Good day folks!
Here’s to hoping that everyone is having a wonderful summer. As of late, I’ve have some newer wholesalers bring deals to me. And, when they present the offer price on the property, they, not intentionally have forgotten that everyone wants to make money in a transaction and it’s necessary to work your way backwards and include all the costs.
There are a few ways to look at deals when you are trying to determine your Maximum Allowable Offer (MAO).
First you can use a percentage minus the rehab costs to get a ball park figure. Some folks use 65% of the ARV minus the rehab costs to get you MAO. Some folks use 70%. It really depends on the market you are working in. The thought process is that 30-35% of the ARV will cover all costs and leave enough money for everyone to get paid. Here’s an example using 65% –
ARV – $300K X 65% = $195K
Rehab costs – $75k
MAO = $120K
However, I prefer to work my way backwards to reach my MAO. Using the same numbers from above, this is how it will look:
ARV $300K
Rehab costs $75k
Hard Money Costs $35k (will vary dependent on lender)
Broker fees (5% typically) $15k
Holding costs $5k
Legal Fees $5k
Contingency $10k
Wholesale fee $10k
Rehabber profit $50k
MAO – $95K
Working your way backwards is more accurate, will CYA and leaves room in the deal for everyone to make money. Newer wholesalers usually forget the rehabber wants to make money. Typically, they would send me the same deal listed above and excitedly tell me they have the property under contract for $160k and can I help them find a buyer. This is what I receive:
ARV – $300k
Rehab costs $75k
Legal fees – $5k
Holding costs $5k
Broker fees (5%) $15k
Asking price $160k
Invariably, I have to get back with them and explain they need to add hard money costs, some type of contingency/oops money and oh by the way, the rehabber is going to want to make at least $50k on this project. If you can get the asking price down to $95k or $100k, then I will present it to my buyers list.
So, wholesalers, when you are out there looking for properties and putting them under contract, remember to include all the costs because just like you, everyone wants to get paid. 🙂
Download Brownstone’s repair estimate calculator to help you out with your rehab numbers.
Be sure to check out our upcoming events and we will see you at rehab tour in the near future.
Bernadette Trafton, Boston AREIA Chief Connector
Thanks for this, I am new to wholesaling. I have a question, when I get my first deal, do I send it to you directly or go thru Brownstone or both?
Thanks!
You can send it to me.
please reach out to me at bernadette@bostonareia.com
Hi, I am new to wholesaling and I want to find out if Massachusetts uses a title company or an attorney to help close the deals with the homeowner.
If so? Who do you recommend? I am always happy to build a 100% trust partner to work with in helping me get off on the right foot.