Do Wholesalers need to know/estimate repair costs?

Question

First off, I did search forums and these are the two answers I got :

"My best advice and the safest advice for you, don't estimate rehab costs for them. There are too many factors outside of your control that contribute to rehab costs. As the wholesaler, your job is to find a great property and leave a lot of profit on the table so that you can move onto your next deal and they can rehab and retail.

Now, if you have an inspection report you want to disclose that to the buyer and let them make the decision from there. Your job as the wholesaler is to buy at the right price and sell at the right price.

"Instead of focusing on costs when speaking to the end-buyer investor, I recommend that a wholesaler talk to the things that need to be repaired/renovated and let the investor decide what the costs will be."

However, I was reading an article from an investor than he said this:

""My best advice and the safest advice for you, don't estimate rehab costs for them. There are too many factors outside of your control that contribute to rehab costs. As the wholesaler, your job is to find a great property and leave a lot of profit on the table so that you can move onto your next deal and they can rehab and retail.

Now, if you have an inspection report you want to disclose that to the buyer and let them make the decision from there. Your job as the wholesaler is to buy at the right price and sell at the right price.

"Instead of focusing on costs when speaking to the end-buyer investor, I recommend that a wholesaler talk to the things that need to be repaired/renovated and let the investor decide what the costs will be."

So which is it, do you just need to be able to list to the investor area's of the property that needs repair, OR do you need to know the ACTUAL repair cost as a wholesaler?

Aaron Mazzrillo · Answer

You don't need to get it down to the $100. I rehabbed houses before I started wholesaling so I have experience in this area.

Here is a great cheat you can use. I call it the $5K increment estimate:
Example: 
You see a crappy kitchen. Will it be $5K, $10K or $15K to tear out and replace? 
The bathroom is from the 1950s. Is that a $5K job or a $10K job? 
New roof: Tile $10K, shingle $5K.
Int & ext paint: $5K

The average 1,200 sq/ft, 3/2 runs from $20K-$30K to rehab. If the place needs everything you may be leaning more towards $30K+ as long as it isn't a total disaster.
 
I did an entire house, 3/1, 1,000 sq/ft down to the studs on the inside, insulated the walls, new electric panel, drywall, new windows, landscape, flooring, everything new except roof and hot water heater and it was just over $50K. We had a lot of problems with permits on that job though. You can see pics on my facebook profile. Check out the Avocado Sub 2 Deal in my pictures.

Typically, investors that burn through a few houses a month will have much lower expenses than your 1 a month or less rehabber. The rehab expense will really be determined by your rehabber, what he wants to do to the property, and his/her ability to get quality work done at a reasonable price.

You should have a list of what needs to be done and at least a rough budget for the cost. Go hang out at Home Depot and price stuff out. Use your own house as a learning device. What will it cost you to replace your kitchen? Paint, carpet, new closet doors, interior door, ceiling fan and window for your bedroom?

Aaron Mazzrillo · Answer

Here is my wholesale formula for a deal I am selling to a retail rehabber.
(subtract number for each item as you go down)
ARV
Rehab
Acquisition fees (escrow/title)
Holding Fees (utilities, taxes, Ins, HOA)
$400 Home Warranty (total waste of $400)
Sales Costs (Commissions)
Buyer's Closing Credits (Typically $5K in CA)
Seller's Closing Costs (My Flipper)
Wholesale Fee (My paycheck)
Offer price
-----------------
The amount left is what your buyer will make as profit. If you don't know what the rehab expense will be, how do you know what to offer? How do you know if your buyer will make any money when he sells?

You won't be doing your job of passing on solid deals to your buyers and then you will be here posting about building a buyers list because you won't have any repeat business. I have less than 5 buyers on my list and they keep calling me for deals. They take me an my wife out to dinner. They buy me gift cards to expensive restaurants. It is because they make a lot of money working with me. That is what you should strive to become in your market.

Do your job right and become a great wholesaler, make a lot of money, and get the best investors in your market begging you for your deals. 
Good luck!

Side note: If your buyers need hard money loans, you will need to add that to their expense of doing the deal (pts & int) and deduct for that as well. I don't sell to investors who need hard money loans. My buyers pay cash. I stopped dealing with hard money buyers. It is too difficult and sometimes they don't close.

