First Wholesale Buy Deal Feedback ASAP Please

[Melissa Block]

Hello, I have successfully connected with a wholesaler. They have found me a property in the Lakewood, CO 80232 zip code. 

Current Details 

1963 Brick Ranch Single Family 992 sqft/3 bd/1 bath 1 car garage. There is 992 sqft in the unfinished basement to add an additional bathroom and 2 more bedrooms. 

We will need to clear the hoard of belongings left behind from the entire home before the demo and rehab can begin. The front lawn has no grass. The previous owner has zero-scaped the entire front lawn.  

The wholesaler has calculated the ARV at 570K and stated needs only a $60K cosmetic renovation to get it to that ARV

I estimate that it will take 74K in rehab and used that higher number and estimated the ARV to be 560k to account for a further decline in prices over the next few months.

Questions 

This wholesaler has sent me 2 other homes that I hesitated on because I felt they were overpriced after I ran them through the Fix and Flip calculator. The wholesaler told me that the homes were both bought by other investors for full asking price. Now I'm questioning if I'm turning down good deals because I'm being overly cautious and overestimating costs and underestimating potential profits. I'd really like some help from the community. 

They are asking $389K and the report shows that I would need to buy at max 310,600 to make a 20% profit if I can sell the home for $560K. 

Am I going about this all wrong? All feedback is welcomed. I will be walking the home today at 12PM MST and they are going to want me to make a quick decision and I want to be as prepared as possible. FYI, I will have a contractor with me but in general, is my line of thinking wrong since other investors are picking these properties up in less than 12 hours of my being notified that the properties are available for off-market purchase? 

View report

*This link comes directly from our calculators, based on information input by the member who posted.

[Randall Alan]

Quote from @Melissa Block:

Hello, I have successfully connected with a wholesaler. They have found me a property in the Lakewood, CO 80232 zip code. 

Current Details 

1963 Brick Ranch Single Family 992 sqft/3 bd/1 bath 1 car garage. There is 992 sqft in the unfinished basement to add an additional bathroom and 2 more bedrooms. 

We will need to clear the hoard of belongings left behind from the entire home before the demo and rehab can begin. The front lawn has no grass. The previous owner has zero-scaped the entire front lawn.  

The wholesaler has calculated the ARV at 570K and stated needs only a $60K cosmetic renovation to get it to that ARV

I estimate that it will take 74K in rehab and used that higher number and estimated the ARV to be 560k to account for a further decline in prices over the next few months.

Questions 

This wholesaler has sent me 2 other homes that I hesitated on because I felt they were overpriced after I ran them through the Fix and Flip calculator. The wholesaler told me that the homes were both bought by other investors for full asking price. Now I'm questioning if I'm turning down good deals because I'm being overly cautious and overestimating costs and underestimating potential profits. I'd really like some help from the community. 

They are asking $389K and the report shows that I would need to buy at max 310,600 to make a 20% profit if I can sell the home for $560K. 

Am I going about this all wrong? All feedback is welcomed. I will be walking the home today at 12PM MST and they are going to want me to make a quick decision and I want to be as prepared as possible. FYI, I will have a contractor with me but in general, is my line of thinking wrong since other investors are picking these properties up in less than 12 hours of my being notified that the properties are available for off-market purchase? 

View report

*This link comes directly from our calculators, based on information input by the member who posted.

@Melissa Block

I read your post and feel like I want to offer you lots of words of caution. I would be very cautious with any wholesalers representation as to either what a property will sell for or what it needs. The old adage of “Don’t trust the messenger”rings very true here. 

My analysis of a property always starts with looking at what is selling and what has sold recently in the area as to establish values. In today's market, however, you have to also factor in that there has been a huge shift in the market in the past few months. So, even looking at recent sales at this point could be quite misleading as to an ARV, as interest rates have doubled, and buying power has really come down for buyers. Remember that any home that is for sale on the market right now, hasn't sold at that asking price yet… Many people are holding out that they can still get higher prices, when the market may have moved away from them. I would be very cautious about using sales data that is more than three months old in today's market.

You can use Zillow and go to the map that is provided on their page of most any property and have the option to click on a tab called lot lines which will quickly show you recent sales in the area you were looking at.   You can then click into the listing and look at the pictures of the house that sold to see how it compares to your subject house.

Regardless, the source you use, you have to make sure you’re comparing apples to apples – same level of renovation and condition of your property to your comparison 

I quickly pulled up the ZIP Code that you are looking at and for 900 ft.² the ARV you are being presented appears really really high to me at first glance. I saw houses that were double the size of what you are dealing with selling for way less than what you were being told was the ARV. (By $100,000 and more) - but not knowing everything about your subject property makes that observation very subjective.

It did look like condos were selling for more per square foot in homes though.  Keep in mind I did 1 minute of research though.  I would look at what similar properties are selling for based on dollars per square foot, and do a deep dive on that as a part of establishing ARV. Take 10 homes around your subject property and see what the average ARV per square foot tells you.  By using dollars per square foot you can somewhat translate what different size properties mean to your size property.

Being that this is your first deal, it throws up even more red flags for me.
 
While you don’t mention your location, I got the impression from your post that you don’t actually live near the property this wholesaler is selling you. How familiar you are with the renovation process makes a big difference here. We manage our own renovations, but only do it locally. Trying to find vendors, as well as stay on top of a renovation when you are not present would  be really challenging. If this is your first remote renovation, or your first renovation in general, I would tell you that would be a huge challenge to find quality people that you can trust to do the job when no one is looking over their backs. Even when we are present, it is difficult to get exactly what we want without staying right on top of most every vendor. There are just too many little decisions that someone has to make as to how something is  going to go that can’t be properly managed without trusted eyes on site.  Left unchecked, the typical vendor will always choose the easiest / fastest way to accomplish something- which may not always be the best way.

Then, there is what you may not know that can always hurt you financially. A recent example of this on our part was that we were trying to do a cosmetic renovation on an older property, and somehow decided that the windows needed to be replaced. This immediately led us down the rabbit hole of needing engineered plans, a ton of additional permitting, and having to bring the entire renovation up to 2022 building code with the city inspectors checking every little detail on a 95 year old house. $40,000 unexpected dollars  later, we had new windows (worst decision ever!! Lol). We will still be fine, because there was upwards of $200,000 in profit on the deal - but it put a serious dent in our forecast.  The market also cooled in the process, so that didn’t help either.  The broader point being that on occasion things can go sideways – very sideways, and you have to have a deal that can absorb something like that to ultimately come out ahead financially.  The other point being that if this is your first renovation, you may not know what you don’t know at this point.

We personally always throw in at least $20,000 of unexpected expenses into an initial calculation, because you don’t know what you don’t know about the property until you start to tear it apart.  Think along the lines of “Is that asbestos?” And what that would do to your cost calculations for instance.

The ARV values alone on your deal make me skittish, but a lot of that is probably not knowing the finer details. My biggest suggestion would do lots of research on the actual ARV you could expect from the house using as recent data as possible. My other suggestion is to start small and start close with a house that you can drive to and oversee. A half million dollar deal is a pretty big place to start for a beginner. if you have the resources to begin there, great! But if a $20,000 cost overrun would cause you huge financial problems, I might suggest starting smaller.

Wish you the best, and be really cautious if this is your first jump into a renovation.

Randy