A profitable wholesale deal starts with making the right offer.
So how can you make the best offer possible?
Time is money, so let’s get straight into it …
When writing an offer, you’re going to find the maximum allowable offer — MAO — by knowing the answer for the numbers.
Question #1 — you must identify and determine: What is the after repair value (ARV)? Meaning after you fix it up and do whatever it is you plan on doing to it, what can you sell it for?
And don’t go crazy here like so many wholesalers I’ve seen have a tendency to do… some wholesalers can be not super honest — for example, they’ll send you that email blast and tell you that the after repair value is $380,000 — but the legitimate ARV is actually $300,000. There are no comps to support that valuation.
Don’t blow smoke.
Check the numbers and make sure that your ARV is accurate.
Now, you can be on the upper side of aggressive because you’re smart and you do really good work and you know how to stage and merchandise the property for sale effectively so you can command top dollar…
But if you don’t know how to do those things, then you probably want to be a little bit more conservative on that ARV value.
So, you make sure that you can get the funding that you need and that you write the right offer.
Question #2: How much is the buyer expecting to profit from the home?
When you make this offer to your prospective seller, you got to build your profit into the offer, remember this adage: In real estate, you make your money when you buy, and you realize your investment when you sell.
Which means if you pay too much for the asset, you won’t be able to sell it.
So, if you haven’t invested the time to find enough good quality opportunities to look at and bid on, you become a motivated buyer because you’re just so desperate to buy something, you’ll buy anything… you’re going to end up being a motivated seller and you will lose money.
It is a lose scenario.
You can never be motivated to buy real estate.
We buy because the numbers make it a good deal. And the numbers say buy…
We don’t buy because you woke up this morning and thought, “Hey, I should buy some real estate today.”
That is not the reason to buy real estate.
You buy it because the numbers make sense.
So, building your profit, building your costs… how much is it going to cost you to fix it up, to put it into sellable condition?
And then you need to include your fixed costs.
Fixed costs are:
- purchase price
- financing cost
- closing costs
- carrying costs
- rehab cost
- monthly gas bill, electric bill, water bill, sewer bill
You’re going to have those costs every single month, which brings us to the next point…
You’ve got to move fast.
You guys cannot move slow on this stuff. You’ve got to move quickly. And then, of course, you need to fill in your wholesale fee. How much are you seeking to make from this deal?
Now, let me give you guys some baseline, some benchmarks…
The average wholesale fee is about $18,000.
But you should not plan on making $18,000 your minimum net…
When you wholesale, you’re always going to wholesale for a net amount, which means whoever you’re wholesaling the property to is going to pay all the fees, closing costs, excise tax, any seller premiums that are there, anything to bring the taxes current — or if it’s subject-to deal, taking over the underlying lien and bringing it current.
It’s a net to you.
And the number is $10,000. Baseline…
You can’t make a living if you’re making less than $10,000 on a wholesale deal.
And, some of you are thinking, “Well, Lee, I’d be happy just to make $5k.”
But remember, there’s going to be negotiation here…
So, when you’re building in your profit and loss analysis, just plan on and build in a $10,000 wholesale net fee.
Now, if your buyer comes to you and wants to negotiate that net fee down because they need a better price to make their numbers work, that doesn’t mean we take a haircut on our fee. It means that we go back to the seller and say:
“Hey, I’ve got good news, and I’ve got bad news. The bad news is I don’t have enough margin to get this thing sold. The good news is, if we can shave off $3,000 on the price we originally agreed to, we can get this thing closed next week.”
So, we apply the downward pressure on the costs from our buyer to the seller. We keep our $10,000. It doesn’t move. We are not flexible, because you’ve done a lot of work…
For one, you had to learn how to do this the right way. You had to run the ads, talk to the seller, negotiate the deal, get it under contract, and market for the buyer. Now you’ve got the buyer, but of course you don’t want to make less.
So, here’s your formula.
Your maximum allowable offer (MAO) is your after repair value minus your profit, minus your repair costs, minus your fixed costs, and minus your wholesale fee.
That’s is your maximum allowable offer.
And you can see that we are already building in the person who’s going to buy this property from us. Remember, we’re wholesaling this. We’re not flipping it. We’re already building in their fixed cost, their rehab costs, their purchase price, their carrying costs, and their profits.
That’s the secret sauce of wholesaling — you’ve got to find good enough deals and leave enough meat on the bone that the person you’re wholesaling to can still walk away and make $20k-$25k.
And that is the other baseline number that you need as a wholesaler. You need to plan on netting $10k.
But when you’re building in your numbers, you need to build in numbers where your end-buyer is going to make, at minimum, $25,000 net.
Why should they make more than me? Because they’re taking on the bulk of the risk. They’re the ones who are actually buying the property, taking title in their name, either using their own cash or getting funding through CoGo Capital (one of my companies), through you as their broker.
They’re the ones on the hook for making that monthly payment on the debt service. They’re the ones making the payment on the taxes and the insurance and the rehab costs.
And the contractors should make more. They deserve to make more. They’re doing more.
Now, a mentor told me years ago: “Don’t count other people’s money, so don’t worry that they’re making $25k or $50k or $100k.”
The best outcome you could have as a wholesaler, is that whoever you wholesaled the house to makes $50,000 in cash… and instead of you thinking you left a lot of money on the table, you actually got a buyer for life.
Go find more assets, more opportunities. You got a buyer for life. Just wholesale those things to them all day long.
There you go…
Like I said, some of these thoughts ay differ slightly from other investors who hang out around here. This is what’s been working for me and my businesses.
So, I’d say take from here what works for you business.
Then rinse and repeat!