How do you factor holding costs wholesaling deals

Question

Im looking to use this formula to calculate my offers on deals to cash buyers who fix and flip. It was suggested that I calculate fixed costs at 15% of the ARV, and the end buyers profit at 30% of the ARV. Is this reasonable? My formula for calculating offers would then be

100K x.30 = (30K Buyers Profit)

100K ARV x.15= (15K Holding costs and fees)

10K-(Repairs)

5 K- (Assignment fee)

100K(ARV)-30K(buyers profit)-15K(Holding Cost)-10K(Repair Cost)-5k(assignment)=40K

Is the 15 percent holding cost eating up too much of the profit or is this realistic?

Will Barnard · Answer

No, holding costs are included in an investor's analysis of acquisition cost to exit value ratio. In other words, if an investor who is a rehab flipper knows that at 70% of exot value, he can make money, he will offer up to 70% (less repairs) of exit value for a property.

Example, your $100k exit value example - Investor will offer 70% of that which is $70k less the repairs of $10k, so his/her max offer to you would be $60k. So if you expect to make $5k wholesale fee, then you can not pay more than $55k as opposed to the $40k figure in your original example.

Will Barnard · Answer

So the investor would be looking at something like this:
$all-in cost of acquisition plus rehab of $70k, $10k in re-sell costs, $3k in holding costs (not including any interest if a loan is used), and his/her gross profit would be $17k. With $73k invested, that would be a 23% cash on cash retrun which is considered very good. (anything at or above 20% is good).

Roy S. · Answer

Maybe I'm not understanding something.  The buyer will have holding costs and will include that in figuring what he will pay for the property.  So even though the wholesaler does not have holding costs, he still needs to include it in figuring what to offer for the property, doesn't he?  While I agree it's usually included in the 30% (ie 70% of ARV), it still needs to be considered.

Will Barnard · Answer

Bruce,
Brian is correct, you should have $0 holding costs wholesaling a deal (unless you buy, take title, and then you do not sell for days, weeks, etc.) If, in such a circumstance, you used transactional funding, than you would of course incure those charges which could be named "holding costs".

That said, you should be able to structure your wholesale deal without any holding costs. With the numbers you presented, do you really think you can find sellers willing to sell their property at 40% of value? Investors are struggling to get below 75% of value in my CA market. Unless you are in OH, IN, MI or similar, it is rare to find deals at 65% of value, let alone 40%.

Steve L. · Answer

Bruce -

Every market and price range flippers and landlords use a bit different desired profit, but here is the most standard one.

100k ARV (this must be a real number based on 30 days on market)
30k - 30% of ARV for expenses/profit (basic breakdown 10% for closing costs, 10% for carrying costs, 10% for profit)
10k - repairs
5k - your assignment fee

So if you are planning to wholesale that property you could pay 55k.  On a 100k house a 10k profit margin might not be enough safety for the flipper.

You can ask your buyers list what they are satisfied making on each deal and work the numbers that way.  I know my costs are average 13% of ARV with hard money (not 20% like the formula allocates).  But I am my own broker and save money other places.

Good luck.

James H. · Answer

Why would you have holding costs when wholesaling? If you are wholesaling, you get the seller to sign the contract to sell the house to you or your assignee. Then you assign the contract to a cash buyer (your assignee) and charge a fee to tranfer the contract. This way you don't actually buy the house, so there is only one set of closing costs which your buyer pays. It doesn't cost anything to hold a contrat except the earnest money you give to the title company to hold which is the "consideration" that makes the contract valid. You set the earnest money at 25 bucks or some other insignificant nominal amount.

So the answer is, your holding fees = oppurtunity cost of 25 bucks until you get it credited back once the property is bought.

How do you factor holding costs wholesaling deals

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