Buying Wholesale at a Profitable Price

Savvy real estate investors know: you make your money on the buy—that is, to either earn a positive cash flow while you own the property or get a nice check at closing, you must buy at the right price.

Here’s how to purchase wholesale properties at a profitable price:

First, determine the After Repaired Value (ARV). This is how much the property will be worth after you’ve done the necessary rehab work. Do this by studying comparable sales (comps) in the area. Check local property records for recent (a year or less) sales within a mile of the property you’re considering. Look for houses with similar design, square footage and numbers of rooms.

Do a drive-by inspection of the comps to confirm that they truly are comparable. Be sure they’re in the same neighborhood and that the surrounding properties are similar to the ones around the house you’re researching. Your goal is to realistically calculate the amount an owner-occupant will pay for the house when it’s fixed up.

Next, determine how much you can afford to pay for the property, a number also known as the Maximum Allowable Offer (MAO). Figure out all of your costs, including the expenses involved in the actual purchase (title work, title insurance, appraisal, loan fees, survey, etc.); the expenses involved in selling the property (Realtor commissions, marketing costs, any other costs you may pay as part of the deal); your costs while you own the property (taxes, insurance, debt service, utilities, etc.); the costs to rehab the property; and the amount of profit you want to make on the deal. Subtract all theses costs from the ARV, and you have your MAO.

Keep in mind that the MAO is the maximum amount that you can offer for the property and still make your desired profit. If you can buy for less than your MAO, your profit will increase.

If the seller is asking more than your MAO, make an offer anyway. The worst that can happen is the seller will say no, but he might counter-offer with a price you’re willing to pay. Or he might even accept your initial offer.

A final note on calculating your desired profits on wholesale property: every real estate investor would love to make huge profits on every deal, but the reality is that some deals are great, others are merely good, and others you need to walk away from. For purposes of figuring out your MAO, use a profit number that is the minimum amount you require to do the deal, and use your negotiating skills for a greater profit.