Every hear that? The exact formula…
Guess what? There is no exact formula, but you hear about all of these “secret” formulas online from lots of “gurus”. There are rough guidelines to follow, but every seller, house, and neighborhood are different.
I get this question from people a lot:
How do I know how much I should pay for a wholesale flip?
PS – for those that don’t know what wholesaling is – It is, basically, where you flip a house that you don’t currently own. You simply find a house at a certain price, and bring in a buyer who will pay you more. You collect the difference! What a simple concept, hey?
My whole business and income changed drastically when I learned this concept. Maybe I’ll tell you the exact story how I learned how to do this in a future post. It’s kind of interesting. I had to buy a certain house in order for this guy to show me what it was and how to do it…
Nick, how much should you pay for a wholesale flip?
Here is what you need to know:
1. You need to find out what the place is worth when it is completely fixed up and remodeled.
This is also is referred to as ARV (After Repaired Value).
There are multiple ways that you can do this. The lucky thing we all have now that I didn’t have when I first started doing this are sites like Zillow and Trulia.
You can go on these sites and find out mountains of information about the property you’re looking at, the surrounding homes for sale, homes that have sold, etc.
There really aren’t many excuses that you can make for finding comps (comparable sales).
Zillow is a dynamite resource for doing your research. Play with it for a while and mess with the different options and you will start to see why it is going to be a great tool in your toolkit for world domination as an entrepreneur 🙂
You also can call a realtor and ask them to do a quick market analysis on the property in question.
Now, there is a strategy to doing this the right way. You want to find a “hungry” realtor who is willing to do some legwork to gain a new client. You don’t want to contact the “super producing” realtors that are really busy. Sometimes the hungry realtors are newer and want to establish some foundational clients. They are perfect.
Just call them and let them know you are looking at purchasing a property that is not on the market and you may want to flip it. Tell them that you may list properties with them down the road and would appreciate if they could do some research for them and do a market analysis.
Those are 2 solid options for getting the ARV for the property you are looking at. Don’t overthink it and freak yourself out over weird details that probably don’t exist and really are just in your imagination.
So, once you figure out what the house is worth when it’s fixed up, what do you do next?
2. You figure out how much needs to go into the property for repairs and remodeling
This is something that freaks people out and paralyzes them from moving forward because they think that you need a background in construction or something. I still, barely know how to pound a nail straight and I have bought and sold over 150 properties.
There is a rule of thumb that I have adopted over the years of doing this that can generate a quick estimate for repairs. Let me stress this AGAIN though…It is a rough and quick estimate that has proven to be pretty accurate after doing tons of deals.
I call it the Quick Quote.
Obviously I call it that because it’s quick and is sometimes necessary to pull out of your back pocket when a seller puts you on the spot.
By the way, I have 2 tiers of the Quick Quote:
One is for a house that needs a full cosmetic rehab which included a total remodel of the interior. This would usually include new kitchen, bath(s) carpet, flooring, paint, light fixtures, drywall, windows, etc. This formula does NOT include other things like furnace, roof, siding, foundation repairs, new driveway, or anything that is over and above a regular full-interior remodel. You would add those amounts on top of the Quick Quote.
Square Footage of house x $25-$30 = Quick Quote.
Example: 1200 Sft house $30,000-$36,000 to remodel.
The second tier is for “light rehabs”. What I mean by that is this – properties that just need light work like some carpet, paint, some new fixtures, and a few other minor miscellaneous things. The formula I use for this is:
Square Footage of house x $9 – $13 = Quick Quote.
Example: 1200 Sft house $10,800-$15,600 = Quick Quote.
Remember, these are for interior remodels only.
Also remember that there is nothing like bringing in real contractors that can give exact quotes for the work that is needed. This is NOT a substitute for that, but it is a shortcut that can give you an idea of costs.
I definitely recommend bringing in real contractors whenever possible so you are dead on with your numbers.
Once you have the remodeling numbers figured out, now what do you do?
3. Put the ARV together with the Repair costs and a few other numbers and you’re on your way
Now that you know what the ARV is and you know the cost of the repairs on the property, here’s what you do (this is a pretty solid formula that is great to work off of):
ARV x .65-.70 = X
Then you take that number (X) and subtract the repair costs. (I’ll use an example in a second because I love examples).
PS – the .65-.70 represents your buyer’s profit, miscellaneous expenses, closing costs, and realty commission.
Once you get that number, you subtract the wholesale profit you need to make on the deal. This should reveal your offer price. It’s always good to offer a little bit less than this as a padding for negotiation with the seller.
Okay, here is the example that will make sense of all of this:
I will use a $150,000 ARV.
$150,000 x .65 = $97,500
$97,500 – $35,000(repairs) = $62,500
$62,500 – $6500 (wholesale profit you want) = $56,000
There you have it. $56,000 is the offer price that you will present to your seller.
There definitely can be “in between” details and variables within this process, but I want you to feel confident to go out and start looking at deals and talking with sellers.
By the way, this is the same formula you can use if you were buying this property yourself to rehab it. You just would eliminate the last step of subtracting the $6500(wholesale profit).
One of the biggest fears newbies in this biz deal with is that they don’t want to go look at properties and meet sellers because they don’t quite know what to look for, how much repairs will be, and wonder if the seller “know that I’m new”. I put that in quotes because it is definitely a crazy fear that I imagined in my own mind when I first started in this business. I’ve been there. I know and have experienced this very fear many times. It’s okay 🙂
Now, enough talk from me…I want each of you who read this article to comment below with your biggest fear involved with this process and I will respond to every single one…….GO!