We get a lot of new investors who have a “Hot Deal” they want to run by us and quite often it’s not quite the “Hot Deal”. However the only way to learn is a new investor is to get out there and look at deals and run the numbers, and you need to do this a lot to get good at it.
So the first check on your “Hot Deal” is to make sure it is not listed in MLS currently and that you are dealing with the seller.
Next, we are currently dealing with a wholesaler who has a VERY VERY GOOD DEAL number’s wise. However the owner is having health and mental issues and the person selling is actually a friend, so were not 100% sure the seller actually wants to sell, it’s obvious the family wants to buy the house or keep it. So while the numbers work, this wholesaler is wasting a lot of time calling attorneys to see if he can hold the seller to the contract that his friend had him sign to sell his house. . . . and really if you have to sue the seller to get them to sell you the house . . . we probably don’t want that either. There are a lot easier ways to buy a house other than suing the seller . . .and when a wholesaler starts suing their sellers, they get a bad name and you don’t want that.
So the second check on your “Hot Deal” is to make sure you are dealing with a person who actually has the right to sell the house and if you are dealing with a group of sellers, that all of the want to sell. At one point we were dealing with 3 siblings and the sister would not go to closing unless she was paid her share of the profits up front as she was convinced her brothers were going to screw her out of $25,000 somehow.
Now we have passed tests one and two – the house is not currently active in the MLS and the person selling has the right to sell it, now do the numbers work.
For a person rehabbing the numbers look should look like this:
Purchase Price </= (70% *ARV) – Repairs
If you don’t remember your algebra, that is Purchase Price should be less than or equal to 70% of the after Repaired Value Minus Repairs.
Let’s put some numbers to that.
If the house is worth $100,000 and it needs minimal repairs, let’s say $10,000, the the most we could pay would be:
(70% * $100k) – 10,000
or $70,000 – $10,000
or the most we could pay for the house is $60,000
So third check with basic numbers to work would be the purchase price would need to be less than 70% of the ARV minus repairs.
Now right now is a HOT HOT market, so the rehabber might pay a bit more than 70% of the ARV to get a really good deal – meaning a house in an area where there are a lot of buyers, where the rehabbed houses sell in 30 days or less and that is probably going to be in a neighborhood in KC where the values are over $150,000 and under $250,000 – our sweet spot. But that will vary by neighborhood so do your research and see how fast this house is going to sell at the ARV price. If days are market are low and there are several comps the rehabber might go up to 80%. However if there are very few comps or it takes more than 60 days to sell, they might even want to be under 65%.
Now keep in mind that here at kcmoHomeBuyer.com we are typically going to be wholesaling the house ourselves, so we need to lower our offer price above by our wholesale profit and if you are partnering with us on the deal, we need to take out your profit too.
So fourth check with basic numbers is would the numbers work to give the wholesaler a profit.
I have a newer investor send me a deal and I wanted to take a look at it.
” I wanted to run by you a deal and see if you and Don are interested. Home price is $79,000 or 80,000, needs only cosmetic rehab (carpet, paint, bathroom sink and cabinet, light fixtures, a few new interior doors). The ARV is about $100,000 (based on comps we received). Independence, MO. Is this too small a margin to consider for you to flip? Since you are a realtor you wouldn’t need to pay closing costs and could do the rehab inexpensively. Let me know if we this is in your ballpark. If not, would we be wasting our time on trying to wholesale this?”
Let’s break this down:
ARV: This is listed as $100k in the email. The house is under $120,000 in a low end neighborhood where there are a lot of renters and usually it takes a bit to get the house sold, like a longer time and paying up to $3,000 in closing costs for the buyer. So we would need to find out how fast houses are selling in that market.
Repairs: There email lists out some basic cosmetic rehab and I will give them the benefit of the doubt that the house only needs $10,000 in repairs. Let me first say that I have bought houses that were considered “perfect” that also need at least $10,000. I will give this deal the benefit of the doubt and assume the repairs are really only $10k, but I would venture a guess that they are probably going to be closer to $15k or $20k.
If we put this in the formula 70% of the $100k is $70,000. Less $10,000 in repairs would mean the most a rehabber could pay at 70% would be $60,000. If the rehabber pushed the numbers to pay up to 80%, then the rehabber could pay $70,000.
Then we would back off our profit, and if that is $5,000, then we would need to buy it for $55,000 to $65,000.
So this particular deal does not really look like a deal for us as a wholesaler.
Back to the email, they say that as Realtors we would not have closing costs, but – that is not true. All buyers have closing costs.
If we were to buy it to rehab and sell we would have $300 to $600 in costs to buy at the title company and similar to sell. After rehab it will be listed and sold and the buyer’s agent will want to get at least 3% in commissions.
Let’s look at actual numbers:
- ARV: $100,000
- Commission $ 3,000 ( for us as a Realtor)
- Title Company $ 1,200 (both sides)
- Buyers fees $ 3,000
- Taxes $ 400 (4 months taxes)
- Insurance $ 400 ( 4 months insurance)
- Utilities $ 600 (4 months utilities)
- Interest $ 400 (4 interest on money)
- Rehab costs $ 10,000
- Purchase Price $ 80,000
So based on the numbers, before the wholesaler makes any money, if a rehabber were to buy it a $80,000 he would only make $1,000 in profit. There is no money for a wholesaler in this deal.
However this could still be a deal for a landlord buyer who wanted to buy and hold it, who was going to make his profit through cash flow over time.