One of the things we, as investors, must deal with every day is analyzing wholesale deals. Whether flipping houses is your business, or your part time hobby, analyzing wholesale deals is part of the life blood that keep it pumping. Also, as most of us know, time is money. To be successful at flipping houses you have to look at hundreds if not thousands of deals a year to get that handful of incredibly profitable flips.
Obviously we can’t go see or even dig deeply into hundreds and thousands of deals per year. And we all know the old 70% of ARV minus repairs formula, but what is ARV and what are repairs?. Flippers everywhere know that we NEED wholesalers and their deals to keep our business going and growing, in fact often times we view our friends that are wholesalers not just as friends, but as business partners with a mutually beneficial goal and relationship.
However, wholesalers are still human. When they put together their numbers for investors to look at we must keep in mind that the function of their business is to SELL property. We try to limit our interaction with wholesalers who are just in it to “sell” a “deal”, but nevertheless even good wholesalers can push their numbers.
The first thing we do with EVERY DEAL is deduct 5% from the stated ARV. This helps us account for skewed comps and slight market variances. Generally, we find that even completely honest and ethical wholesalers and even our own comps can vary slightly. If there are greater variations than 5% repeatedly from a wholesaler, we usually stop working with them.
This leaves us with the question of, what are repairs. How many times have you seen a deal with “no repairs” or a $10,000 repair budget for a 2500 SQFT home that needs EVERYTHING? Even when a repair budget looks very healthy we often find there are a lot of items missing. This is usually due to the simple fact that most wholesalers do not understand the true costs of labor and materials and don’t understand the finer points and details of major rehabs.
Our rule of thumb is that we add 20% to any repair cost we see and we can keep that fixed because we find as scopes of work climb and price point rises wholesaler’s repair estimates become less and less accurate, not through any fault of their own, but just through a lack of detail and understanding. This also helps us account for rising costs of labor and materials. I know a local wholesale company we work with quite frequently that has a very thorough and accurate rehab sheet, but the prices on it haven’t been updated in 4 or 5 years. Needless to say all our material suppliers and sub-contractors keep their prices VERY accurate and up to date.
This should give you a good base line to run numbers quickly and efficiently. We know if a deal works with these safety measures on it, it’s DEFINITELY worth digging into, meaning taking time to run our own comps and possibly go see it to create our own scope of work.
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