I have mentioned in a previous post how important appointments are for making deals happen, it’s time to understand how to evaluate a good real estate wholesale deal. If you don’t believe wholesaling is for you, I want you to look at this chapter as a way to understand the processes and challenges that a wholesaler faces so you can better interact with them.
I had already done dozens of deals before I was introduced to wholesaling. I had first heard about wholesaling on bigger pockets and later on discovered that one of my early coaches actually started his rental and flip business as a wholesaler in Boston Massachusetts.
The irony to my start in this part of the business was that I was already a real estate agent and as an investor I had nearly 42 rental units at the time. I had come across a legal 2 family that had the potential to easily be converted to a 3 family. The only problem was that I was over-leveraged AND this deal was in a location I don’t like to invest in.
I decided to list the property well under market value for the seller and soon I had multiple offers. Eventually the buyer backed out and the seller approached me because they knew I bought property in the city and offered it to me at a 40% discount from my listing price! I didn’t know what to do. I didn’t want the property, but I also had the opportunity to lock it up WELL under asking price AND because I had been marketing it for months, I had buyers lined up that I knew would pay at least $10k more than what they offered me.
I regret this decision today, but I made a call and gave that price to another investor who quickly purchased the property and I was paid a small commission as the agent. That day right after I hung up I realized that I had missed an opportunity to triple my income on this deal and vowed to never let an opportunity like this slip by again.
This next chapter is going to seem more specific/detailed, but at the same time I want to be very clear that the rules can change from city, town, state and from property type and strategy. Let’s dive into analyzing a real estate wholesale deal.
ANALYZING THE DEAL: DETERMINING REPAIR PRICES & YOUR OFFER PRICE
The first part of determining your offer price is knowing your ARV (After Repair Value). Which is the price a property can sell for, after all repairs. In order to find the ARV you need Comps. The reference to “Comps” is another was of saying “Comparable Sales”. As we discussed earlier the rules can change from cities, towns and states so, Comparable Sales are what properties are selling for, in the same neighborhood as your property, with the same criteria as your property, after all the repairs are completed.
How to Find Comps
1. The number one way to pull comps is from the Real Estate MLS.
• Build a relationship with an investor friendly Realtor
• A lot of agents will send you comps
• Some agents will give you their login info so you can pull your own comps.
2. Your County Auditor Website
• Search your property address and then other address on the same street
• Most Accurate
3. Zillow.com (not always accurate)
4. Trulia.com (not always accurate)
5. eAppraisal.com (not always accurate)
6. Realquest.com ($49 /month)
There are many ways to find good real estate agents in your target market who can provide you with accurate comps. Below are a few of the ways I use when entering a new market:
1. Facebook Groups
a. Search your city and state
b. Click on any property and call the agent
Once you have your real estate at the ready it is time to request that they provide you with accurate comps. You may have to provide them with some criteria to make sure the comps are accurate.
Below are a few guidelines you can use to help guide your agent:
– They need to be properties that have sold in the last 6 months.
– They need to be in the same neighborhood and as close to your property as possible. No more than half a mile away
– They need to be the same beds, baths, and square footage as your property (can be within 200) square feet higher or lower than the square footage of your property)
– If your property has a wood frame then only search for properties with wood frames
– If your property is a block home then only search for properties that are block homes
*** DO NOT CROSS MAJOR ROADS WHEN SEARCHING COMPS ***
– The date the property sold should not be any longer than 12 months prior
– Find at least 2-3 comps, the more comps you have the better
If you don’t want to contact your real estate agent and are in a rush to get a few quick comps for the property you can use a website like Zillow. Just keep in mind that this website is strictly driven by the data that has been entered which may be outdated and doesn’t compensate for strange or abnormal layouts that can reduce value.
The following are a series of steps for finding Comps using Zillow:
1. Visit Zillow.com
2. Type your address into the search bar
3. Click “Search”
4. Close the screen on top showing your property.
5. Click on “More Map”
6. At the top, click on the “Property Type” tab
7. Uncheck everything except “Recently Sold”. Make sure “Recently Sold” is checked
8. At the top, click on the “Beds” tab
9. Select the number of beds that your property has
10. At the top, click on the “More” tab
11. Select the number of “Baths” that your property has
12. Subtract 200 square feet from the square footage of your property and then add 200 square feet to the square footage of your property. Enter both of these numbers into the “Square Feet” blocks.
13. For “Sold in last”, select “12 months” in the pull down
14. Click on “Apply” at the bottom
15. Once the map appears, find your property.
16. Select Comps that have the same criteria as your property, are close to your property,
*** DO NOT CROSS MAJOR ROADS WHEN SEARCHING COMPS ***
17. Write them down
Now that you have your comps it is time to determine your ARV (After Repair Value) by adding up all of the sold prices from the comps and then dividing that price by the number of comps. Here is an example of comps for a property I recently looked at while I was living in Tampa, Florida:
House 1 sold for $230,000
House 2 sold for $274,000
House 3 sold for $259,000
House 4 sold for $296,000
House 5 sold for $150,000
House 6 sold for $238,000
House 7 sold for $245,000
House 8 sold for $188,000
House 9 sold for $234,000
2. Sum of all comps = $2,114,000
3. Divide $2,114,000 by 9 (number of comps) ARV = $234,888.89
4. ARV (After Repair Value) – is what an investor can sell the property for after all of the repairs are completed.
You are making great progress ad you can start to see the potential for this property, but a deal is only good if you can make a substantial profit. In order to do that, you are going to have to determine the amount of repairs to be expected and decide on what a decent profit margin will be for your efforts. Before we start talking about potential profit lets discuss Estimating Repairs.
There are a series of standard steps to follow and I have listed them as follows:
1. Set up an appointment with the Seller so that you can view the condition of the house.
2. Evaluate the amount of work that is going to be needed using quick estimates similar to the ones below. Please note these estimates where accurate numbers in Massachusetts as of early 2020 and with the price of labor and materials on the rise will likely not be accurate in the near future:
– Cosmetic Pricing
• Paint Interior ($600 – $1,000)
• Carpet/Flooring ($1.47/sqft)
• Lights ($20 – $200)
• Paint Exterior ($600 – $1,000)
• Landscape ($500 – $1,000)
– Remodel Pricing
• Kitchen ($6,500 – $10,000)
• Bathrooms ($2,500 – $5,000)
• Windows ($150/each)
• Window Trim ($150/each)
• Appliances ($1,500 – $2,000)
– Mechanical Repairs
• Water Heater ($1,000)
• Central Air ($2,500)
• Electrical ($4,000)
• Plumbing ($3,000)
– Structural Repairs
• Roof ($4,000)
• Siding (3,000 – $5,000)
– Quick Estimates
• Cosmetic Only – $10K
• Cosmetic, New Kitchen and Baths – $20K
• Cosmetics, New Kitchen, Baths, Central Air and Roof – $30K
• Full Rehab – $35K – $40K
NOTE: Quick Estimates only apply to homes that are 1,000 – 2,000sqft. For homes that are 2,000 sqft and above, increase estimate by 30%. For Rental Homes, lower estimate by 40%
If you have found this first half of Evaluating a Great Real Estate Wholesale deal to be valuable and would like to learn the steps to deciding you “Max Allowable Offer” or MAO. Please comment below and let me know that you are interested!
As Always, Cheers to YOUR Success!