I dont trust this...what do you all think?

Question

Ok, for wholesale deals I was taught to use the formula Arv x .5 minus my fee (5k min) and minus repairs = Max allowable offer I can make on a property. Right? Ok. I go into Propstream pro and I find a property.

- The estimated value of the property is $51,415

- The last tax assessment of the property was $34,070

I take the ARV (which is the estimated value of the property, right?) of $51,415

I multiply that by .5

I subtract $5,000

I estimate repairs by taking the square footage (1,400) and multiplying the square foot by $20 (assuming a gut job).

Here is my math:

51,415 x.5 -5,000 - (1400x20 = 28,000) = -$7,292.50

Is that right? So this is a deal I should overlook because I cant make any kind of reasonable offer. Right? I feel like my math is off because ALL 200 properties I have evaluated are coming up a negative number, or too low to offer on. What am I doing wrong?

Barry Pekin · Answer

@Asad Malik,

ARV is After Repair Value, not the current value of the property.

Every time I hear the MAO formula for a fix-and-flip, the multiplier is in the neighborhood of 0.7, not 0.5.

The $20/sq ft estimation can vary a LOT based on where you are.  I just went to a class where (for Northern VA) you could expect to pay more than double that for a major effort.  (Less for rental quality, etc.)

But, as for what you're doing wrong, I think you're approaching this completely the wrong way.  Yes, play with some numbers to get some practice, but if that's your plan for finding properties, you're going to waste a lot of time.  You need to contact sellers.  Lots of them.  And often.  You need to find those relatively rare motivated sellers who would even consider such an offer.  If you were cold calling, you would want to call a lot of people, and if you spent that much time on each person, you'd never meet your numbers.

Erik W. · Answer

Formulas are useful to spit-wad numbers, but if your offers are too far below market, no one will take them.  The other thing about formulas is they are useful for "mass" transactions.  If you're not making 20 offers per day, why allow a potentially inaccurate formula rob of you of deals?

I'm curious how you got a value of of $51,415?  That's an oddly "specific" number.  Most people don't value real estate with anything other than "000" in the hundreds position.  Example: $51,000.  $52,000, etc.  Never seen a value like $51,415.87.  Does that come from Zillow's "Zestimate"?  Most times, those number are crap.  Don't rely on assessor's either.  They're almost always off: sometimes high, sometimes low.

A better way would be to set up your own spreadsheet calculator and see if wholesaling is a profitable venture in your area.  Let's say you find a house that's worth $50,000 today "as is", but with $15,000 of repairs, it would probably be worth $80,000 (ARV).  You desire a minimum $5000 profit.  Does this deal work?

$80,000 (ARV) - $50,000 (sale price) - $15,000 (repairs) = $15,000 residual.  Yeah, that deal will probably work.  Might even be able to buy it for $45,000 and sell it fast for $70,000, which still leaves you a margin of $10,000 profit.

The biggest mistake I see wholesalers make is they do not leave enough "meat on the bone" for a Buyer to want to deal with them.  Ideally, you need to have superior knowledge of market values for property "as is" and fully repaired properties and be able to support that with comps.  Otherwise, the Buyers will stick to the MLS listings, which they know most time are priced accurately.

So my advice is get your numbers rock solid.  Research your market thoroughly and be able to show values using 3-5 comparable recent sales (<3 months) and actual repair costs using bids from reputable contractors.  Long-term survival as a wholesaler depends on you making deals that profit your Buyers as well as you.  Make your buyers happy to come back to you again and again.  They are your customers.  No business survives long if they fail to achieve repeat business.

Will Barnard · Answer

As Derreck stated, money is not going to just fall in your lap or be easy to grab, you have to know what you are doing, bring value to the table and understand the numbers. The formula you provided is not accurate, if everyone used that formula, nobody would ever do a deal as finding a property at half off of value is, well, just about impossible. Be careful using guideline for,uk as and numbers and Never use a price per SF to determine rehab costs. There are no short cuts to evaluating rehab costs, you must know how to price out each repair item properly and that takes research, practice, and some helpful and useful tools found within the threads of BP Nation.

Derreck Wells · Answer

@Erik Whiting "$80,000 (ARV) - $50,000 (sale price) - $15,000 (repairs) = $15,000 residual. Yeah, that deal will probably work. Might even be able to buy it for $45,000 and sell it fast for $70,000, which still leaves you a margin of $10,000 profit."

