Making an Offer

Wholesaling
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Making an Offer

Marcel Pean
District of Columbia, WA · Member since 2016 · 45 posts · 7 votes

This question may be more specific to my market of Washington DC but maybe you can still help.

I recently attended a REIA where a rehabber presented his latest flip and the entire process. At the end he shared his financials.

3 bed / 3.5 bath, ~1,500 sf rowhome in an up and coming neighborhood in NW DC. 

ARV - $660,000

Rehab - $135,000 (He really spent $175,000 but that's because it sat longer than expected plus a few hiccups)

Purchase - $365,000

Based on what I've learned from REIA meet ups and about wholesalers, typically you determine purchase price and wholesale fee using the following formula:

(ARV*70%) - Repairs - wholesale fee = Purchase price

($660,000*0.7) - $135,000 = $327,000. That's not even with me taking out the wholesale fee! As a wholesaler I would have offered the seller anything under $327,000 because I would assume that a rehabber wouldn't purchase it for much more than that. Am I getting my numbers confused? Am I missing something? This is a situation that comes up for me fairly often. Should I really be offering more and how can I justify offering more?

Any feedback on this is greatly appreciated. Thanks in advance!

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Russell BrazilBusiness Member
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
10y

Ignore the formulas and convert it to actual dollar amounts. This was a $60k profit at these numbers even though he blew through an unexpected $40k extra. If you are making offers based on a formula instead of what the market is, you will never close a deal.

$365k acquisition on a $660k ARV is a huge home run. At that ARV I'm typically seeing a $450k acquisition cost in Petworth and Trinidad.

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  • Carolina E.
    Investor · NW Indiana · Member since 2012 · 833 posts · 197 votes
    10y

    @Marcel Pean That formula is a base line.  It works for some markets and not for others.  If you are noticing that many investors are buying much higher than what you get using the formula, you will have to adjust it.  Just make sure the investors are really buying higher and that it wasn't just this investor, make sure they have done a few.  Also, keep in mind, does the property have anything special? location, amenities etc. that would make it worth more.

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  • Marcel Pean
    OP
    District of Columbia, WA · Member since 2016 · 45 posts · 7 votes
    10y

    @Carolina E. Thanks for the feedback! I understand that that formula is a base line and you can between 60% - 80% depending on the property. But even with those adjustments the purchase price was still pretty high! What makes this particular property special is that it is in DC, which is a very expensive market by the way, and it has high end finish such as custom cabinets, marble counter top & hardwood floors throughout. This is the level of how most homes are being rehabbed. Maybe this is why the rehabber paid what he did...

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    10y

    Ignore the formulas and convert it to actual dollar amounts. This was a $60k profit at these numbers even though he blew through an unexpected $40k extra. If you are making offers based on a formula instead of what the market is, you will never close a deal.

    $365k acquisition on a $660k ARV is a huge home run. At that ARV I'm typically seeing a $450k acquisition cost in Petworth and Trinidad.

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  • Marcel Pean
    OP
    District of Columbia, WA · Member since 2016 · 45 posts · 7 votes
    10y

    @Russell Brazil Thanks for the feedback! I see that you are in the DMV also so you can attest to home prices here. 

    Could you please clarify what you mean by "convert it to actual dollar amounts and ignore the formulas?"  I know the formula is a guide/base line but when you have ARVs hovering around the million dollar range, is there a rule of thumb or a percentage amount increase to determine purchase price?

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  • JD MartinBusiness Member
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    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes
    10y

    You have to know, with pretty high certainty, the following:

    1.Reasonable ARV.
    2.Reasonable rehab costs
    3.Projected holding costs

    Without that info, no formula matters. With that info, no formula matters either, as you can reverse engineer the problem based on how much profit you, and the investor, want/expect/need to make. 

    Percentages make less sense as you get higher in cost because your profit is in real dollars. Which would you rather have: 10% of 100k or 20% of 30k in profit? 

    Formulas for this kind of stuff is just a quick and dirty way of seeing if something might make sense. You are have to put actual numbers to paper.

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  • Brandt Smith
    Cypress, TX · Member since 2016 · 132 posts · 49 votes
    10y

    @Marcel Pean 70% works great at $100k. At higher properties you need to use a lower %, and this is driven by your market.

