The Formula For Wholesaling houses
When you’re wholesaling houses it’s important to never pay more for property then you should. If you pay more for a property than what you should, you run the risk of not being able to sell the home quickly. You also stand to make less of a profit. So knowing exactly how much to offer is a big deal and something you shouldn’t take lightly..
So what is the magic formula that will allow you to NOT pay more for a property than what you should?
The formula that you will want to remember is this…
$.70 on the dollar minus repairs. This is the formula that most all wholesalers use when they wholesale houses.
Here’s the formula written out –
(.70 x ARV) – Repairs
For those of you that do not know what ARV stands for it stands for the After Repair Value. So this is the value of the property after it’s been repaired. This means that when you are wholesaling these types of properties, this formula only makes sense when you’re dealing with properties that are in need of repairs.
These are not the typical homes you see for sale with green grass, perfect landscaping and granite counter tops. These are the homes that need a little TLC. That’s how you can pick them up at such deep discounts from the banks.
Let’s get back to our formula…
$.70 on the dollar minus repairs is what you can expect a rehabber to pay for this kind of property. This is a great deal for a rehabber. So if you want to make a profit on this house, you need to offer less than $.70 on the dollar minus repairs. So the formula you will use when making your offers will be lower. You will never pay more than $.65 on the dollar minus repairs.
Here’s the formula written out –
(.65 x ARV) – Repairs
When calculating this number, you always do what’s in the parentheses first. So first, to determine the after repair value of this property. You can do this a couple different ways, but the easiest and least expensive way is to call your real estate agent and have them do a CMA. If you don’t have a real estate agent on your team, you need to get one. Just make sure they pull both active and sold listings. That is important!
Quick Example of Wholesaling A House
Let’s say you find a home that is worth $300,000 after it’s been repaired. We plug in the formula of $.70 on the dollar times the after repair value and this gives us a price of ($.70 x $300,000) = $210,000. Now let’s say there’s going to be $20,000 worth of repairs. Once we put this into your formula, we now know that someone is willing to pay us ($.70 x $300,000) – $20,000 = $190,000 for this house.
Now that we know how much someone is willing to pay, we can use our maximum offer formula to determine how much we are going to offer. If we plug in our formula of $.65 on the dollar minus repairs we get ($.65 x $300,000) – $20,000 = $175,000. This should be the maximum amount that we can offer on the home. This is the bottom-line number when wholesaling houses.
And obviously every wholesale deal is different in every situation is different but these are the numbers that most wholesalers use when wholesaling houses. There are a few things you can do to increase your profit margins. It just means you may have to wait a little while longer to find a buyer that will pay more than $.70 on the dollar minus repairs.
Whatever you do, don’t get greedy and lose the deal completely. That tends to be a very common mistake among beginning investors. They wait hold out for a higher price and then end up holding onto the property longer then they should have and eventually end up losing the deal. The idea behind the wholesale strategy is to get in, get out and get paid quickly. Wholesaling houses is a great business to be in especially right now because of all the inventory. Set a goal and start making those offers now that you have the formula. Oh and don’t forget, you have funding now so you can make all cash offers which is a huge advantage.