How does a wholesaler determine how much they paid

Question

I am a newbie wholesaler I haven't even done my first deal and been doing some research on wholesaling for a little while I am figuring how this works and I read that there's two different ways so far. One I have found is like for example say a house is worth 200,000 (ARV) and the buyer wants it down to 170,000 and say you convince the seller to get it down to 120,000 for the buyer and that means you get paid 50,000. So that's one way the other way I am not too familiar with but I think it goes like whatever the (ARV) is the sees what 70 percent of that is and then they subtract. That number from the rehab cost and I think the fixed costs and whatever is the result is the wholesalers profit so can someone tell me which is the correct way to predict how much a wholesaler gets paid and tell me if I got how its done wrong or what any professional wholesalers could help me out thank you have a great day

Lydia R. · Answer

@Harold Smith There is no formula to determine how much a wholesaler gets paid. Its completely dependent on the wholesalers ability to negotiate. To use the numbers from you example: if the ARV of a house is 200k (being able to determine an ACCURATE ARV is so crucial) your average investor wants to buy that house at 70% ARV minus repairs so $140,000 minus repairs. Lets say the house needs 30k in rehab. Most investors will want to pay $110,000. Which means you need to have it under contract for less than that. You dont go to an investor and say hey what would you pay for this house. You analyze the deal, do the math and put it under contract for a price that allows you to make money AND your investor to make money. Ive seen several of your posts here on BP. Keep learning about the process and start practicing deal analysis. Are you driving for dollars and starting to familiarize yourself with neighborhoods in you area? Are you looking at the properties that are selling in your area to get a feel for the market? Are properties selling quickly or are they sitting on the market and having multiple price reductions? Reading about real estate is good, but you will never really learn if you arent out there getting some hands on experience.

Barry Pekin · Answer

Hi Account Closed.

As a rule of thumb, a buyer will want to purchase the property from you for 70% of the ARV less the estimated repair costs.  So, if you find a house with an ARV of $200,000.00 (do your homework and get comps!), with estimated repairs of $35,000 (again, do your homework and do NOT underestimate this amount!), the buyer will want to pay $105,000 (70% of $200,000 is $140,000, then subtract the repairs).  Your fee is the difference between that and what you are able to negotiate with the seller.

When you're negotiating with the seller, you need to determine your MAO (Maximum Allowable Offer).  Say you want to get at least $5,000.00.  Your MAO would be $100,000  If you can't get it for less than, say, $120,000, you probably need to walk away.

Dustin P. · Answer

It depends on your market. In Phoenix you will not find a 70% ARV minus repair deal. I've maybe seen one of these in the past year. If people say that they are buying at 70% ARV minus repairs, then they're using a target ARV not one proven with closed comps, at least from what I see.

But either way, you figure out what the ARV is. Then you do whatever percentage of the ARV investors are buying at in your market. Here in Phoenix it's anywhere from 80% to 86%, depending on multiple factors. Quicker, cosmetic flips in an area with zero actives will be purchased at a higher percentage then a full gut job needing 3 or 4 major systems replaced in an area with a lot of actives and longer days on market.

Once you get your % of ARV, back out the repairs. If you aren't sure how to estimate repairs, you can get a few bids from contractors. Understand that these numbers may be pretty high, because a contractor is going to mark up the costs so that they can make money too.

Once you subtract that number from your % of ARV, that's the target sales price to an investor. Now you have to back out closing costs, and maybe some buffer in case you have to drop the price, and then back out what you want to make, and that's your offer price.

Don't be afraid of 5 pops. Investors will respect the fact that you're just trying to get deals done even if you're only making a minimal fee, and if you get an investor a good deal they will likely come back to you. Repeat business and doing a lot of deals is better than trying to kill it and make 20-30k on one deal.

John Teachout · Answer

My two cents worth here would be to start out with something lower priced if you're a newbie. It seems like you may need to do more studying on this process before you start getting people to sign things as you don't seem to have an acceptable understanding of what it is you're trying to accomplish. There's lots of threads on this site regarding wholesaling. Do some more reading before you start in so that your chances of success will be higher. Everyone has their first deal but you don't want it to crash and burn.

Account Closed · Answer

@Barry pekin on the bigger pockets blog section on wholesaling there is a article titled The ultimate beginners guide to wholesaling the part f the article where the author does the math is where I learned the fixed cost should be factor in the maximum allowed offer

Account Closed · Answer

@Barry I was referring to fixed cost I read bigger pockets article called The ultimate beginners guide to wholesaling and that's how it was explained

Account Closed · Answer

Barry pekin thank you for the advice but shouldn't the fixed cost go into as well just for asking

Barry Pekin · Answer

@Harold Smith,

What fixed cost are you referring to?

If you mean the costs the rehabber has to cover (holding costs) while doing the rehab, that should be covered in their 30%. If their holding costs are higher, they will tell you they need that to be 35%, which is where getting to know your buyers works.

If you mean your fixed costs, they should be minimal, but you certainly want to make sure your assignment fee is sufficient. I’m just starting, but I’m budgeting $500/month for my business. That’s to cover all of my costs. This is money I can afford to invest without making anything back. I want my fees to cover that and quite a bit more. When they do start coming in, I will be reinvesting quite a bit (more marketing!), and the world better watch out!

Selvin Cummings · Answer

@Barry Pekin I'm grateful for your response. I need a little schooling in how you worked your number. But I asked a question earlier today, trying to start a discussion, in regards to wholesaling. The "Assignment As" forms, where can I obtain them and use over and over again? Also, in line with what you shared, I have a good relationship with a home owner who owned her home for 39 yrs. Of which, it needed repairs then but they didn't lift a finger to fix it. She's willing to let it go for whatever she can get for it and relocate. Now, using Property Shark, the equity it stated to be around $380k and the house is estimated to be around $340k. The figures for the Comps were in between those 2 figures. This may not be enough to go off of but with this info, what's steps would you make right now?

How does a wholesaler determine how much they paid

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