As you may know I like to make the beta reading of my book open sourced so the community that will be using them can actually gain the information and request changes or additional information to be added as the book is being written.
This post is One Chapter of my coming book, “GET THE DEAL”. Which the idea has it’s origins from the live training with the same name that I have taught to thousands of real estate investors all across the country and have had time to refine the information to answer the questions most asked at those trainings. Without further ado I want to encourage you to read this chapter and leave your suggestions in the comments below!
Evaluate A Wholesale Deal
“I find that the harder I work, the more luck I seem to have.”
– Thomas Jefferson
Now that you understand how important appointments are for making deals happen, it’s time to understand how to evaluate a good 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
- 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:
- Set up an appointment with the Seller so that you can view the condition of the house.
- 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 the state of 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: These “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%
What Price To Offer The Seller
Now it’s time to calculate your MAO (Maximum Allowable Offer) is the maximum you can pay the Seller for a property. This number as to include your Assignment Fee which is the fee you charge for finding the deal. This is the price you tell the seller is your maximum offer. Stick to it.
Do not change the offer amount even if it seems to be too low. After to lock down the property with the seller you are going to market this property to potential investment buyers and they will need to make sure the deal has meat on the bone for themselves.
Below is how to calculate MAO on the property that will be assigned to a flip/rehab investor:
Main Formula: ARV x 0.70 – Repairs – Assignment Fee = MAO
ARV = $120,000
Repairs = $20,000
Assignment Fee = $10,000
The main formula applied looks like this: $120,000 (ARV) x 0.70 – $20,000 (Repairs) – $10,000 (Assignment Fee) = $54,000 (MAO)
ARV = $150,000
Repairs = $25,000
Assignment Fee = $15,000
The main formula applied looks like this: $150,000 (ARV) x 0.70 – $25,000 (Repairs) – $15,000 (Assignment Fee) = $65,000 (MAO)
ARV = $127,000
Repairs = $10,000
Assignment Fee = $8,000
The main formula applied looks like this: $127,000 (ARV) x 0.70 – $10,000 (Repairs) – $8,000 (Assignment Fee) = $70,900 (MAO)
How to calculate MAO on a property that will be a Buy and Hold (RENTAL PROPERTY)
For rental property, an investor will pay a little more for the property than for a fix and flip because they will get the money back in rent once the property is stabilized. Repairs for rental property is a lot cheaper because the investor will only fix the property enough to make it livable.
Repair cost for a rental is normally no more than $10K for a single family or per apartment unit. I have seen turn-overs cost us as little as $1,500 when they are just paint and cleaning, but this is not the standard. A typical turn-over is closer to $5,000 when the unit hasn’t been turned in the last 5 years and can get as high at $10,000 in older units.
The Main Rental Formula is: ARV x 0.80 – Repairs – Assignment Fee = MAO
ARV = $300,000
Repairs = $60,000
Assignment Fee = $15,000
The main rental formula applied looks like this: $300,000 (ARV) x 0.80 $60,000- $60,000 (Repairs) – $15,000 (Assignment Fee) = $165,000 (MAO)
The assignment fee is the fee you charge the buyer for finding the deal. Keep in mind that you won’t always get paid the number you plugged into the formula. Even if you make $1,000 profit, it’s still a win. All of your deals are not going to be huge profits, and there will be some that you talk about for years! Don’t lose out on a deal because you are trying to maximize your profits or being greedy.
On that note, always be marketing for new deals so you are never relying on just one. Remember, one deal is VERY close to no deals and you want to stay focused on filling your deal funnel.
GETTING PROPERTIES FOR PENNIES ON THE DOLLAR & MAKING AN OFFER
In sales of any kind building rapport is the most important step and it is even more important when negotiating with a real estate deal. Building rapport is the process of inspiring a person to feel comfortable with you and to trust you.
8 steps for Building Rapport with the Seller on the First Phone Call:
1. You have to get the seller to like you. If the seller likes you, they will do business with you.
2. Show the seller you care about them. Don’t make the seller feel like you are only here to take their house and then move on to the next.
3. Know their why. You can do this by asking them “WHY” they are considering selling their property to you. (Note: you may have to ask “WHY” as many as 3-4 times to get to the real hidden emotion)
4. Show the seller you are here to serve them and to fix their problem or situation.
5. Don’t sound desperate. Always mentally position yourself as someone who wants to help, but can wait as long as necessary for them to work with you.
