How are people making money paying these prices?

Question

I've been ramping up marketing significantly over the past few months and now I'm starting to directly compete with some of the major wholesalers and flippers in the Central PA market.

I keep getting feedback from sellers that I'm just way off from the offers made by some of these other investors.  By so much, that I feel like I must be missing something.

A few examples:

1. Pre-foreclosure property, judgement balance of $155K, ARV was $220k (best case).  The place needed at least $60k in rehab.  Seller said he had an offer from another investor at $160K.

2. Probate property on about 2 acres of land.  Nice 2200 sq. ft. home, but needed completely updated, including a brand new forced air HVAC system.  My rehab estimate was $120K, ARV was $300K best case.  My offer would have been in the $75K-$80K range.  I walked through at the same time as a local wholesale/flipper, and his offer was $170K.

So, how are investors making money paying these kind of prices? Are they wholetailing? Maybe for example #2, they planned to subdivide the land? Once I figure in rehab AND holding/closing costs (including interest/points), I just can't understand how people are making any kind of money while paying this much for property.  These aren't newbie investors, these are major outfits.  Are they wholesaling to newbie investors (making it an even worse deal for them)?

What am I missing here?

Brandon Roof · Answer

First, I wouldn't get too frustrated because it sounds like you've done a good job sticking to financial principles and not chasing "deals".

I think any of the scenarios are going one of only a few ways:

- Your estimates are off and those a little more fine-tuned to the market are picking these properties up.

- Your estimates are correct but there are other investors willing to take a smaller return on investment or are volume players.

- You're not missing anything and these investors' optimism is going to get them extremely hurt.

Based on what I see a lot in my market, it's more of the latter two.  People with higher incomes splashing around without a true understanding of the implications of their purchase.  I have a number of doctors in my market that are some of the major landlords of single-family and small, multi-family rentals that I can only imagine are squandering away money and opportunity.

Then there are others that are wowed by what they see on HGTV and decide to try their hand at it only to get punished.  This often occurs with things like the stock market as well, or even things like sports betting and poker.  People hear the one-in-a-million story and believe they are destined for the same greatness.

Hang in there and be mindful of your process.  Take the blinders off every once in awhile to reevaluate yourself.  Often, not much will have to be changed but I think it is important to remain adaptable in an ever-changing environment.

Jack Seiden · Answer

I think there are three answers to this this question

1. Some people probably are saving money by having their own crews although I think this maybe overstated I just essentially gc’d an paint and carpet type contract and felt I was paying more doing it on my own on a per hour basis than with my gc.

2. Saving money by cutting quality significantly and not pulling permits ( I spend tens of thousands every Reno getting stuff up to code and doing things no buyer would ever notice or in some cases even care about)

3. I think more people then you would think are losing money at this point.

Russell Brazil · Answer

A lot of rehabbers are employing their own crews these days, thus significantly cutting down on rehab costs.  Getting rehab costs lower is key in this market.

Bill B. · Answer

Anyone buying multiple houses per week/month is probably paying 20% less for supplies and maybe 50-70% less for labor. With that in mind you’re paying $30k more for rehab while they pay a few k more for the house  maybe they’re doing lease to owns, getting retail plus good interest. Ask them? See who buys the next house you dont get  look them up on the county assessors website

I’m very small time but I’ve hired the right guys where I can get tile installed for $2/sf when the going rate is $3 -$3.50 and the GC is making money at that rate, so what’s he paying, $1/sf? That’s a $2-4k difference. Does painting the entire interior of a house cost you $1,000 or $3,000?  Does an entire granite kitchen cost $1200 or $3200? I think this is the hardest part, finding the independent workers who charge a good rate for themselves but much less than going rate and giving them enough business so they recognize you as an opportunity.

Unfortunately you’ll find many/most of them will just keep raising their prices every time you give them a job.

Ronny Lee · Answer

There is nearly always someone willing to overpay. Go where your money is needed most. :-)

Derrick E. · Answer

I guess it's possible your rehab costs are off? Maybe you are planning to over renovate the place? Is it possible your ARV is low?If you are confident in your numbers then stick with you offers. If your numbers are accurate those other guys will be out of business before long. \

I also think we are getting close to the top of this current cycle so maybe that has something to do with it?

Best of luck to you.

How are people making money paying these prices?

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