A wholesale real estate investor (like Cobia Holdings, LLC is) is company that identifies undervalued properties, negotiates a purchase contract with the seller, and then assigns that contract to an end buyer for a profit. We usually don’t purchase the property – but instead are a broker between you – the home owner and our list of investors. So we earn money by connecting motivated sellers with interested buyers. To determine the price of a wholesale deal, here are the steps and things we look at:
- Calculate the After Repair Value (ARV): The first step is to estimate the property’s value after all necessary repairs and upgrades have been completed. This is known as the After Repair Value (ARV). To determine the ARV, the investor researches comparable properties in the area that have sold recently, taking into account factors such as location, square footage, and amenities.
- Estimate Repair Costs: Next, the investor assesses the property’s condition to determine what repairs and improvements are needed. This may involve a walk-through of the property, consultation with contractors, or using a standardized repair estimate sheet. The investor then estimates the cost of these repairs.
- Determine the Maximum Allowable Offer (MAO): The Maximum Allowable Offer (MAO) is the highest price the investor can pay for the property while still ensuring a reasonable profit margin. To calculate the MAO, the investor uses a common formula:MAO = (ARV * Discount Rate) – Repair CostsThe discount rate varies depending on the investor’s desired profit margin and the level of risk associated with the deal. A common discount rate used by many investors is 70%, but this can be adjusted based on individual preferences and market conditions.
- Account for Wholesale Fee: The wholesale fee is the profit that the investor aims to make by assigning the contract to the end buyer. This fee can either be a fixed amount or a percentage of the property’s sale price. The investor must factor in the wholesale fee when determining the final offer price. To do so, the investor subtracts the desired wholesale fee from the MAO:Offer Price = MAO – Wholesale Fee
By following these steps, we can determine a suitable offer price for a property that ensures a reasonable profit margin while still offering an attractive deal to the end buyer. It’s essential to remember that pricing is critical in wholesale real estate investing, as overpricing the property may lead to difficulty in finding an end buyer, while underpricing may result in reduced profits. There’s a lot of risk on our end – as if we can’t connect you with an investor we have to close on the property ourself and then either fix it up for a final conventional sale, or try to sell it as-is at a lower price.
Let’s look at a real world example… we recently were asked to review a pristine home in Lehigh Acres, Florida. A few of our team members went out, inspected the home and it was perfect. In this condition and this market – one could reasonably expect to sell the home right now around $290-$300k. It was initially our impression that the owner wanted to liquidate the home quickly (rather than putting it on the open market).
Our sister agency, a full service real estate firm – had just sold a home that was almost identical about a block away for $295k. It was clear the total ARV for this deal would be around $300,000. Unfortunately in this case there wasn’t any additional work to be done on the house. It was pristine, no issues, no defects, perfect lawn, new roof. Literally no value could be added by wholesaling the home – other than a fast cash transaction to the seller. The seller opted to simply put it on the open market after we were yelled and cursed at with an offer of $250,000. What the seller doesn’t realize is that there is a 90-120 close window right now for general home sales and a total of 5%+ generally comes from the seller in terms of fees for closing costs and real estate agent fees. So, the options were a) close immediately 100% cash, no dealing with agents for $250,000 or around $267,500 (after all expenses including sales tax) in a conventional sale. Either way we would be taking on a pretty significant liability.
Another scenario. A client came to us needing to get rid of their home immediately. Their home – if totally fixed up in Downtown Fort Myers, was comparable to homes in the $240,000 range. Unfortunately because of recent downward trends in the market, the particular area this home is in (a bit riskier) and the condition of the home, we were able to quickly settle with the client for $130,000 and flipped it to an investor immediately at $139,000. It would simply need that much padding to ensure a qualified company and crew could come in, fix it up, and then either flip it or rent it out.
Want an even simpler version – here’s an analogy:
Okay, let’s say you want to be a helper who finds broken toys, fixes them, and then sells them to your friends. Here’s how you figure out how much to pay for a broken toy and still make some money:
- Look at how much a fixed toy costs: First, you need to find out how much a toy is worth when it’s all fixed up. Look at similar toys that are in good shape to get an idea.
- Guess how much it costs to fix the toy: Now, you need to figure out how much it would cost to fix the broken toy. Think about what’s wrong with it and how much it would cost to make it like new again.
- Find the most you can pay for the broken toy: You want to make sure you can still make some money after you fix the toy. To do this, we use a little math. Take the fixed toy price and multiply it by a number less than 1 (like 0.7) and then subtract the cost to fix the toy. This gives you the most you can pay for the broken toy.
- Don’t forget your helper’s reward: Since you’re the helper finding and fixing the toys, you deserve a reward too! Decide how much you want to make for each toy and then subtract that from the most you can pay for the broken toy. This will give you the final price you should offer for the broken toy.
By doing this, you can buy broken toys, fix them, and sell them to your friends while still making some money for yourself.