There’s a common saying amongst real estate wholesalers that you “make your money when you buy.” That is, the key to making money in real estate investing is by finding and buying good deals. If you run your comps right and use the proper formulas to secure good deals, the rest is easy.
So how do you do that?
Here are the four big formulas that every wholesaler should use to run the numbers on their deals.
1. After Repair Value (ARV)
When a motivated seller calls you, the very first thing you’ll want to determine is the after repair value of their property (or ARV) — that is, how much the property will be worth once it’s repaired and ready to sell on the market.
This is a core part of running comps.
Because you can work back from that number to determine how much your cash buyer will be able to make when you flip the contract to them, as well as how much you can make in your assigment fee and thus how much you can actually offer the homeowner.
But how do you determine the ARV of a property?
Here’s a 13-minute video from Ryan Dossey that’ll show you how to run comps for free using Zillow…
And here’s a 9-minute video that’ll show you how to run comps on Propstream…
Running comps and finding the ARV of a property isn’t rocket science. This is something that real estate agents do all the time using the MLS. In fact, if you have a friend who is a real estate agent, perhaps the easiest way to get the ARV of a property is to ask them to run comps for you.
How does this work?
Running comps is really just a matter of looking at the recent sales price of similar properties near the target property to come up with an on-market value. “Comps” stands for comparables and that’s exactly what it is — comparing your target property to the sales price of similar properties.
This means looking at the sales price of properties that…
- Have sold very recently.
- Have the same number of beds and baths.
- Have similar square footage.
- Are in similar condition to the target property once it’s repaired.
- Are in the same area.
The more similar the comparable properties are to the target property, the more accurate your ARV is going to be. This is very important to get right because the rest of your math depends on this number.
If you’re nervous about getting it right, then pay a real estate agent to run comps for you.
2. Repair Costs
Once you have the ARV of the property, you’ll know how much the home is worth after it’s repaired.
But how much are repair costs?
That’s the next thing you need to calculate. And this process is going to be a bit more involved than just going to Zillow and running some comps. You’ll need to actually see the house for yourself, take pictures, and make as accurate of an estimate as possible. In fact, we have a full guide here to estimating rehab costs like a pro.
In that article, we share five different methods you can use. Here’s the gist of each…
Average Price Per Square Foot — This is not the most accurate way to estimate rehab costs, but it’s a decent starting point. You can estimate that a “light” rehab (carpet & paint) will cost about $15 per square foot, a “medium rehab” (carpet, paint, kitchen, & bath) will cost about $25 per square foot, and a “heavy” rehab (roof, windows, siding, drywall, etc.) will cost about $50 per square foot. Again, these are very crude numbers but it’ll give you a starting place with estimating your repair costs.
Category Method — This is the most accurate method for estimating repair costs and the one that most smart wholesalers use. They create a long checklist of categories (such as flooring, kitchen, windows, HVAC, appliances, bathroom, etc.), scour the property looking for damage, and assigning a cost to every repair. Obviously, this requires you to actually know how much things cost to repair (which is the hardest part), but you can figure that out by talking to contractors or even by asking other experienced real estate investors in the area how much certain things cost. This breakdown of repair costs won’t only give you a more accurate picture of the deal, it’ll also help you offload the deal to a cash buyer because they will see you’ve done your homework.
Per Room Method — This method is just a different approach to the above category method. Instead of categorizing repairs by floor, windows, roof, and so forth, you categorize repairs by room. This can be a helpful way to break things down and organize all of the photos you took so you don’t get confused about what damage is where once you’re back home. Then you can determine repair costs by each room and come up with a total estimate.
The GC Method — This is our favorite method but it’ll also cost you a bit of money. Hire a good general contractor to go through the property with you and tell you the costs of repairs. The main caveat to this method is you need to find a good GC with great referalls who isn’t going to screw you with bad information. So make sure you do your research and ask probing questions before choosing a GC to help you out.
