I’m a newbie trying to get started in St. Louis,
I am looking to purchase a property (3bdrm ranch) from a wholesaler
for $80K and resale it at retail. I have not done my due diligence as of
yet but I will. The whosaler indicates that the FMV is $130K. My question
is what type of percentage do you think is acceptable for purchasing
+ any repairs
+ carrying costs(mort/taxes/ins/agent sale fee) = MaximumOffer
(MaximumOffer / FMV) * 100 = at least 65%
What type of ratio do you use when determining if the property is
a good deal? Is there anything wrong with buying from wholesalers?
Welcome aboard. No, there’s nothing wrong with buying from wholesalers, if they’re good at what they do. Strange as it may sound, considering how many folks are getting into investing and are told to start out that way, it’s an extremely rare occurrence to find a good wholesaler.
Inevitably, they miss the comps, the repairs, or just don’t leave enough meat to make the risk worthwhile.
I would suggest throwing the percentage routine out the window and only using it as a backtest to verify you’re in the right ballpark. Even if you were to use a ratio as a quickie test, that measurement can change radically depending on your market. For example, if you’re in a strong buyer’s market and the property’s going to sit for 6 months, would you pay as much as you would if it would fly out the door in 30 days?
Using 65% less repairs as the industry norm is not necessarily a bad idea, but you definitely need to know why (i.e., the components of the other 35%), and you need to adjust for your market, your skills, etc.
One of the best ways to determine if you’re getting a good price is whether or not you can sell the deal to someone else (or several folks) for more than your agreed price, as-is.
What I’m really suggesting is that investing in real estate based on general rules of thumb is not a good idea. There’s a balancing act between sitting on the sidelines learning and taking action. It’s important to have at least a core knowledge of what you’re tackling so that one of the earlier deals is not your last.
For example, I had done somewhere between 10 to 15 rehabs with different levels of success and applied that experience and knowledge to a rehab that was outside my “norm”. The numbers appeared good on the surface, but I didn’t know this particular niche market. It was a very expensive lesson.
If your numbers are good and the repairs are minimal, it sounds like a good deal on the surface. Just make sure.
A simple option contract works fine for flipping properties. However, that may not work considering your seller is a wholesaler because that person has a deadline as well.
Aren’t you curious why this wholesaler is offering you the deal instead of one of his regular buyers? I’m a skeptic, but it’s rare that a true deal from a quality wholesaler makes it to someone fairly new.
Verify, verify, verify…
Consider finding a partner with whom you can share the risk. Consider wholesaling it to someone else with the wholesaler’s permission. I’m sure you’ve heard the expression a quick nickel is better than a slow dime. Consider finding a mentor at your local club.
REI is a long term gig. It’s better to be armed and cautious and still in the game years later than it is to go out in a blaze of glory. Sorry for the soapbox, but I’ve been seeing more and more folks just jump in lately without appropriate consideration of the risks.
So, to summarize, this may be a great deal, but no deal is better than a bad deal. Trust your gut instincts and proceed accordingly.