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So I’m analyzing my first potential options property, and would appreciate some insight from someone who knows what they’re doing!:blink: It is a small house (1000 sq ft), 3 bed/1 bath in a lower-priced neighborhood for the area. FSBO $80k; from what I can tell so far surrounding homes are valued from $72k-$96k for similar (or slightly larger) sq. footage. The house has had some updates over the last 7 years including foundation, roof, flooring, and kitchen appliances, but it is an older home built in the 1960s. It has been on market for almost two months and has recently had an almost $10k price cut. Since this is my first deal, I’d like to make a minimum $3000 profit after wholesaling to my buyer.
My buyers list is made up of about half rehabbers looking for new projects, and others looking for rent-ready properties to add to their holding portfolios. I’m thinking this might be a possibility for the latter group. Based on the specs above, do these numbers seem workable? Does anything that I’ve said even make sense (lol)?
Thanks so much for all the help. It is so encouraging to see the helpful advice everyone has to share here.
— S.
I can’t remember where I’ve seen it, probably in the HIgh Volume Wholesaler series, but there is a fairly standard formula to determine what is the most you can pay for a property after repairs and your profits are factored in. I hope Jackie doesn’t mind my sharing, but her approach, according to HVW, is to ask “if I could pay you cash for your property and close within the next few weeks, what is the least you would consider taking?”
A couple things come to mind in your scenario
1. For your buyers who are rehabbing to retail, you will need to leave enough profit in the deal for them to make some money. What tools are you using to estimate repairs? Every area is a little different and you’ll need to find a method that works for you in your area – estimated cost per square foot, actual cost, etc. You didn’t mention anything about a mortgage(s) on the property. That will be important to know.
2. For your buyers who are looking for rent ready, you will need to give them some ideas about the rental market in that area – what can they expect to rent it for so they can calculate their gross rental income. They will also need to know what they will need to spend to make it rent ready.
This is of course just scratching the surface. I got the impression from your post that you’re looking for some things to start considering.
Good luck, it sounds like you’re on the right track.
-Deb
Hi Lotus
If you have landlords looking for rent ready properties, have they told you what their criteria is for ROI or Return On Investment? Here in South Carolina where I am, my landlords will buy almost anything and everything that will give them a 20% ROI. Market value is usually no concern to this type of investor, only cash flow. To know what your ROI will be you need to have a pretty good idea of the market rent for the property if it is not already rented. If you take the gross rent for the year minus taxes and insurance you will have a figure called NOI or Net Operating Income.
NOI divided by purchase price will give you first year ROI. For example if the property you are considering rents for $500 per month and taxes are $1200/yr and insurance $400/yr the NOI would be $4400/yr. To realize a first year 20% ROI, your investor could only pay
$22k for the property. So if you are wanting to make $3k on the deal yo would have to option the property for $19k or less. If the rents are $750/mth then you would have to option at $34k or less for you to make $3k and your buyer get his 20%!
I look for these deals daily. I have one buyer who will buy all I can find. I am also seeing here in my market blue collar DIY’s buying cheap (10-15k) houses and rehabbing themselves on weekends.
I hope this helps and you may find your buyers there are looking for lower ROI’S. It is of great benefit to know your buyers wants and needs first and then shopping for the right property is much easier.
If you need help figuring your option price for your rehabbers, Jackie has a great section in her Real Estate Profits on Steroids book on how to figure and a really cool way of figuring repair costs as well.Wes Johnson
All great info, thanks for the response. I know there are still some missing pieces in this puzzle, so thanks for raising those points. I guess there are a couple “oddballs” about this property:
1) Based on the seller’s listing (I haven’t seen the property or even contacted the buyer yet), it sounds like all the major work has already been done to it. Granted, it would probably be off-putting to the average buyer due to its age and small size, but it is certainly comfortably habitable, and even seems a bit more “luxurious” than one might expect for a house in the older, less expensive side of town. The only red flag I can think of is the lead paint and other “old house” issues, but I would hope the recent “fresh paint” has addressed that . . .
