How to Wholesale Real Estate: Example Deal
By now you have spent hours searching for properties that are below market value that you can wholesale to your end buyer investors.
Finally you come across a property for sale at a steep discount to market value and you decide to contact the seller to learn more about the property and their reasoning behind selling.
After eliciting information from the seller you discovered they are moving out of state and are greatly motivated to sell their home so that they don’t have to deal with the costs of two homes.
After a showing with the seller it’s obvious the home needs some repairs, such as carpet, paint, roof, and landscaping, but is structurally sound.
Step 1: Determine the After Repair Value (ARV)
You should have a real estate team set up to assist your business so first you’ll want to contact your realtor who is a vital member of your team.
Your realtor will be able to analyze the sales comps in the area to see what prices similar houses in good condition sold for.
They’ll be able to tell you the comparable price per square foot of similar houses as well as the low and high comps. When you go to make an offer to the seller you will want to use the lowest comp in the neighborhood.
Step 2: Calculate the repairs
Drive by the property and give it a quick glance for any major concerns. If you get to go to a showing of the house then you can roughly estimate the repairs needed on the interior.
Look at the ceilings for water damage and in the bathrooms for water damage. Roofs are expensive to repair so make sure to ask how old the current roof is and analyze its condition.
Your buyer will do the thorough inspection and decide on repair costs but by calculating up estimates ahead of time you will be more likely to get a buyer to take the deal from you since you’ve saved them some time on work.
Step 3: Make an offer to the seller
You want to make an offer that will help out your business right? Your asking price should be lower than what the seller probably expects to get for the house.
It’s your call how much lower to go than what your gut is telling you the house is worth or what your realtor advises but ultimately expect to get declined the majority of the time.
Some sellers will counter offer and some will accept depending on how motivated they are. Construct your offer so that you can profit and your end buyer can profit.
Work backwards figuring out how much profit your end buyer will want in order to accept the deal and then add in your fee. Without an end buyer you have no wholesale business so consider their needs.
Construct your offer so that it considers:
- Repair costs
- Holding costs for 6 months (general time required to rehab)
- Closing costs
- End buyer profit
- Your wholesale profit
The following is how I construct an offer:
* Know the conservative ARV: $150,000
* Determine Repair Costs: $25,000
* Fixer’s profit: $25,000
* Est holding costs: $8,000 (loan fees, utilities, taxes, etc)
* Est closing costs: $12,000
* Total Costs ($70,000)
* My PROFIT or assignment fee: $5,000
* Maximum Asking price $75,000
The asking price of $75,000 in this example would be 50% ARV but again your numbers may turn out 50-65%.
Should you offer the $75,000 in this example?
No. I would offer the seller between 40-50% ARV and see what happens considering they’ll most likely counter offer up to 50-60%. Starting with your maximum asking price will not leave yourself with any negotiating room. For the sake of this example, let’s say the eventual purchase price is $70,000.
Step 4: Get a Buyer to Wholesale To
Ideally you want to have a list of buyers ready to go that you have met and networked with.
You’ll contact your buyers and let them know about the property hoping one will spark interest in purchasing it.
Then you would add $5,000 to the $70,000 and request a purchase price of $75,000 from them.
Have a stipulation in your contract that states the buyer will need to buy with cash within 5 days. After the fixer agrees to purchase, then you go to the final and most important step.
Step 5: Collect $5,000!
How many homes do you think you can sell for $.50 on the dollar?
No matter what market or economic condition, if you purchase at the right price and sell at the right price, you will find buyers!
Once you get that first deal completed you’ll have confidence and experience to pull from. Overtime your business will improve and you just may become a wholesaling king doing 5-10 deals per month.
Not a bad income to live off of.
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