How to Wholesale... to me.

Wholesaling is a great way to start out in real estate.  To get up and running in wholesaling you need at least one good go-to-buyer, hopefully more.  You need a buyer who is serious and moves fast on good deals.  This market won’t wait around for indecisive buyers.  I’m one of those serious buyers.  I move fast on good deals and once I commit to a deal I very rarely walk and, if I do, it’s only as a very last resort and with great pain and deliberation.

You have got to have confidence in your buyer and your buyer has to have confidence in you, the wholesaler.  The only reason I would pay finder’s fees is if a wholesaler is saving me time and hassle and presenting ready to go deals on a silver platter.  Marketing, managing, coordinating, contracting and oversight of ongoing rehab projects are more than a full time job.  I’m more than happy to pay bird dogs to feed me steady streams of future deals.  But if you waste my time more than a couple times then I’m not going to give your deals much attention after a while.  I can go find my own deals with not much more hassle and save the finder’s fee.  If I waste your time I would expect you’d eventually stop brining me deals.

I think new wholesalers often neglect or under price 3 key general aspects of a rehab deal.  On the show “Flip This House” they only show the purchase price and the repair costs on their deals, but there is more.  Make sure you also account for closing costs when you – or I- buy the home, holding costs (I normally budget at least 6 months) and closing costs when I sell the home (including realtor fees and possible closing costs paid for the buyer depending on the market).  These three items can easily add up to 23% of your end sales price.  You won’t be in business if you neglect or even undervalue these costs.

Base your deals on the numbers.  Know the value of your property as is.  Know the value and costs of your repairs.  Know the costs of a transaction.  Make sure you (or in this case your end buyer) have at least a 20% net margin after all costs.  Here is how I figure most of my flips.  Take the after repair value or what you think you can sell the home for and then deduct:

(1) 20% for your buyers profit.  Some people require thicker margins, but I really recommend not going any less than 20%.

(2) 6-9% for closing costs when your buyer sells (Add 3% for a realtor, 1% for your closing costs and I like to budget 2-3% for the buyers closing costs at least in my market) Even if you’re dealing with someone not using a realtor, make sure you budget for sales and advertising.

(3) A good estimated cost of repairs.  At least compile a good list of repairs needed.  I can help you figure a ballpark cost if needed.

(4) 6 months holding costs (interest, taxes, insurance)

(5) 3-9% of the purchase price for your closing costs when you buy it.  (This depends a great deal on your financing.) If you’re dealing with a private lender they could easily charge 4-6 points and then tack on 1-2% for the title insurance, stamps etc. etc.  Check with your local title company for basic fees.

(6) Your finder’s fee

The resulting number will be the minimum price you (the wholesaler) should be willing to pay for a property.  I know step 5 is confusing since at that point you won’t know the purchase price but you should have a ballpark idea.  Just put a good estimate in for step 5.

Once I go through the above backwards plan and get a purchase price; I then go through it again starting with my newly discovered purchase price and adding all the costs to make sure the price falls within a good window for a fast sell.  Holding costs can kill you.  Cash flow is one of the biggest rehabber killers.

These are not absolute numbers.  Some deals I would have to see thicker margin.  For instance if the comps were really uncertain, the neighborhood is particularly risky, if the project is a long distance from me and therefore more difficult to manage, and an endless number of other factors.  Every deal is different.  If that frustrates you then you’re in the wrong business.  Flipping is more art than science.  The numbers above are about as much science as you get and offer a good starting point.

Happy hunting.

Justin Pierce

Snow Goose Homes LLC

703-587-8929cl

888-680-6881of