Pre Screening Wholesale Property Deals

If, for some reason, you can't get a CMA, then you can consult your county appraisal districts' value. However, remember, this is just to give you a ballpark figure; county values aren't generally very accurate. Another option is Zillow.com (http://www.zillow.com/). It's a free website that will give you the value of a property. Again, it's not very accurate. You really need to work with a realtor to get the most accurate figures.

Then, based upon the repairs the seller tells you about, you have a couple of options. You can use the Instant Rehab Estimator tool software I have on my website at www.DoDeals.com. Or, you can call contractors and ask them to give you an estimate. If the house is vacant, they can take a look at it and give you a more accurate estimate. If you need the services of a hard money lender, then they send an inspector to the property, and he or she completes their own form.

Repair costs will vary with the house and the neighborhood. Depending on your area, repairs to lower-income properties may range from $15,000 to $25,000. For moderate-income houses, they may vary between $10,000 and $15,000. Keep in mind that the cost of these repairs depends who's going to take care of them. For example, if someone's going to fix up the property and rent it (or fix it up and do an owner-financing), then the repair costs will drop dramatically. These individuals will buy for more than rehabbers who are going to fix the property up and retail it.

After you estimate how much repairs will cost, I highly recommend that you add a 10 to 20% contingency to the estimate to account for miscellaneous items you might have missed. This is especially true when you decide to rehab a property and retail it. I guarantee if you don't add the contingency, it will come back to bite you in the rear!

With all these calculations, you now know your after repair value (ARV). So, in order to determine the sale price, you use one more calculation:

Sales Price = ARV x Margin - Repairs

Here's an example: Assume a property has an ARV of $100,000. The margin is .70. The estimated repairs are $10,000. So, the calculation looks like this:

$100,000 (ARV) x .70 (Margin) = $70,000 - $10,000 (Repairs) = $60,000 (Sales Price)

If you're selling the house to landlord investors, they will generally pay more. Most of them like moderate income houses, but some also like lower-income properties because they can get more cash flow. These are good buyers for you because landlords will tend to pay between 80-85% of margin. If a house in a really good rental area, they'll pay up to 90%.

Another good source of buyers is contractors who buy houses, fix them up, and then retail them. They'll pay between 75 to 80% of margin. That's less than landlord investors, of course, but the contractors want to save the repair since a lot of physical labor goes into those repairs.

Rehabbers pay even less than contractors-65 to 75% of margin. Since they fix up the house with the intention of retailing it, they don't expect to pay as much.

DETERMINING THE MAXIMUM ALLOWABLE OFFER(MAO)
With the information above, you know what the sales price is based on the ARV, repairs, and how much you can possibly sell the house for. You also know how much you want to make as a wholesale fee. As I said previously, I like to make at least $10,000 on my deals. So, as shown below, take the previous example and subtract the fee:

ARV $100,000
Margin x.70
= $ 70, 000
Minus Repairs $ 10,000
Sale Price = $ 60,000
Minus Wholesale fee $10,000
MAO = $50,000

You know now that the maximum allowable offer is $50,000.


Some wholesaling gurus teach you that you should only get houses under contract for 65 to 70%. I take a different approach. I recommend that you buy based on how much you can sell the property for. Whatever you can sell the house for, your objective is to get it for less and get the difference for your profit. It doesn't matter if it's at 65% or 70% or 80% or 85%. Here's an example: Assume you have a potential deal where you know that you could sell the house for $90,000. And you know you have to buy it for $85,000 (85% of value). That means you could turn a $5,000 profit. So, why turn it down based on percentage? My advice-don't always go with the margins. Be flexible and get good deals based on much money you can get out of the deal.

Okay, once you've done all the pre-sale work, then it's time to meet with the seller-the subject of my next article.

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