The process of calculating an offer for wholesale homes or properties to rehab is one of the most complicated parts of being a real estate investor. The ability to buy wholesale property low is one of the most critical parts to being a successful real estate investor. Having bought and sold over 250 houses I’ll give you the equation we use and walk you through the process. We use the equation 65% ARV- rehab cost – our assignment fee = offer. ARV stands for after repair value. For example a house that is worth $100k fixed up that needs 30k in work will bring us to an offer of 25-30k. Our “assignment fee” is taken into account if we plan to wholesale the home to another real estate investor. For an assignment fee we like to make at least $5,000, but up to $35,000, just depending on how good of a deal we feel we can get.
It is vitally important to get a price out of the seller first before having to make an offer, if at all possible. Whether looking at wholesale homes or wholesale property for rehab always get a price out of the motivated seller first. At the very least work to get an idea from them through discussing the situation. For example we found out recently there was $10k of back medical bills owed on a wholesale house deal we were doing and $3k of property taxes were owed. It turned out the heirs just wanted to resolve these issues and we were able to come to a deal. If we had only gone on what they wanted we would never had been able to solve the situation and get the deal for the wholesale house deal.
If the seller has given you a clue as to how much they were hoping to get for the house (or clue you in on the situation) you have a HUGE advantage. You can now use bracketing to get them down further. If the price they “want” is reasonable and you can make money, still offer them 10-15% less. If they bulk you can split the difference or bracket up slightly. Do not get anxious and sign the wholesale home deal just because you know you can make $5,000. With a little patience in your negotiation you can make $15,000 instead. The ability to do this comes with time and practice. After a while you’ll have a good feel as to the seller’s motivation and willingness to sell for a cheaper price.
If the price the seller wants for the wholesale home is way too high then you should give them a rough ballpark of where you’d be and get off the phone as quickly as possible so you can move on to the next deal. Unless they show a willingness to come close to your offer or there is a possibility of assuming their payments. Make sure to mark the lead for follow up and move on. We have seen sellers come down time and time again over 70% or more of what they initially “want” for their house. Your job is to stay in front of them so you’re there when they change their mind. You do this by calling on the wholesale home every few weeks to see if they’ve changed their mind.
When you have no other choose but to make an offer, use this equation. Work in as much of a spread as possible for yourself. Just because you know you can sell the above referenced deal for $35k doesn’t mean you offer $30k. We get this type of deal for $10-$15,000 over and over and make $10-$15,000 on our assignment fee. The way we do this is getting a price from the seller first and bracketing down from there.
I have a ton of free real estate investing information on my blog about wholesale homes, finding rehab houses for sale, and about flipping houses for dummies at www.Real-Estate-Rocks.com! Happy Investing- Mitch Painter
Mitch Painter has sold over 250 houses and owns over 150 apartment units. He actively wholesales 3-5 wholesale houses a month and oversee’s a full-service in house management and apartment maintenance company. He documents the deals he’s doing twice a week on his blog at www.Real-Estate-Rocks.com and also offers a ton of free information on how to find deals NOT listed with a realtor, negotiate with sellers, and find private lenders!