2) I looked up the county tax records but can’t seem to find a deed history, so can’t tell how many owners or if there is a mortgage. The current owner appears to be an elderly gentleman whose recorded address is in a small town about 2 hours away; however I can’t determine how long he has been the owner or who (if anyone) currently occupies it.
3) Nearby houses seem to rent in the $1k/month range, but I haven’t yet confirmed those numbers. With such a small mortgage (and fairly low property taxes), maybe I should consider keeping it myself at that rate
Lotus,
There are older homes all over the country. Lead paint is an issue only if you let it become one.
You said this home is listed as a FSBO. That should lead you to the owner. It doesn’t matter how long that person has owned the property. They are advertising it for sale, right? When you reach that person all your questions about a mortgage, whether or not it’s occupied, what repairs have been/need to be made etc will be answered.
Call about some of the other properties that are rentals and find out what they are charging. You can pretend to be a prospective tenant or just go to the area on a Saturday afternoon and tell people you’re looking to rent in the area, how much are the places renting for. It’s rare that someone won’t give you that information.
I get the sense that you are trying to do some “corporate espionage” before you contact the seller. Most of the time it’s easier to just make the call and get the info from the seller. You can always confirm the facts later. Don’t let information gathering get in the way of moving forward. You might talk yourself out of a good deal before you’ve even given the deal a chance to develop.
Good luck,
sounds like the sellers are asking top of the market for it. Two months is nothing in the DFW area. If they have not sold by November they may be more motivated.
For one of your buyers to be interested, they would need to buy at about $50,000 cash. Could pay as much as $65k if the sellers were offering financing.
But keep in mind that just because they are asking $80,000 does not mean they would not take a whole lot less for a quick, all cash offer. you’ll never know until YOU call and talk to them.
Just to make sure you understand. You should never EVER tell your buyers about a potential opportunity until AFTER you have a contract on it. Otherwise, you’ll be luck to make a $500 referral fee.
Thanks for all the input, everyone! I think I am going to do some watchful waiting on this particular property since the current numbers don’t seem like that great a deal for my targeted buyers.
Now I have identified a house nearby that seems to have more potential: 3 bed/ 2 bath only partially-updated, has some foundation issues (estimate on file), definitely needs some fixing up inside including unfinished paint, carpet, some cosmetic modernizing, etc. Looks like a good project for my rehabber buyers with a listed price of $125k in a neighborhood with estimated values of $115k-147k. Only hitch is that it is an REO property and what I’ve seen on the forums here seems to point away from REO’s as wholesaling opportunities. But might it be worth a shot to put in a low offer on one that obviously needs work like this? Isn’t the worst that can happen that the bank rejects the offer? I’m prepared to learn the extra nuances of a deal like this if it would make sense to do so— what say the seasoned pros?
Lotus
your numbers are WAY off.
You need to re=read Real Estate Profits on Steroids.
To wholesale a property you need to get a contract on it for about 50% BELOW what it would be worth all fixed – MINUS repair costs.
So, the for 3/2 house you mentioned, assuming it is worth about $120,000 — your contract would need to be in the $50,000 – $60,000 range.
If they are asking $125,000 then it is NOT a good deal. If they are asking $125,000, it is very unlikely they would accept a $60,000 offer.
If they were asking $80,000 — then you might get them down to $60,000 — maybe
the very best wholesale deals are properties that do not have a fsbo sign or a realtor sign out front. To find wholesale deals, look for old, run down houses, then send a postcard or knock on the door, then ask, if I could pay you all cash and close within 3-4 weeks, what’s the least you’d take
that phrase does not work on “listed” properties.
the other problem with listed properties, is that everyone already knows about them ( including your buyers) —
spend some time driving around in the older, least expensive neighborhoods looking for run down and apparently vacant houses
Those will be your best deals and highest money makers.best of success
jackieLotus, we all were once where you are at. The best advise I can give you it to keep trying and keep learning. Sooner or later you’ll stir up some business. You have the “go get r done” mentality which is good! Kudos for that, as many times people just think of what they might do but never act on it. Keep the acting and learning and it will come to you. Also, some of the best deals are homes with equity in it so I woud stay away from REOs.
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