Quote from @Jack Phillips:
So I have a hypothetical situation:
Lets say a properties ARV is $550k,
Repairs are $75k,
And Wholesale Fee is $10k.
Using the mao formula:
$550,000*80%-Repairs-Wholesale Fee = MAO of $355k
When I am making my offer price to the homeowner, how do I include any liens, mortgages, and/or money owed? Do I subtract the the offer price ($355k) by the total amount of money they owe? Or is that not my job and I offer the full $335k to the homeowner, find cash buyer to buy the property, and the cash buyer and title company deal with all that.
Please help, thank you
Hi Jack!
When considering the purchase of a property in a real estate wholesale transaction, it's important to understand how to factor in liens, mortgages, and money owed on the property. Your hypothetical situation provides a good basis for discussion.
Understanding Liens, Mortgages, and Debts: These are obligations attached to the property and must be satisfied at the time of sale. Liens and mortgages are secured against the property, meaning if the property is sold, these debts must be paid off with the proceeds from the sale.
Making an Offer: When you calculate your Maximum Allowable Offer (MAO) using the formula you've provided, you're determining the most you can pay for the property to ensure a profitable deal for yourself and a potential cash buyer. Your calculation does not inherently account for liens, mortgages, or debts.
Offer Price and Debts: Generally, the offer you make to the homeowner is based on the property's value and the cost to repair, not directly on the homeowner's debts. However, the homeowner's net proceeds from the sale will be the sale price minus any outstanding liens or mortgages. In some cases, if the total debts on the property exceed your offer price, the sale might not be feasible unless the homeowner can bring money to the closing or a short sale is negotiated with the lenders.
Your Role in Dealing with Debts: As a wholesaler, it's not typically your responsibility to pay off the homeowner's debts. Your role is to agree on a purchase price with the homeowner and then assign the contract to a cash buyer. The cash buyer, in coordination with a title company, will handle the payment of any outstanding liens or mortgages at closing. The title company will ensure that these debts are paid from the sale proceeds before disbursing any remaining funds to the seller.
Considerations for Your Offer: If you become aware of substantial liens or mortgages, you might need to consider these in your negotiations. Sometimes, knowing the total debts can help in structuring a deal that is feasible for all parties. However, your primary focus should be on the property's value, repair costs, and your desired profit margin.
Title Search and Due Diligence: Before finalizing any deal, a title search is essential to uncover any liens or mortgages. This is typically conducted by the title company or a lawyer and will give you a clear picture of any encumbrances on the property.
Communication with the Homeowner: It's important to have transparent conversations with the homeowner about liens and mortgages. While it's not your job to pay these off, understanding the homeowner's situation can aid in negotiations and in ensuring the deal is viable.
In summary, when making your offer, focus on the property's value and your calculated MAO. Be aware of any liens or mortgages, as they will affect the homeowner's net proceeds, but these debts are typically resolved at closing with the involvement of a title company and the cash buyer. Your role is to negotiate a deal that makes sense for you and to find a cash buyer who will ultimately take over the contract and deal with the financial intricacies of the property purchase.
Good Luck with your negotiations!
KC