Reverse Wholesaling — This one is more of a method of wholesaling than it is a method of estimating repair costs, but the outcome is the same. Instead of looking for a deal and then finding a buyer, you start by finding a cash buyer and asking them what type of property they’re looking for. You then go look for a deal that fits their criteria. You can partner with them when estimating repair costs and even coming up with your max cash offer. This makes it so that the wholesaling process is reversed and you’re able to work more closely with your cash buyer while running the numbers.
Whichever method you choose, estimating repair costs on a deal is not something to take lightly. The better your estimates, the easier it’ll be to come up with your max cash offer and the easier it’ll be to pass the deal to a cash buyer. So take your time and do it right.
3. The 70% Rule
At this point you know the value of the property and you know how much it’ll cost to repair the property. We’re getting close to completing the entire wholesaling equation.
With those first two numbers in hand, the next thing you need to determine is how much your cash buyer should pay for the deal and still remain profitable.
This is important because, as a wholesaler, you need to give your buyers good deals. This will ensure that you’re able to continue working with great cash buyers and that you are able to make a healthy profit.
You can determine this using the 70% rule.
The 70% rule states that a real estate investor should pay no more than 70% the ARV of a property minus the cost of repairs. It just so happens we now have both the ARV and the cost of repairs in hand.
Now remember, this is the amount that your cash buyer should pay for the property… not you.
The formula looks like this…
Your Buyer’s Price = (0.7 x ARV) – Repair Costs
Let’s look at an example. Imagine that you found a property with an ARV of $250,000. You estimate total repair costs on the deal are $25,000. Here’s how the numbers work out in that case…
(0.7 x $250,000) – $25,000 = $150,000
This means that your cash buyer should pay $150,000 for this property. All you now have to do is figure out how much you want to make on the deal and then how much your max cash offer on the property is.
4. Assignment Fee
The assignment fee is how much you — the wholesaler — make on a given deal. This number won’t be the same on every deal. How much you stand to make depends on how good of a deal you’re able to get (which is why you shouldn’t start negotiations by throwing out your max offer).
In fact, you can see an example of this from one investor who uses our mailers here at Ballpoint Marketing. Check out how much his assignment fee varies per deal…
So don’t think of your assignment fee as a number that’s set in stone. You’re not an employee getting a paycheck — you get a higher assignment fee if you find a better deal and negotiate better with the homeowner… that’s it.
If you make money it’s a win. And you can work on finding better deals and increasing your assignment fee over time.
The only way to determine your assignment fee on a particular deal is to consider the gap between…
- The homeowner’s desired sales price
- Your cash buyer’s max purchase price.
You make money in the middle. Squeeze as much as you can out of each deal… and if you’re not making as much as you want, try to find better deals.
5. Max Offer
Finally, you can determine your own max cash offer.
If you’ve run all of the previous numbers, then finding your max offer will be very easy. Just deduct your assignment fee from the 70% rule cacluations you made.
So the final wholesaling formula looks like this…
Your Max Offer = (0.7 x ARV) – Repair Costs – Your Assignment Fee
Imagine once again that you found a property with an ARV of $250,000. You estimate total repair costs on the deal are $25,000. And you want to make $10,000 as an assignment fee. Here’s how the numbers work out in that case…
(0.7 x $250,000) – $25,000 – $10,000 = $140,000
This means that your max cash offer you should make to the homeowner is $140,000.
But you shouldn’t start negotiations there, of course.
In fact, it’s a good rule of thumb to start well below around at least 10% below that. In this case, you migth start negotiations by offering $120,000 and see how the homeowner reacts. You can always increase your offer to $140,000 but don’t go beyond that.
Why Many Wholesaler’s Calculations Are Bad…
It’s very common for wholesalers to make bad estimates on their deals and thus struggle to offload them to more savvy cash buyers.
So I just want to close with this final thought: take your time and do what you have to do to make accurate esimates on your deals. That’s how you win as a wholesaler.
You make your money when you find good deals.
The better the deals, the more money you’ll make… and the better your reputation will become amongst your cash buyers… which will make the dispositions process much faster and easier.
We’ve given you everthing you need in this article to get started making good estimates and calculations. It’s on you to take the information and use it in your business.