Figuring out wholesale prices to give homeowners

[Christopher Langan]

So Im going to assume this has been asked a million times, but I was just struggling to figure out the ARV and the costs.

I have knowledge on what  and how much X should cost and stuff, but when people explain calculating the costs its more elaborated through writing.

I was wondering if someone could kindly explain it in math form.

Im more of a math guy just fyi. 

For example. I know a house thats on the market for $350,000 and the comps of the neighborhood/area is $325,000-400,000 depending on size, sq ft., etc. 

How would I determine a price I could offer

P.S. This is a distress home as well as a friends home. I dont believe it will sell on the market for that amount.

[Lee S.]

Originally posted by @Bill Gulley:

Yes, 10% of ARV.

No, I didn't appoint myself as the pricing cop, thank you. That comes from my legal and economic understandings of predatory dealing, what functions and services of all kinds are priced at, how values are compared, be it doing a tax returns as a service, or repairing a car, doing brain surgery or facilitating a sale of real estate. What's the intent of the Fair Trade Act, what would the Federal Trade Commission say? If you were a publicly trade company, how would the SEC look at your sales, think it's just based on big dollars?

Since this was a rental, I assume, 10% is a bit on the high side but very acceptable for a "no touch" deal. If you fix something, title, repairs or some survey botch, then you have a basis to add that value as well.

Those getting into any business need to understand business first, most really don't but think they do. By that, I mean they don't really understand their product, the valuation of services by comparable services, or ethical and even legal requirements of doing business.

Seems many here think of being in RE like a predatory moving company might operate. Give a bid for a job, haul the stuff across country, then hit the client up with fees that triple the bid price and keep the property in storage, for additional fees, until they get paid. BTW, those types get sued and lose.

Attitude check needed. Just because there is money on the table it doesn't mean it's yours to take, you have to justify EARNING it, not just TAKING it.

Consider learning pricing, a bit of managerial marketing, business law, comparable unit pricing. There are various areas of managerial accounting that can be read without knowing debits and credits or FIFO and LIFO.

Wholesaling to a flipper certainly has to be priced allowing a profit for the flipper, not necessarily at 70%, you need to put a pencil to it beginning at the ARV, then back off to a probable sale price, then subtract his profits, costs of repairs, holding costs, transaction costs to get to you number of what you sell for, take out your fee and follow the same costing approach to get to an offer. Problem is, wholesalers try to grab too much for what they are doing (which is comparable to the services of a Realtor). If your offer includes more than that means the owner is getting less or the flipper gets less or the end buyer pays too much.

If your fee is excessive, then the owner turns you down or the flipper won't buy, so your fee needs to be reasonable. If you are successful obtaining excessive fees, then someone is getting screwed. The other guy may or may not find out, they may or may not care, point is, they got screwed by you from taking more than you're ethically entitled to and perhaps legally entitled to as to dealing equitably.

This all goes to part of the issue of why other real estate professionals have problems with wholesalers and "investors" or rather real estate operators.

A good education in real estate and business will cure many of your problems as a wholesaler. Learn to compute values related to your business instead of taking the lazy, uneducated, uninformed methods of using rules of thumb, then you'll see where profits and pricing intersect. It's not that hard, just takes some time and average intelligence. :)    

Talk down to people much?  You speak as though nobody but you has any business experience (I've been self employed my entire life thanks). I don't have a dog in this fight, I've never wholesaled and don't plan to unless I come across a deal that only makes sense to wholesale.

You seem to be very comfortable questioning other peoples ethics and morals having never met them or dealt with them in a personal or business sense.

I'm in no way encouraging or ok with people taking advantage of people (lying etc),It's one of the most disgusting human traits.  but If a wholesaler is completely honest with a home seller, Gives them an offer and backs that offer up with real numbers, where is the dishonesty?  If they then pass on the deal to a rehabber or retail buyer and that person crunches their own numbers and is happy with the price, what does it matter what the wholesaler got it for?  It's irrelevant.

You're making the comparison of "profit margin" to "dishonesty", two completely different things.

Someone can charge anything they want for a service (as long as a price is not regulated) and as long as they do it honestly and ethically, it's up to the consumer to make their own decision.  RE investors are not monopolies, the consumer has infinite choices. 

Are you telling me a Ferrari is worth 10-50x what a honda civic is worth?  Is Ferrari Predatory?  Porsche has the highest Gross Margin in the auto business, they must be a bunch of predators since their GM is 3x higher than Ford and GM. How do you value worth?  Has Bill Gates really added Billions more "value" to mankind than you or me?  How about Peyton Manning? Tom Hanks? Donald Trump? a school teacher?

How about eating at your standard local chain restaurant vs the fancy 5 star place?  Show me the value add.

I invest in the stock market, I can click my mouse right now and buy a stock for $100 and if I get lucky, I can sell it in a short period of time for $150 -$200.  Where is my value add? How did I earn that? (hint: risk vs reward)  Is a house in California really worth 10x what a house is worth in Ohio?  Does this mean that every home seller in California is predatory?

If a wholesaler is trying to mark up the price too much then they won't find an end buyer, it's called supply and demand.  As long as they didn't lie to the seller, they are only screwing themselves.  Yes, they may delay the seller from getting rid of their property.

The problem that people have with "wholesalers" or "real estate investors" has nothing to do with "wholesalers' and "real estate investors" and has everything to do with the individual doing dishonest things.  These same individuals would be dishonest no matter what business or profession they were in.  Name a profession, I'll show you someone that did something illegal or unethically within that profession with a quick Google search.  I'm embarrassed to be associated with others within my trained profession because of their dishonesty.  It seems you feel the same way about people within RE investing and are choosing to make a blanket statement/accusation because of that.

This does not give you the authority to pick arbitrary profit margins and call anyone that doesn't stick to your number's unethical or predatory. If it's not arbitrary, please show me the equation you use to come up with your % numbers, show your work please. I'm not talking about % ARV, Please show me your equation that told you that 10% ARV is the ethical number and why 5% or 15% isn't. I'm sure everyone on the board can learn from this. Hopefully we can all then use this equation to value any work we do within any profession/business from this point forward, you seem to have it all figured out. Maybe some on here can take this magical equation into their current jobs and leverage a nice raise with it. People refer to CEO vs employee pay differences, depending on what study you reference, the difference is 5 to 331x. We can fix all of this with your magical equation.

Every comment I see on here regarding "finding the deal" is it is the most valuable and difficult part of investing. If you can find the deal, you can do anything with it (wholesale, rehab, retail etc). Why is the wholesaler responsible for the flipper's profit? Again, the wholesaler will only be screwing himself if he is asking for too much, just like any other product it will sit on the shelf. I have an idea, if the flipper doesn't like the wholesalers deal, don't buy it and go find your own deal! I see houses listed on the MLS locally that I feel are 50-100k over what I think they are worth retail, should I call up the seller and RE agent and call them names? Maybe I'll let the eventual buyer determine the value of these houses to them, I think that is called capitalism right?

While your at it, lay out a deal you have done (never seen you talk about your personal investing, you seem to focus on belittling others), then show  your "ethic's equation" on your profit margin.  Going by your theory, if you have done any buy and hold you better have paid retail because you added no value.