Real Estate Series: Buying Wholesale

Charleston, SC -- historical homes to die for (probably not wholesale)

How to Know if it's Wholesale

Maybe you have heard of the term “wholesale real estate,” but it is still a little vague.  This article will explain exactly what a wholesale deal is in real estate and the percentages that you should look for to make it a wholesale deal.

In real estate, the term “wholesale” refers to real estate that is bought or sold at a discounted price.  To make it a good deal, you must know exactly the rate of discount, and the numbers HAVE TO be right in order for you to proceed.

A good wholesale deal, the only one where you should proceed (unless, of course, you find abnormal circumstances in your specific situation), is the 70/30 deal.

This is where you take 30% off of the after repaired value, subtract the cost of repairs and make your offer.  I’ll go over this in more detail.

First, you must find out the value of the property in the specific area and estimate it as though all repairs had been made (this might mean that you need to gut the house and redo everything or that you just need to change a light bulb).  This will be the value of the property in prime condition, or After Repaired Value (ARV).

Second, write down the estimated cost of the repairs that you would have to do.

Third, find 70% of the ARV.  You can do this by multiplying the first step, ARV, by 70%.  This will give the margin so you have room for a 10% “oops” and 20% profit.

Fourth, subtract the cost of repairs from the 70% of ARV that you found in the 3rd step.  This will be your Maximum Allowable Offer.

Example:
John is looking at a house that is for sale by owner.  He did his due diligence and found that the owner is behind on payments and has to sell his house.

The market value of the comparable properties in the neighborhood is $300,000.  John found that the house will need about $15,000 in repairs to be at the market value of the comparables.

John will need a 20% profit and to allow room for any mistakes (10%).  With these percentages subtracted, the price that he could ask is $210,000 ($300,000 * 70%).

The final step in determining the asking price is to subtract the repairs estimate of $15,000 ($210,000 - $15,000).  The Maximum Allowable Offer that John will make on this wholesale deal is $195,000.

If you’re thinking that this is a very low offer… you’re right!  It is a low offer.  If you have to pay more than $195,000 for this property, it is not a true wholesale deal.  You can still do a lot of things with a slightly higher price, but they will not be considered “wholesale” by the terms outlined in this article.

Do not get discouraged if your offer like this does not get accepted.  It ratio is usually between 1:10 and 1:20 of offers like this that actually get accepted.  If you’re a beginner, don’t expect to get an offer accepted until you have made 19 others.

I think this is also a great guideline when buying a personal residence.  When I originally wrote this article the market was phenomenal (in regards to high values and "booming" real estate).  We all know what has happened during the past five years.  Well, luckily for the investor or home buyer, wholesale deals are easier to find!

The house I showed you yesterday was a great deal but it was above wholesale.  We would have made the bank a wholesale offer but unfortunately four other people had higher offers in.  Well... one in twenty.  We'll just have to keep looking.