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  • Nattapon Permchom
    Investor · Columbia, SC · Member since 2010 · 30 posts · 6 votes
    10y
    I found the formula is accurate around ARV80-200k, below and higher than that it became irrelevant. If you can have good repair estimate, I would calculate by real $$. Like others said 70% rule is just a guideline which help you weed out unrealistic deals quickly, if you look at so many deals per day this help you save time on deal analysis and let you do other stuffs.
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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    10y

    Formulas offer you a good rule of thumb...but in your example you suggest the property might be worth only $327k using the formula. The person who bought it hit a massive home getting it for $40k more than the formula suggested. I don't know what neighborhood it was in, but I'd guess Trinidad or Petworth based on the ARV, and that it's a 3 bedroom. If that's the case most flippers would pay $450k (125k more than your formula suggests) and would make $50k profit on it typically.

    The 70% rule is an estimate, but it doesn't hold up in many real life flips. There are properties where you might get them only at 80% and can still make a ton of money because as you move into higher price points that 20% spread represents a higher dollar figure. Conversely you can get a property at 60% if the price point is too low you wouldn't make enough money to make it even worth your time to do the flip, since the 40% spread represents too small of a dollar figure.

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  • Zane Bradshaw
    Cape Town, Western Cape · Member since 2016 · 53 posts · 2 votes
    10y

    What exactly is this formula used for? Why is the ARV being multiplied by 70%? What are we trying to calculate? Is it the max price to be offered for the property based on the average cost in the neighborhood? my question is if you are calculating this on the ARV of the house you want to flip, how do you calculate the ARV before the flip is done? Mustn't there be a valuation done on the house to get the ARV? Sorry I'm new to this, and really would like to know how it works. Thanks

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  • Marcel Pean
    OP
    District of Columbia, WA · Member since 2016 · 45 posts · 7 votes
    10y

    @Zane Bradshaw Great questions! No need to apologize for wanting to learn. The formula is used to determine your Max Allowable Offer or MAO to the seller. Most investers want to buy a property for 70% of the After Repair Value or ARV so they can get at profit . You make money when you buy. In my original post I was trying to calculate how much to offer to a home owner to buy their house. I determined the ARV by comparing similar houses in the area that have sold within the last 6 months. Similar in size, bedrooms, bathrooms, street and any other unique features. Because I live in an expensive market, the formula doesn't quite apply to me. This formula is more of a base line and the percentage can range between 60% - 80% depending on the market and the condition of the property.

    Hope this helps! Keep asking questions!

    Also, @Russell Brazil The property is in Petworth. Good guess! Thanks for your feedback, I think I'm starting to get it now :) 

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  • Zane Bradshaw
    Cape Town, Western Cape · Member since 2016 · 53 posts · 2 votes
    10y

    @Marcel Pean Thanks for that! That makes a lot of sense. So is it calculated more to 60% on the more expensive properties, since the profits are far larger? And then for lower priced properties more to the 80% marker? Thanks 

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  • Marcel Pean
    OP
    District of Columbia, WA · Member since 2016 · 45 posts · 7 votes
    10y

    @Zane Bradshaw No, I think it's the other way around. More expensive properties will be on the higher side because the spread is larger. Like @Russell Brazil said above, would you rather have 10% of 100k or 20% of 30k in profit? But what I don't know is the minimum acceptable profit a rehabber expects to make? Should I still calculate purchase price using the formula but with a higher % or is it better to subtract all repair expenses from projected ARV?

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    10y

    @Marcel Pean The minimum a rehabber is typically looking to make in DC is $50k. The typical profit range in Petworth is $50-$100k. In PG county the minimum on the sub $350k ARV properties is usually $30k. Profit margins on those are typically $30-$50k.

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  • Zane Bradshaw
    Cape Town, Western Cape · Member since 2016 · 53 posts · 2 votes
    10y

    @Marcel Pean My bad,  yes it is the other way around. And I am also interest to know those percentages. With regards to what @Russell Brazil said, what are the average ARV of those homes? You telling us the profits, but what would the % profits be?

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