First Wholesale Deal Soon - Advice on Rehab Costs and Process

[Kyle Bambu]

Merry Christmas everyone! I should probably be preparing for my family to show up for the Holidays, but instead here I am writing this forum post...

So I have been cold calling a lot lately and recently received two phone calls back from motivated sellers. I'll be visiting those houses on Saturday. I have no experience in determining rehab value or the ARV of a house. In fact, I've never really done any kind of construction work on houses at all. In addition to this, I am not even sure of the whole process. I'm seeing a lawyer tomorrow to try to iron out some contracts that I can use for this weekend. I'm sure that will be expensive, but I would rather cover myself than have some very expensive lesson later on.

My plan is to use 3 different contracts which I feel differs from most wholesalers. The first one is just an Option to Purchase contract because I want to make sure I don't sign any purchase agreement until I find a Buyer. Once I find a Buyer, I'll go back to the Seller and exercise my option so that we can then sign the Sales and Purchase Agreement. After that, I'll go to the Buyer and sign the Assignment Contract with them. Basically, I just want to cover myself with the Option to Purchase agreement so that I never have that risk of potentially owning the house. 

So assuming I get these contracts worked out, I'll be seeing these houses Saturday. Let's simplify a bit and assume that I can figure out the ARV on my own. How do I judge the rehab cost? One house is a 1000 sqft, two floor, 2 bed, 1 bath. The other house is 2,500 sqft 3 bed, 1 bath. Both owners said the houses are "gutted." Which I guess varies based on how that is defined. Both owners also said the siding and roofing was done recently. I looked up the houses from the Tax Assessor. The first house has a Grade of D+ "Below Average," and a CDU of FR- "Fair." The second house has a Grade of C "Average," and a CDU of UN - "Unsound." Obviously, no one is going to be able to tell me how much it might cost to rehab because you haven't seen it. However, any tips or potential opinions on a range that I might expect?

Lastly, assuming I figure out the ARV and rehab costs, I'll have my assignment fee to figure into the equation. Is this usually just 10% of the ARV. I was hoping to have a fee of $10k for each even though one has an ARV of about 70k and the other over 100k. I'm open to any tips or suggestions on any of this as these two deals are my first potential deals. Thank you!

[Will Barnard]

Kyle, place yourself in the shoes of this potential seller. If you were the owner, would you be OK signing a contract for someone to have control over the sale or lease of your property with only $100 at risk? I don't know a single competent person who would which only leaves an incompetent person of some type of deceit on the wholesaler's part. In either case, the wholesaler is now opened themselves up for legal action against them if the seller so chooses down the road.

Getting a property under contract (which required negotiating price), marketing that property (or contract) to the public, finding and contracting a buyer for said property and getting paid for those efforts constitutes the requirement in AZ to hold a real estate license and penalty for violating this is a class 6 felony in AZ. Doing so without a license is considered brokering without a license and can have stiff penalties including fines, jail time, and restitution.

Wholesaling in of itself is NOT illegal just as driving a car is not illegal, however, many people operate a wholesale transaction illegally just as some operate a vehicle illegally (perhaps driving without a license or speeding). What you need to understand is how to properly, legally, and ethically perform a wholesale transaction in AZ and most other states which hold similar laws.

If you contract the deal, close on it and then market it for sale and close, you are fine. If you hold a license, you are fine. If you have your buyer already in hand and perform the transaction using a newly formed entity or trust you are also fine so long as you do not violate the brokering laws.