6. Be a great listener and get to know the seller. Write down everything the seller says and be sure to use that personal information through the conversation and on follow-up calls.
7. Make them laugh. There is no more valuable commodity on the planet than laughter to move a deal in your direction.
8. Mirror the caller on the phone. If they are loud, you be loud. If they are joyous, you will be joyous. If they are quiet, you will be quiet.
Negotiations With The Seller
Once you have built solid rapport with the seller it is time to start negotiations. I mention it often that I prefer to have licensed and trained real estate agents handle all of my negotiations. The reason behind this is that real estate agents spend more time training on sales and negotiations than finding deals. They might not be the best at finding off-market properties, but they ARE the best when it comes to getting a seller to drop their price. Just ask anyone who has ever sold their house through a real estate agent and been told they should drop their price to sell it faster!
Even though I am suggesting that you send a real estate agent to negotiate for you I am going to provide a few of the top techniques I teach agents when training them on negotiations:
1. Know the sellers “WHY” and find a way to fix their problem or situation.
2. Make sure the seller gives their offer first. If they are willing to sell the property for $50k and you mentioned $60k, they will want $60K and you just lost out on $10K profit.
3. A city or town assessment IS NOT what the property is worth. Explain to them what ARV is and that many assessments are pricing the property as if it was in the best condition for tax reasons.
a. Most sellers don’t know real market values.
b. Most sellers don’t know repair costs.
c. Most sellers don’t know why we buy at discount.
d. Always do your research and educate the seller on why the property is not worth the Assessment Value and what the property is really worth.
4. Follow Up is Key. The homeowner’s situation might have changed from 2 months ago and now they are ready to sell. Having your previous notes will make you look good to the homeowner. You may get the deal at a lower price because some time has passed and now they just want to sell the property. Following up will help you keep your records up to date if you find out the property has sold. If it is sold you can stop marketing to them.
Great Tips When Making an Offer to the Seller
Many investors get nervous about making an offer to a seller and that is understandable. There are a couple of tips you can use to make it easier on you and the seller. Remember, being excited about an offer can have a contagious effect on the seller if you have built strong rapport up until this point, so focus on that excitement.
1. When giving the offer, you should be excited. You should get butterflies.
2. Listen carefully and document everything about the seller.
3. When giving your offer, go to the worst part of the house and ask “How much do you really want for the property.” (This is usually the basement or the attic)
4. Offer a few thousand below your MAO so that you can negotiate to your MAO price.
5. Whatever your MAO is, this is the price you tell the seller is your maximum offer. I’ll say it again, Stick to it. Do not change the offer amount even if it seems to be too low.
6. Even if the owner states the property doesn’t need any repairs, be sure to ask at a different time, “What” repairs the property needs including any repairs or cosmetic work. There is a big difference in the response you will get from asking “if” to asking “what” repairs are needed and it’s an important one.
7. Advise the owner you can close as soon as possible. Ask them when they would like to close.
CONTROLLING THE DEAL
The Purchase and Sales Agreement an agreement/contract to purchase real estate. Once the offer is accepted, submit the contract using this form. (The link to a Purchase and Sales Agreement can be found in the Resources section at GualterAmarelo.com)
It is important that you understand how to fill out a Purchase and Sales Agreement. Again the link to a blank contract as well as a completed contract can be found in the Resource section on my website. When filling out the contract, if the property is an Estate, only put the name of the Estate. You do not have to put the individual owners in most cases.
Now that changes if the property is in multiple names. In this case each name has to be on the contract and each person has to sign the contract. If the owner has appliances that you want, write which appliances are included in the deal on the contract in the Terms and Conditions area.
It is important to remember that you are protected by the clauses in the contract. Make sure to put the closing date as far out as possible, but let the seller know you are looking to close sooner.
Be sure to put the full legal description of the property on the contract. You can get this from the tax assessor’s website. THIS IS A REQUIREMENT TO SELL THE PROPERTY!
Email contract to the seller to have them sign it either using an electronic signature software or you can meet in person or have a real estate agent handle this part.
Once you have a Signed Contract
You want to find an investor friendly title company or real estate attorney depending on the laws in your state. Some states are title states and many are attorney states which require a real estate attorney to handle the purchase documents.
You can use Facebook to see who other investors in your area are using. Ask people on BiggerPockets.com or reach out to members in the forums on my website.
Next you will want to mail your signed contract to the Title Company or Law Office. Be sure to take your Earnest Money (EMD) to the title company or law office to hold in an escrow account.
