NUMBERS GIVEN BY WHOLESALERS ARE NOT LIES, BUT DO YOUR DUE DILIGENCE

by Team IWP! on 23. Mar, 2009 in News

By Hari Kusumakar

When wholesalers are marketing their properties to rehab investors, typically they will give them three key numbers to help make a decision:

1. Asking Price

2. Estimated Rehab Cost

3. After Repair Value

The asking price is exactly what it says: it is the price which the wholesaler is asking the investor to pay for this rehab property. Usually it will be based on a numeric formula (i.e. 75% * After Repair Value – Rehab Cost). This would leave 25% profit margin to the rehab investor less the closing costs, marketing cost, holding cost and capital gains tax. The wholesaler’s profit is built into the asking price. Usually, it will be around $2K and can go up to $20K or more.

The estimated rehab cost is the most disputed of the three numbers. Most rehab investors and wholesalers will disagree on this number because every rehab investor has a different cost of doing business. Therefore, wholesalers only provide what the average rehabber may incur as expenses. The rehab investor needs to do his due diligence and find out what his own rehab cost will be in the current situation. This could be higher or lower depending on the investor’s experience and resources in rehabbing. It also depends on what exit strategy the rehab investor is planning. The guideline I use is to find out how many projects the rehabber has completed. Beginners have completed 0-5 projects, average rehabbers have completed 5-10 projects, and experts have done 11 or more projects. Most of the rehabbers in the expert class will have their own crew and their cost of rehabbing will be very competitive. Therefore, they have more room to work when making a bid, especially if they are renting these properties out and holding for appreciation and cash-flow.

After repair value is the price for which a property will sell within a normal marketing time once the necessary repairs have been done. This number assumes that the property is fixed up to the standard of the neighborhood. It is derived from recent comparable sales data within a 2-3 block radius with the help of a real estate agent, and the wholesaler might even provide you the details of these comparable houses to justify his analysis. He hardly ever uses an appraiser to get the after repair value. If he’s a good wholesaler, he will most likely be focused in a certain area (called “farm area”) and will be very familiar with the property values in the neighborhood. He should have his own database of comparable sales from other investors, county records and the MLS.

Use the information the wholesaler provides you as a starting point to determine if the deal makes sense, but then do your own due diligence. Determine your own rehab costs, and determine your own after repaired value. If the deal still makes sense, write up an offer and close on the deal.

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Hari Kusumakar is a real estate investor based in the Chicago area. He also runs the most visited real estate investment website in the Chicago area. This website can be accessed at www.LocateRE.com. He can be personally reached at hari@LocateRE.com

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