is this a good deal?

Question

I'm assigning my contract. The county assessed value is 80,000 dollars. It's a 3 bed 2 bath. It is currently being rented for 700 dollars/month. The tenant has been there for 15 months and doesn't plan to leave. There are no repairs except paint on outside. The tenant has kept it very clean and in good shape. I'm putting it under contract for 44,000 dollars. So i will try to sell at 54,000 ( probably will negotiate ).

Will Barnard · Answer

Tyler, as Jon mentioned, the assessed value means nothing. If the rent value is $700 monthly, then the 2% rule would state that this property is worth $35k. Perhaps you should re-assess your offer. Even if the 2% rule is low for value, there is no way that any investor would pay more than 1% of the rent which would put the value at $70k, and most investors cap it at 1.5% ich would value this property at $46,700 (rounded up). Also, you expect to make $10k in a wholesale fee for a property value of (in my estimation) under $50k? Seems very optimistic to me and I doubt the market will bear such a fee.

Jon Holdman · Answer

What's the property really worth? Tax assessments are useless for determining property values.

Tyler S. · Answer

Thank you will I appreciate your help a lot!

Will Barnard · Answer

Tyler, when I said not to leave room for negotiating in your wholesale fee, what I mean is that all your negotiating should be with getting the highest spread you can from the seller. From there, you set your wholesale fee based on that spread you earned in negotiations with the seller and also base it on your knowledge of what your market will bear for your buyer's as every buyer is different. As to using 10%, or 15% or 20%, that will vary based on each specific deal and each specific buyer. Set your appropriate fee for that deal and send it out. Then, if you don't get any takers, you did any one or a multiple of the following 4 things: Did not negotiate a large enough spread, do not have a large enough real buyers list, did not go after properties your buyers are looking for, or your fee was too high. Before actually purchasing, yes, I suggest you have either an agent or your title company provide you with an up to date CMA for comps.

Tyler S. · Answer

Also do you think I should get comps from the mls before I go through with my deal? Ive already got zillow and county assessed. And also would the mls comps be enough by themselves to determine value?

Tyler S. · Answer

Will I don't undetstand the part about not negotiating. I have to make an offer on the property to get it under contract right? And how do I tell whether I should use 10% or 20% as my wholesale fee.

Will Barnard · Answer

@Stephen - 2% rule states that the total gross rent divided by 2% is your offer value for the rental property. So for $1000 monthly rent, you can pay no more than $50,000 however, this rule isto practically guarantee that you will have cash flow. If you buy at such a rule, you will have cash flow. @ Tyler, when wholesaling, you do not want to be "negotiating", that is for making offers and dealing with service providers. When wholesaling, you need to be shopping for deals that your buyers are looking for and negotiate a great price from a seller. Once you do that, the equity in the deal will be the guiding factor to your fee. Typically, a guideline for wholesale fees is 10%-20% of the spread. Example: $100k contracted deal that needs $25k in repairs and the exit value (ARV) is $179k. You have a gross equity spread of $54k in such a deal and so you can expect to get between $5k-$10k in such an example. The exact fee will depend on your buyers and the deal itself. Some deals are easier while others are more difficult and so your fee will range depending on several factors, plus every area is different. Remember, this is only a guideline and you can obviously get what ever the market will bear.

Stephen Tangwa · Answer

Thanks John I will check that. Steve

Jon Holdman · Answer

Stephen, please read in the Rental Property forum. There are several threads that discuss this metric. Tax assessments are for tax purposes, not values. There are any number of reasons why they may be different. Some counties have past sales available on line. Some title companies will make this data available. If nothing else, look at comps (not zestimates) on zillow. Best is to get access to the MLS either by working with an agent or becoming one. Very best is to learn your farm area intimately. Follow it over months and years. Watch all the sales. Track them. Look inside as many as possible. Drive every street. With enough effort, you will know values in the area. ARV is a very key parameter. There's no quick and easy shortcut to determining it.

Stephen Tangwa · Answer

Hi Will, you made mension of the 2% rule. Could you help me understand what it is and how it works. Thanks. Steve