What formula do you use to calculate your “wholesale purchase price”? Currently, I deduct 70% from the seller’s asking price then that’s my offer price. Does anyone have another way the calculate this or could elaborate?
Conventional ‘wisdom’ says:
(ARV X 70%) - (Repair costs + holding and sales cost) = Max Offer
Keith
You can’t just deduct 70% from the seller’s asking (or deduct 30% from the seller’s asking price). This would assume the seller’s asking price is the full, after repaired value.
You may discover the seller has already discounted the price, based on the ARV, and you only need to offer a few thousand less than he’s asking, instead of tens of thousands less.
Once you know the ARV, deduct the repair/marketing/closing/assignment fees, to find out the maximum offer you can make.
You want to start somewhere less than your maximum offer, so that you can have room to negotiate. Otherwise, starting at the maximum will put you in a corner, with nowhere to go, but above your maximum.
Hope that helps.
Be sure to read the other threads in this forum for more detailed discussion of this, including my posts.
:beer
I agree with the posts here. The key component is to know the After Repair Value. This is the market value if the property is in good condition. You are going to either need a lot of experience to determine that or a really good realtor to give you a BPO based on your planned renovation.
Some investors are either looking for greater profit or unwilling to take as much risk, so their formula is this:
(ARV x 60%) - Rehab Costs = Wholesale Price
This formula does not work well in highly competitive areas.
Hi all,
I’m confused! There are two ways of doing this can someone shed some light on this?
Find the area your buyers want and the types of property they want to buy and of course how much they will pay
Look at the price of HUD foreclosures sold in that area for the last 30 days
(HUD foreclosures are historically the cheapest REO)
Your cash buyers will not find prices lower than HUD REO prices in that area.
If you want to make a 10K Wholesale profit per deal then you need to make offers at 10K under HUD REO prices for area.
What you have to understand is that REO/distress property prices will not always be at 70% of ARV
so you have to disregard that illusion and make offers based on HUD REO prices.
Here is a breakdown of this formula: (ARV X 70%) - (Repair costs + holding and sales cost) = Max Offer
ARV - After Repair Value (lets say $200,000)
x .70 Discount to provide buyer with 30% profit ($60,000 profit margin)
$140,000
- Repair Costs (lets say it will cost $50,000 to renovate the property)
- Holding Costs (what you will spend besides renovation costs to hold the property i.e. taxes, insurance, utilities etc - lets say holding time 6 months, costs $5,000.)
- Sales Costs (what it will cost you to sell the property i.e. realtor commissions, transfer tax, title insurance etc - lets say 8% of ARV or $16,000.)
Max offer ($140,000 - 50,000 - 5,000 - 16,000) = $69,000
Personally, I believe that the 30% profit should include the holding and closing costs. This will be more practical in most markets. In that case then the max offer would be $90,000 ($140,000 - $50,000). Your estimated in pocket cash after a 6 months holding period would be around $39,000 ($60,000 - $5,000 - $16,000).
As markets are getting more competitive and discounts are less and less, the profit margin is going to shrink.
I think each investor has their own ‘pain threshold’…working alone, I had less overhead and 30% was too much…I was more on the line of 20%…
Keith
Keith, I have to agree with you hear. Each investor must know what their market can bear. In some areas, investors can reap a 30% return on investment. In many areas, however, since the market is rebounding, the return are going to diminish as competition and prices increase.