He's not planning to do the work himself. He's trying to "wholesale" a deal to a flipper. Those numbers might work if he were selling to the end user, someone who plans to live there, but where's the profit for the guy that actually adds value to the property? The original poster has no money and is basically trying to lock up a contract and sell that contract to a flipper for $5k. He's not trying to buy a house to fix and flip.

@Asad Malik your first mistake is searching the MLS for properties. Propstream just searches MLS listings, which every flipper can do. If you're trying to wholesale, the only way to actually make any money is to find off market properties, which takes work, which is why flippers are willing to pay you for $5k for that work. It's basically a finder's fee. Using the numbers Erik put up, if the house is on the market for $50,000 and after spending $15,000 to repair it'll be worth $80,000, then a flipper only stands to make $15,000 after all the work is done. WHY WOULD THEY PAY YOU $5,000-$10,000 OF THAT $15,000??? The correct answer is; They wouldn't. The only way you're going to make money is to work for it. Go drive neighborhoods and find distressed properties, figure out how to contact the owners, and get those properties under contract. But you better have buyers lined up before you do. Word spreads fast when people don't follow through on their contracts. Real estate is NOT a get rich quick scheme. It requires real work.

Erik W. · Answer

@Asad Malik, estimating FMV "as is" is one of the most important skills every wholesaler must master.  The way you do it by knowing your market inside and out.

Start with the MLS because it's online and the most efficient marketplace you'll find.  Type in the same criteria for the house you are considering locking up in a contract.  Same number of beds, baths, square footage and location.  If the house you want to buy is in poor condition, look for phrases in the MLS description like "handyman special", "sweat equity", and "need a project?"  If the house is in good condition, look for phrases like "move in ready", "extensively updated/ recently remodeled", etc.  Eventually, after you view 200 or so, you'll start to get a good general idea just looking at a house that it has a value between $X and $X +/- 5%.  Then you get inside and look at the actual condition and estimate repairs.

I look at 20-30 properties online and walk thru 4-5 each each week as a part-time REI.  Been doing this since 2005, so I know my market pretty well.

Kevin Sobilo · Answer

@Asad Malik, I suspect that the ARV you are using is way low. I don't know anywhere a gut remodeled single family home would be $50k.

So, if you used $100k for the ARV your math would be:

$100,000 x .5 - 5,000 - (1400x20 = 28000) = $17,000.

Asad Malik · Answer

This thread is throwing my trust of Propstream into question. Another reason I purchased it was it suggested that finding cash buyers using their system would be easy. Any credibility to that?

Charles Willie Harris · Answer

Also with Propstream, I wouldn't use the Estimated Value as the ARV.

Use their Comparables Tool to find other properties in that area and make sure you adjust the Sale Date Timeframe and the Distances such that you have between 5 and 10 total comp properties. Then after that, try and sort by the highest sale price and focus on the top 3 highest comps that most closely matches the property you're looking at (Year built and square foot are the most important to get close).

Take those averages and that should be your ARV within +/- 5% of error.

Will Barnard · Answer

Where did you find a 50% formula here on BP? If you did, it’s wrong and not valid advice.

Let’s be clear here for your benefit and anyone else reading this, the standard max offer formula for a rehabber is called the 70% rule (more appropriately should be called guideline and not rule). This rule states your max offer is exit value multiplied by .7 then minus repairs. If you are a wholesaler, it would be the same formula but then also subtract your desired profit from the end of that equation to arrive at your max offer.

Example: $100k exit x .7 = $70k less $25,000 rehab = $45k max offer a rehabber should typically pay. This is not a hard fast rule, just a quick calculation to see if you are in the ballpark with seller.

That all said, in our current competitive market in many areas of the country, finding a deal at 70% is no easy task either and would be considered a triple in my area. Additionally, exit value price points play a big role in how one must adjust this rule. As an example, a $75k exit value deal may need to be at 65% to work where an exit value of $500k could easily work at a 75% clip.

Hope that clears it up for you.

Lydia R. · Answer

@Asad Malik There are a few things wrong here. 1. You cant use prop stream to get your ARV. You need to use sold MLS comps 2. The general formula is 70% of ARV minus repairs minus wholesale fee. That is a general rule of thumb, not a set in stone formula. 3. You have to have a more accurate way of estimating repairs.

I dont trust this...what do you all think?

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