How to Evaluate a Wholesale Deal

So, you are new to real estate and have attended a few seminars. You have even done some networking through some local REIAs (Real Estate Investors Associations). You have started building your team and have some real estate agents, hard money lenders, contractors, and more at your disposal.  You even have some of your own funds available to do fix & flip in order to “put a little skin in the game” if your hard money or conventional lender requires it. The fact is, you want to get into the game so bad you can taste it! I know the feeling, we have all been there.

The only problem is property acquisition. You are in a good market and although selling deals is quick and easy- finding deals is competitive and tough. You know that there have to be some deals out there because several of your fellow investors are doing Fix N Flips at this very moment. You have thought about sending out letters and postcards, putting up signs and possibly doing some door-knocking (BTW you really should be doing some of these marketing items) but all of that takes time and effort and you are growing impatient by the minute.

As you are working on your computer a couple of possible wholesale deals pop up. You remember that you signed up on a few wholesalers’ websites recently so you think to yourself “What great timing- it was meant to be!” You then do quick due diligence and then call the wholesaler and speak with them about making an offer. In your head you are already spending the money you will make from this deal.

That was easy- right? Yes, that part was easy, but remember- you only did a quick due-diligence on the numbers on the property. The big question is- will you make or lose money on this deal?

In real estate, we have a saying that “you make your money when you buy a property” and it holds so true. If you pay too much in purchasing the property then you may have to cut corners on the rehab or selling of the property which may cut heavily into your days on market in order to sell, your final selling price, or both. If you pay too much you could conceivably lose money on your rehab and that isn’t why you got into this business.

Let’s talk about ten steps and items to take into consideration to maximize your chances of having a profitable Fix N Flip:

1. Call the wholesaler, verify the property address, and ask for proof that the wholesaler actually has the property under contract.  Wholesaling is a very competitive game and successful wholesalers are very good at playing it!  In making a call about a possible wholesale property in the past, I have actually found that the person that is wholesaling to me is wholesaling from another wholesaler and just adding on a few grand to the purchase price. Although my primary concern is my purchase price and if I will make a profit, double or triple stacking wholesalers can lead to a lot of complications. It’s like dominos when one falls the rest follow suit. Personally I prefer to deal directly with the person that actually has the property under contract.
   
   
2. Establish ARV (After Repaired Value). The ARV is the basis of your deal. ARV refers to a selling price at which you can sell the property rehabbed to the standard of the neighborhood in 30-60 days or less. Start by running comps. If you have a realtor this is something they can do for you, but at the end of the day, you are the one totally responsible for the value. Use them only as a guide. I would also check a number of various websites like realtor.com and others, and look for recent “Solds” and recent “Listeds”.  Avoid “estimates” or “quick values” at all costs. These are electronic valuation models and are not always accurate. You want properties listed or sold in the area of the wholesale preferably within a half-mile or less, similar beds and baths, type of property (ranch, triplex, etc.) and within about 20% = or – of the subject property. This should give you a good idea of what the fixed up, quick sell ARV price should be. 
   
   
3. Do the Math. Some wholesalers price their properties appropriately. Very few price them too low. Some wholesalers price their products way too high in order to maximize their profit. It’s up to you to determine how much you can pay at the most no matter what amount the property is priced at. First of all review the comps that the wholesaler furnishes. Are they realistic? Are they a little on the high side? Remember if the wholesaler’s job to make the property look as valuable on the backend is possible. However, sometimes they tread the gray area between making the property look attractive and comps that are way too high. It’s up to you to determine what comps are appropriate and apply to the the possible wholesale you’re looking at.
   
   Next, use your formula. Depending on where you received your education in real estate you probably have formulas that apply to various types of buying and selling strategies with real estate. We urge you to use your formula and stick to it! Better yet, minimize your risk by having at least two exit strategies for your property. An example might be that strategy number one is a rehab and you sell the property for a profit. Exit strategy number two, just in case it doesn’t sell as planned, would be to either sell to another investor as a rental or hold it yourself as a rental.
   
   Look at the repair estimate furnished by the wholesaler. Do the numbers look correct at first glance? Once again it’s not uncommon for a wholesaler to furnish figures based on not fixing up everything in order to lower your rehab costs. Remember that it normally costs more and takes longer than you originally estimate. Obviously, until you actually see the property you don’t know.
   
