Pricing a Wholesale Offer
Wholesale Offer: 1 out of 100 get accepted
The challenging part of wholesaling is finding the property at a discount. How many people do you know willing to sell their house for 50% of market value? Searching for these discount properties takes a great deal of time, research and leg work. However, once you get a property under contract for the right price, you will all almost always be able to find a buyer. Note the phrase ‘right price’. So what is the right price?
Generally, you will be able to sell a property to an end buyer at between 60-70% ARV. Therefore, you want to be able to find a property at 50 – 65% of Market Value.
Properties that are available at this price range have two things in common: 1- they need repair and 2- you will be dealing with a motivated seller. A motivated seller may not have the cash to get his house in necessary condition to sell it by conventional standards and may sell at steep discount to someone who can fix it up.
Understand that you are making offers that will benefit your business, so your asking price will be lower than what most people’s expectations are. Expect 90% of your offers to be emphatically declined, 10% of your offers to be countered, 5% to be interesting, and 1-3% to accept.
Also, it is a good idea to construct an offer that will allow your end buyer to profit. Many new wholesalers make the mistake of not caring about the end buyer. If the end buyer cannot sell to someone else, then they will not be in business long and you will have lost a good partner. Losing partners will cut your career short in this business.
Finally, take into account what repairs the wholesale property will have, an assumed profit (generally the same amount as the repairs), the estimated holding costs for 6 months, and the estimated closing costs. For the holding costs, most fixers acquire money from a money lender. The cost of acquisition of this money is expensive. Generally, I figure 65% loan to value of the property at an 18% interest rate for 6 months.
The following is how I construct an offer
* Know the conservative ARV $100,000
* Determine Repair Costs -$10,000
* Fixer’s profit (gen same as costs) -$10,000
* Est holding costs (6mo @18%) -$5,878
* Est closing costs -$9,000
* Total Costs ($34,878)
* My PROFIT or assignment fee -$5,000
* Maximum Asking price $60,122
The asking price of $60,122 would be a offer of about 60% ARV. This would fit into your criteria. Should you then offer $60,122? No. I would submit an offer between 45-50% ARV and go from there. If you start with your maximum asking price, then you will not leave yourself with any negotiating room.
Comments (8)
Hi there. Newbie here from NC. I had something fall into my lap recently. A neighbor offered to sell me their property. THey had an appraiser value the property at $325,000 with a suggested list price of $339,000-$349,000. The rent in our area is around $1900 for a 3bed/2bath. The house is in an excellent neighborhood. There are some issues with the home:1) leak on window wall in dining room I believe it’s a gutter issue. (Owner said they would repair) 2) vertical crack in wall dividing dining room from kitchen (owner said they had checked out prior and not structural, will offer documentation) 3) HVAC is from 2005 4) Hot water heater needs to be repaired 5) one of the bedrooms has no closets and the house is listed as a 2 bedroom on tax records but they appraised as 3 bedroom 6) no laundry room. Kitchen bathroom has washer and dryer in it 7) House is not walk in and buy condition like comparables they used but they used the same C4 “condition” for all properties despite the difference. House also does not have hardwoods like other homes. This house needs work, paint, carpeting or hardwoods (no hardwoods), kitchen upgrades eventually, bathroom upgrades eventually 8) The entrance way is narrow so wondering if they expanded or if they opted for it to be this way when they built it. The room adjacent to the narrow entrance is large so not sure if it was expanded. It is also the room that has no closets. 9) bathrooms and closets are small for todays standards. The master bath doesnt even have a linen closet in it. The linen closet is in the master bedroom, which I thought odd. 10) not the most attractive home in the neighborhood.
Trying to figure out what to offer. I explained to the sellers realtor that the price was way higher than expected and that I couldnt afford it as an investment property. I explained that since he was my neighbor I wanted to be fair and expressed that he would make more if he put it on the market than a sale through me. The realtor said they are not looking to sell retail but instead wholesale and to not give up and that they would have an inspection done for me if that would help. He said to wait until after inspection before making an offer. Any thoughts about what I should offer or what I might be able to deduct?
Another issue is whether to buy as cash offer or loan. Thought of buying with cash and not using a realtor. The owner has a realtor but thought if I go without a realtor and pay cash I would be able to negotiate using that 3% my realtor would have received. Any thoughts on this? If I paid cash I would attempt toget a loan at a later time but not sure if rates are worse for a mortgage if one does it that way. Not sure.
Any and all input would be appreciated.
Thank you
Chris
Chris L., over 3 years ago
Nice post. Any tips for a good contract to use for the offer? A typical purchase agreement is 12+ pages in size 6 font! lol. Is there a form that is simple enough for the seller to easily understand yet has a reasonable amount of protection for the buyers? Or do we as wholesalers and buyers need to assume 100% of risk?
Jay Schultz, about 4 years ago
This was a very helpful post, but as I was reading I couldn't help but think back to my practice today that I did with trying to find comps and then analyze how much properties would cost from sites like Zillow and redfin. But every single time I tried to find a house that was already below market value because of damage or what have you, I couldn't for the life of my find the ARV.
I tried to look at recently sold houses around the house I would be interested in wholesaling, but then I'd somehow end up with an offer so low it was insane, like offering the seller $5,000 or even less sometimes, maybe I'm just not understanding how to find houses in the area. Every time I looked there was nothing in the area sold in the last 3-12 months. And that was without me looking for houses that had similar features to the house I was interested in.
I hope this makes some kind of sense. Can anyone help me with this? I'm also going to try and make a post with this very same message as well, hoping to get an answer here and there, maybe that'll help me understand this a little better!
Marina Caruth, about 5 years ago
Tom - Nice posts, I laughed as I was reading it about one little thing. We hired a real estate broker to work for us full time and make our offers for us. We will generally make between 450 and 500 offers each month to the get to the 25-30 deals we buy. When training the broker on how we operated we had to change his mindset to that of investors and not a listing agent. We told him "if you're not embarrassed by the offer, you are offering too much". Today we admittedly are buying a ton of REO's and your post really focused on buying homes from personal sellers, but I think the statement holds true no matter who is selling the home. You must always protect your ability to not only profit from the transaction, but leave plenty of room for the end buyer. It will always be up to the seller to determine if they will accept your offer or not. Good stuff - Chris
Chris Clothier, over 13 years ago
@ Chris Clothier: "if you're not embarrassed by the offer, you are offering too much"
Good1 !! I'll remember that.
Eyan Lakhani, almost 9 years ago
I too laughed about it. I will definitely incorporate that!
Chris Wright, almost 9 years ago
Good Analysis Tom. You have to begin with the end in my mind in wholesaling and all aspects of real estate investing. The hardest part for most, is getting those first 99 rejections to get to the 1 yes.
Kevin Kaczmarek, over 13 years ago
Tom, thank you for this post. I am a "noob" wholesaler and your insight will help me avoid buying too high. Also, I've learned that getting a good deal is a numbers game and I appreciate your percentage breakdown in the fourth paragraph. This helps me be patient and keep going to get that first wholesale deal.
Raven Woodard, over 13 years ago