FINDING A CASH BUYER
A Cash Buyer is an investor or landlord who will purchase the property you have under contract with the seller ideally in ALL CASH!! These are the people that will be paying you for your deals. Someone who buys houses to fix them up and resells them. (An Investor) OR someone who buys houses and rents them out. (Landlords)
Because of how long financing a real estate deal can take we want to stay away from buyers who require financing. Cash Buyers can typically close within 30 which means far less stress on the seller and becomes increasingly important when impending foreclosure or other financial pressures are effecting the seller.
Traits of a Cash Buyer
1. They must have cash!!!
2. They shouldn’t have a problem with closing in 7 – 10 days or less.
3. They must be able to provide Proof of Funds.
4. They must provide a Non-Refundable Earnest Money Deposit (EMD) of $500 – $1000 upfront and send to the Title Company. If they don’t, then do not do business with them.
5. A true Cash Buyer doesn’t care how much money you are making. If they question how much money you are making, then do not do business with them.
As I mentioned earlier you need to understand there are two different types of Cash Buyers.
Fix and Flip Investor – Like to buy at a big discount because they are taking on
Buy and Hold Landlord – Will buy at a higher price because they are
receiving an income from the property every month from rent. This type of
buyer doesn’t do extreme repairs. Only enough for someone to live in the
Strategies to Find Cash Buyers
1. Bandit Signs are very effective. Put out 20 – 30 signs per deal. Place signs on busy roads and as close to Home Depot and Lowes as possible. Hang them up instead of putting them in the ground. An example would be: “Rehab Special. 4/2 SF Home. Cash Only. $52k Net. Call for Details. 123-456-7890”
2. Craigslist.com, Backpage.com and Facebook.com. Post three ads a day on each site until the property sells. Be sure to include in the ad:
i. Picture of the House
ii. Property Address
iii. Number of Bedrooms
iv. Number of Bathrooms
v. Square Footage
vi. Lot Size
vii. Cost of Repairs
viii. Asking Price and state “Cash AS-IS”
ix. Your Name
x. Your Contact Phone Number (remember to use a google voice or similar service)
3. City/County Tax Assessor Site. This is a Great Way to find Cash Buyers. Now every site is going to be different, but generally you will Click on “Property Search”, Click on “Sales Search” tab. For “Property Data” select “Single Family”. Enter Search Criteria Sales Date and enter a date that is 6 months from today. Click “Search”. The next page will show you the results. Find all of the LLC buyers. Click on their name to
get their mailing address and mail them a Buyer Letter to let them know you have a
house for sale. You can also use a skip-tracing service to find their phone number. I have many suggested resources on my website in the resources section at GualterAmarelo.com and update them regularly.
4. Join Local REIA Meetings. Visit MeetUp.com. Create a free account. In the Search Bar, Type “REIA” or “Real Estate” to find local meetings. You can join groups and post properties in the discussion area to find Cash Buyers.
5. Google Search “We Buy Houses [Enter Your City]”. At the top of the results you will find Links that are ads. Contact each of the companies that have ads (If they are paying for Google Ads they are serious about buying houses)
6. Realtors/Agents can be a key way to Find Cash Buyers. Be sure to find an Investor Friendly Realtor. Have them send you Properties that were bought using Cash Only. Send the buyers a letter to their address and skip-trace their phone number. Also let Realtors know you have a property for sale. Most Realtors have a Cash Only Buyers List they can email your property to. You may have to pay the Realtor a “Finder’s Fee” which can be as little as $500 depending on your relationship with the agent.
7. Joint Venture. You can contact other wholesalers you find on Facebook who have a huge Cash Buyers List built up already. Ask them to send your property to their buyers. You will pay the other wholesaler half of your profit for finding the buyer. When you build your own Cash Buyers List you can bring buyers to other wholesalers so you can receive half their profits. Use the Joint Venture Agreement provided (The link to the Joint Venture Agreement can be found in the Resource section on my website)
8. The Cash Buyers List you Built Up Over Time. When you build your own Cash Buyers List you can bring buyers to other wholesalers so you can receive half their profits. Send an Email Blast to your own Cash Buyer List a property you have for sale. Send a Text Blast to your own Cash Buyer List about a property you have for sale.
SETTING UP THE DEAL WITH THE CASH BUYER
Completing the Offer with the Cash Buyer starts with agreeing on a price to sell the property. Fill out the Assignment of Contract. (The link to the Assignment of Contract can be found in the Resource section at GualterAmarelo.com)
Once completed and signed, email the Assignment of Contract to the same Title Company that you used for the Sellers. Call the Title Company to confirm they received the Assignment of Contract. Soon after the Title Company receives the Assignment of Contract, you will set a closing date and the Title Company will send you a Closing Disclosure for your review.
