Possible Deal Killers?

Question

Hi everyone, so a Realtor i work with sent me an off market short sale deal. He said he would represent me on the buyer side of the deal, gave me the info about the house and i'm going to walk the house with him next week.  Since I am new to wholesaling and never done short sale deal before, is there any deal killer i should look out for when working with a realtor on this? Or any specific questions i should pose to the realtor to find out more about the house? I appreciate your input, thank you.

Aaron Mazzrillo · Answer

A $200K house that needs $75K worth of work? I've been doing this for 15 years and never spent that much money on any property I've rehabbed. Not even the one I bought for $700K and sold for $1.25M. For a $200K house to need $75K worth of work, it would have had to been in a fire, have a serious foundation issue, an airplane fall on it, a broken pipe in the attic that leaked for several months without anyone noticing.. and even that would be a stretch. My most expensive rehab to date was $60K on a $350K house that I took down to the 2x4s on the inside, rearranged the entire floor plan, rewired with permits and added upgraded panel, new windows, re-plumbed, sheet rocked, and replastered the pool as well as added all new pool equipment and blew out the inside with the latest finishes.

I just put a house back together that probably should have been scraped off the lot and it only cost $35K. That included new piers under the raised floor, all new subfloor, new electric, new plumbing, clearing the 1/2 acre lot of piles of junk and trash, new windows, inside finishes done to today's standards and I added an entire bedroom on the back of the house. $35 grand.

If I had to spend $75K on a $200K house, my offer would be... I'll pay your closing costs and give you a gift card for dinner. What's your favorite restaurant?

I just don't think your example is that realistic at all. Or, you need to find a new contractor cuz you're getting seriously bent over.

Phil Z. · Answer

The numbers are not a random 'what if' example.  Its easy to spend $75k on a 2000+sqft house that needs just about everything (not fire or structural).

Your repair figures are insanely low.  Especially to say you couldn't spend $75k+ on a $1.25M rehab or could fully gut a property and rearrange the floor plan for $35k.  Unless you are only talking material costs .. here in New England those number are crazy talk.  Your $350k rehab here would be in the $125k+ range.  A $1.25M ARV rehab you are probably spending $250-300k (these are typically very large colonial properties in CT).

I have flipped plenty of properties and deal with many contractors.  I also associate with a handful of full time investors.  The prices you deal with do not exist around here.

Wayne Brooks · Answer

Yeah, I'm guessing he has no idea you're trying to wholesale.

William Hochstedler · Answer

So you have a Realtor who is willing to help you wholesale an unlisted short sale?

Are you sure about that?

Typically, banks will require the property to be listed as a condition of the short sale.  Also, they will prohibit assignments.  Moreover, laws prohibit the licensed agent from compensating you without your own license so you can't get money from the agent by bringing a buyer.

Start by working on those objections and see where it goes.

Phil Z. · Answer

Well if the subject property is in inferior condition, (which investment properties usually are), then 5% off the lowest comp doesn't make much sense.  I don't understand why you would use a non-subjective formula instead of an accurate ARV and Repairs calculation.

The percentage off ARV doesn't mean much without knowing the repair costs.  I made offers much lower than that when the repairs are extensive.  This might work just to see if a property's worth looking into, but to use it as a basis for making an offer is extremely risky.  In my opinion it's not worth the risk of losing your shirt by not knowing the actual numbers.

ARV - Repairs Formula:  $200k (arv) - $75k (repairs) - $20k (carrying) - $40k (profit) = $65k (67.5% off)

% Off ARV Formula :  $200k (arv) * 50% off = $100k  (You would lose your shirt)

Jim Keller · Answer

Phil

In my Southern California market, mainly Riverside and Orange County there is typically a 20 to 40% spread in the high to low comp's specially among areas that were hit hardest by distressed property sales.  I stand by the plan to offer at 5% below the low comparable pricing,  We typically buy short sales at 55% of ARV and have been doing it for years. These numbers would give any first time wholesaler enough room to offer a good price to the end buyer and make a generous fee for their hard work.

I would agree that anyone buying, selling, and negotiating with a bank fully understand the ramifications of their actions.  We have learned the right and the wrong way to conduct our self and recommend all investors, agent, brokers, and negotiators do the same.  My comments here were to encourage all to move forward and learn to operate at the highest level and be successful.

Come see my latest deal at "my first mobile home flip in Southern California" on bigger pockets  I picked this home up on short sale for 50.13% of ARV.  Our original offer was 39% of ARV the bank said no and countered us at 50.13 of ARV and that worked good for us.

Phil Z. · Answer

You are doing deals on a 5% discount?  That is arguably a 0% discount when   all is said and done. You should be in the range of 30% discount for   wholesaling.

As far as wholesaling Short Sales, I strongly advise against it unless you have a lot of experience with difference short sale servicers.

Steve Baldwin · Answer

@Logan J Davis

As a Realtor who wholesales, I would appreciate your full transparency, up front.

Together the two of you could be a stronger and more profitable team!

Best of luck!

Steve

Jim Keller · Answer

Logan

I'm just wondering if you don't know what the bank will be approving as a far price how could you choose your exit so soon.  My usual game plan is to offer 5% below the low market comparable.  This should/may give you an scenario to possibly flip the property if holding the deal is out of the question.  A majority of my marketing efforts revolve around distressed property.  Our goal is to always start out attempting to buy for the lowest price possible price and adapt the buying strategy if needed.

If the deal is good enough to wholesale to someone for a flip its good enough for you to do the same.  look in some of the hard money postings on BP's or find your own private money and become a flipper.  People tell me all the time how easy it is, I mean we all watch HGTV don't we.  Just being funny....... about how easy it is.  Take this seriously and you could be rewarded well.  A good place to start with your agent,  would be how your two's relationship fits in to the banks arms length agreement you will be required to sign at closing.

Good luck

Jim

Logan J Davis · Answer

@William Hochstedler Thanks for the  response i will check on those!

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