to be sold to a fix & flipper and they're gonna wanna finish it the way the want to, knowing what works in that market.

-Most fix & flip guys want between 15%-20% return, depending on the capital they have to deploy. But at over a $1million, even though the return for them may be around 16%, it's too much capital for so little return. Last developer I worked with who was all in for $2 mill (paying our assignment fee), paying the purchase price, cost to develop, holding costs, etc, netted $1mill. 50% return on their money.)

-If you can find a title company who knows how to structure the closing, you don't have to double close for anyone to know what your assignment fee is. This is how we assign, without doing a double close.

-You can make this work and make some money, but I think most flippers in LA would want a higher return if they're going to spend over $1mill.

Let us know how this pans out. :)

Shannon Wright · Answer

Thanks, @Shari Peterson ! @Curtis H. , lets talk about this, I can close it for you and we can discuss pricing. I don't believe there is anyone in the SF Bay that will close a double or assignment.

Shari Peterson · Answer

From a funding standpoint, you can expect to pay about 2% of the loan amount for a double closing.

As far as closing costs, it is important that you have an Escrow agent that is investor-friendly and familiar with the ins and outs of handling a back to back double closing so that it is handled professionally and legally. I'd recommend that you contact @Shannon Wright at Casa Bella Escrow. She knows the ins and outs so that you will have a smooth closing.

Curtis H. · Answer

Also, what do you guys estimate closing costs to be on a transaction like this with a double closing? I want to make sure I have all my numbers at least in the ballpark.

Curtis H. · Answer

@Darron Washington

You are correct in your assumption, but I'm thinking more "wholetailing" than a true wholesale. I envision a family buying this as a bargain they can put sweat equity into at $1.05 million, and it will be worth $1.6 million after 4-5 years of them doing upgrades as they can afford it. There would be a line around the corner for the open house. I have already seen this myself when visiting relatives in the Bay Area. It's insane out there.

Curtis H. · Answer

@Alex Verdugo

The remaining $350K or so is meat on the bone for the buyer or investor. They won't realize that $350K without putting in at least an additional $100K in upgrades, in addition to the $30K I would have put into it. I could do that myself, but that would make this a remote rehab, which I have no interest or experience in doing. If I can make $75K profit and not touch it at all, I would rather do that of course.

So in a perfect world I would...

Buy it for $950K (max)

Immediately wholesale it for $1.05 million ($100K profit)

New buyer can put $150K into it and sell it easy for $1.4 million.

Alex Verdugo · Answer

I think you’re missing $350K. $950k - your $100 k fee for making the deal - the $500k to the sister and you still have $350k left over. Cause if you don’t want it, I’ll gladly take it off your hands.

Darron Washington · Answer

That selling as is price seems a bit high for wholesale but hopefully that works out for you

Possible $100K Wholesale?

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