I know what each of my buyers is looking for as far as a return on their cash invested. I calculate the ROI based on how much cash my buyer will have into the deal. I adjust my wholesale fee or acquisition price (offer amt) according to the expected ROI of the buyer I am selling to.

I hope this helps.

Account Closed · Answer

Hi there, Matt. I personally only go after properties that have cosmetic issues. I sometimes submit offers without seeing a property, yet I estimate a high end rehab/remodeling job when I'm structuring an offer. When I have an accepted offer or a counter, I then will send one of my contractors out to view and inspect the property. I hope this bit of information helps.

J Scott · Answer

Yes, you need to know how to estimate rehab costs, but not for the purpose of telling investors how much it will cost to renovate the house.

Instead, you need this information so that YOU can evaluate the deal personally, so that you know if a potential wholesale is viable or not.

Account Closed · Answer

As a rehab investor/flipper, I wouldn't take a wholesaler seriously if they could give me a rehab estimate on a property they were trying to wholesale. How would I know if the deal was worth looking at? I get about 5 deals a week across my desk and they all have repair estimates. I do my own due diligence, of course.

If you don't want to or feel uncomfortable with give a number for repairs, at least come up with a list of everything that you think needs updating and repaired. This give me at least an idea of what costs I'm looking at to see if it's a deal.

Aaron Mazzrillo · Answer

You still need to know (roughly) how much to deduct from ARV. If it is really just cosmetic, I would use about $10K on an average sized house. All the rehabs I have done in the last 2 years, with the exception of one, were on properties I am keeping as rentals. Even turning a house into rental condition typically costs me in the neighborhood of $6K~$12K. I am basically fixing, painting, and cleaning, not really replacing much except flooring and appliances.

I have made the biggest checks off the complete pieces of junk. I actually prefer those to turn key houses any day. Mold, cat urine, garbage, squatters... The more problems for the owner, the more money that is going into my bank account when escrow closes.

I am sure she is selling properties, but it sounds like she knows what her buyers are looking for and what they are willing to pay. My friend and fellow wholesaler has a great saying about that: "I am the shoe salesman and it is my job to know the financial feet of my buyer."

I'd like to know the percentage of houses she gets under contract that don't close because she has no clue what she is doing?

Matthew J. T. · Answer

My other question is you don't necessarily have to wholesale distressed properties do you? I'm sure there are PLENTY of properties out there with cosmetic problems, than motivated sellers have to sell because they are in pre-forclusure. You don't necessarily need to buy a piece of junk I wouldn't think, as long as the seller is motivated to get rid of the property for whatever reason, I think the less distressed the property is the better.  I don't see a point in dealing with highly distressed area's when there are tons of motivated sellers needing to just move out because they cannot afford it.

Kobus De Villiers · Answer

As Aaron pointed out you just apply the basic $5k increment. Start with basic house that needs just paint inside/outside with a few rooms carpet and assign that an estimate of $5k. Use that as a starting point and then add more as needed.

Remember that this is a tool to help you get your values correct and offer a price that will allow you to sleep at night. If you offer to much and get stuck with a house you can't flip then it is your money and reputation on the line. Do what you feel necessary to be comfortable with the offer you made. Your risk level will not be the same as my risk level so decide for yourself what is needed to sleep soundly.

Matthew J. T. · Answer

Good answers guys, I will take all of what you said into consideration. Let's say you are working with a house that isn't in bad shape at all, that just needs cosmetic work and some touch ups, I wouldnt need to get any numbers for that or just simple numbers?

And give them an idea of what needs to be fixed. Keep in mind when wholesaling a house I dont want to be looking for a complete piece of junk either, I wanna make sure it's in decent shape, at least

According to this lady she says that she's been fine without knowing estimates for years, and doesnt follow a formula.

http://www.youtube.com/watch?v=B-IFl1prszA&feature=related

what do you think?

James Hiddle · Answer

Keep in mind that it's an ESTIMATE not actual cost. Also if you are going to give an estimate make sure you tell your buyer to do their own due diligence anyway. A few will already know this but there are some that do take the estimates as the gospel so tell them to check for themselves.

Do Wholesalers need to know/estimate repair costs?

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