How to Analyze a Real Estate Deal for Wholesale
So I get this question quite often from people wanting to get started with wholesaling real estate. There is honestly no simple answer to this, I wish there was. What you get from a lot of people is that you need to be 70% of the ARV minus repairs. Well, that is great and all but the issue with that is that it leaves no room for your assignment fee. So this is the formula I like to use 60% of Tax Value minus the repairs. So let me give you a good example of what this looks like then I will explain my reasoning for this.
John has a house that he wants to sell me. I ask him how much does he think it needs in repairs. He says 10k, so I tell him I will call him back after I run the numbers. I look the house up in the county records and see it’s valued at $100,000. So I call John back and ask if $50,000 is a price he would be interested at? If he says yes then I move to setting a time to see the house. If he says “No” I move on and add him to my follow up.
So that is a perfect world scenario, but let me explain why I am doing 60% of Tax value and not ARV. No, it has been my experience that Tax Value is anywhere from 5% – 10% lower than ARV. This gives me some room to play without a BPO or (CMH). Then instead of 70%, I do 60% because that is where my assignment fee will be. Why did I take the owner’s repair estimate? Well, this makes it easier for me to go back to the owner and say they were wrong and go lower. If you get the price wrong it makes you look unprofessional. In the above scenario, I would be comfortable to sign a contract at that price. There is so much more that goes into estimating repairs that most people don’t do it very accurately unless they a contractor and have actually done repairs like that before. Estimating repairs is one of those things that can get new wholesalers into trouble with their deals. I suggest reading The Book on Estimating Rehab Costs (affiliate link) and get a good idea on how to do this or read this blog post on how I sometimes estimate repair costs.
Thanks for reading and now go out and take some action!
Don’t forget to pick up you copy of 50 Tips for Real Estate Wholesalers