   
4. Make arrangements to see the property. Now it’s time to make an appointment to take a look at the property. I like to drive the area either before or after my appointment and take a look at the neighborhood in general and take a quick look at the comps that I used. I also look to see if there are a lot of properties for sale in that particular area which means it may take longer to sell the property than anticipated. Once at the property I take a look at the outside. I look at the general condition of the roof, landscaping, outside of the foundation, and any other items that might need to be budgeted for. Then we go inside and again look at the general condition and compare it against the rehab list that was furnished by the wholesaler. It’s likely you’ll find a few more items that will need attention. Be sure to pay close attention to any type of structural issues. If you’re a new investor it is not a bad idea to take someone more experienced or even pay a contractor a few bucks to come to take a look at the property along with you. After viewing a few properties you’ll be able to take an accurate look at what is needed for rehab and what it’s going to cost.
   
   
5. Ask the wholesaler how the sale of the property will be accomplished. If things seem to be moving in a positive direction that I will ask the wholesaler how the sale will be accomplished. There are several techniques for doing so and space does not allow us to go into each and every technique, so make sure that you consult with your real estate mentor or a trusted,  experienced real estate investor on what is required and what your role and the role of the wholesaler is in each of these. Some of the techniques include an Assignment, Double Close, or LLC assignment.
   
6. Earnest money. You likely already know the amount of earnest money that the wholesaler is asking for as it is normally included on the flyer or will come up in general conversation early in the deal. Is our policy to always offer less earnest money than what the wholesaler is asking. If it’s a large amount and they won’t budge then I would ask for an additional 48 hours in order to have an inspection done on the property before the money goes hard and I could lose my deposit.
   
   
7. Inspection. It’s not a bad idea to have an inspection done on the potential wholesale deal, especially if you’re new to real estate investing. Some home inspectors offer special rates to investors or may do what’s called a mini- inspection where they just look at all the large ticket items. In most cases, I will do a sewer scope. The best deal can go south if you have to put in $5-$10,000 in digging up the yard and replacing the sewer pipes. I also use this time to get a contractor into the property and give me hard numbers on the rehab.
   
   
8. Figure out your backend strategies. Now it’s time to run some hard numbers on the rehab of the property. Make sure you take into account all of the applicable numbers including buying costs, holding costs, insurance costs, and selling costs such as realtor fees and possible seller concessions. Then take a look at some possible alternative strategies for the property. This may also be a great time, once you figure out your backend strategies, to begin to market the property to your potential backend buyers and to double-check the validity of your two or more exit strategies.
   
   
9. Get your financing in order. Simultaneously as you are looking over this deal you probably have contacted a lender, either conventional, hard money, or some sort of money or credit partner. Make sure that you have everything that they require for you to furnish them in order to make a decision on your loan in order. Please refer to our legalwiz.com site the article titled “How to Get a Hard Money Loan” that will step you through how to prepare and best present the documents for a loan. If you are using a money partner ask for proof of funds from them to make sure they will have the money needed at closing.
   
   
10. Close the deal. Now it’s time to get the deal closed. Most wholesale deals need to close fairly quickly so make sure you get your ducks in a row. Insist that the wholesaler keeps you in the loop all the way through the process up to the closing date. Communicate constantly with your lender or money partner. Make sure that any needed funds required from your end will be available at the time the title company will require them to be there. Keep in touch with the title company that will close this deal to make sure they have everything they need from you and from all other associated parties. If this is a rehab or is going to need some fix- up as a rental, then get some hard dates from your contractor as to when they will start on the property and when the planned end date for the fix-up will be. Start planning your backend marketing right away to maximize your chances of a quick sale or rental.

A Quick Note on Wholesalers…

You might think by reading this article that all wholesalers are a little on the crooked side. Nothing could be further from the truth, however, there are a few bad apples out there just like in any other business and it’s up to you to determine whether you’re doing business with one or not. Most wholesalers are honest and forthright but the final decision is up to you to determine whether this deal will work for you or not.

Once again we hope you have enjoyed this article and here is to your success!