***MAKE SURE YOUR NAME AND THE ASSIGNMENT FEE IS ON THE CLOSING DISCLOSURE. IF THEY ARE NOT ON THE CLOSING DISCLOSURE, YOU WILL NOT GET PAID!!***
There are a few different types of closings. Traditional Wholesale Closing & Double Closing. There are reasons to do the different types of closings and there are a different series of steps to doing them the right way.
In a “Traditional Wholesale Closing” the Cash Buyer brings his/her money to the closing and pays you the wholesaler and the seller of the property all at once. The Pros are that there are No Extra Closing Fees. The Cons are that the seller can see exactly what you made on the deal. Which generally works out fine as long as you set that context early in your negotiations. On occasion you may run into some sellers who have a problem with that. This is where a Double Closing can be used.
“Double Closings” are also known as a “Back to Back Closing”. This is used when the wholesaler acts as the buyer on the closing in one room and then goes to another room to sell the property to the Cash Buyer. The Pros to this type of closing are that you only own the property for 2 minutes. Sometimes you can use the Cash Buyers money.
The Cons to a double closing are that sometimes you have to contact a hard money lender and pay a fee to use their money. This fee can be in the range of 1%-2% of the price of the property.
Start To Finish
Let’s recap with a “Step by Step” to completing a deal from Start to Finish
Step 1 – Find a list of properties (Absentee Owners List, Probate, Driving for Dollars, Bandit Signs, etc)
Step 2 – Market to the Properties (Direct Mail, Postcards, etc.)
Step 3 – Homeowner calls you, letting you know they want to sell their house. You get all of their info (Property Details, Sell Price and Phone Number). Set an appointment to look at the property.
Step 4 – Visit the property. Write down what repairs need to be done. Let them know you will do more research and you will give them a call back with your offer.
Step 5 – Pull comps and determine MAO.
Step 6 – Call Seller back with your offer and they accept.
Step 7 – Fill out contract; send to the home owner so they can sign it.
Step 8 – Send signed contract to the Title Company
Step 9 – Market for a Buyer
Step 10 – You and the Buyer agree on a sell price
Step 11 – Fill out the Assignment of Contract and have Buyer sign it
Step 12 – Send Assignment of Contract to the Title Company
Step 13 – Buyer sends EMD to the Title Company
Step 14 – Title Company does the title search and the title comes back clear.
Step 15 – Closing is scheduled.
Step 16 – Buyer brings money to Closing. Everyone gets paid.
1. Take action. Just Do It. You will never get a deal if you never get started.
2. Wholesaling is a marketing business. Be creative, stand out and be different. Stay away from what everyone else is doing. You have to make the homeowner say I’m going to call this person over calling so and so.
3. If you are not quick on your feet, you will miss out on A LOT of deals. DO NOT PROCRASTINATE.
4. When you get a deal, reinvest your money to get more deals. Once you get a steady income, then you can start taking a salary.
5. Go to Biggerpockets.com to get all of your real estate questions answered. Meet buyers and people in your industry.
6. Follow everyone that has to do with Real Estate on all Social Media platforms.
7. Contact a Realtor to find out which ZIP codes have the most cash transactions and buy a list in that zip code. Drive for Dollars in that zip code.
8. If you have $1,000 put all your money on one marketing strategy preferably direct mail letters. This is what is recommended.
9. Do not start off doing a lot of things at one time. Do one thing a lot of times rather than doing a lot of things a little bit of times, and you will get more deals.
10. This is a consistent business. In order to get deals and leads you need to do one thing consistently.
11. You are going to hear NO a million times before you hear a YES. KEEP GOING!
12. Write down everything a motivated seller says to you.
13. When you have found a property while driving for dollars, ask the neighbors about the owner of the property. They may have his contact information.
14. DO NOT let fear keep you from getting started. DO NOT wait to get a logo or business name to get started. JUST GET STARTED!!
15. This business is not consistent. Some months you do a deal, some months you don’t. Don’t build a rich lifestyle just because you start getting a few deals.
16. If you start and don’t finish, you will NEVER get results. You have to finish. If you start something, you have to finish it to get results.
17. Keep marketing. DO NOT STOP MARKETING. You will never get a deal if you stop