Wholesalers when doing your analysis are you remembering everyone wants to make money?

  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