The market is volatile. Very, very volatile. There is no market immune to massive daily, weekly, or monthly swings and gyrations.
The stock market, the foreign exchange market, the cryptocurrency market, and of course the real estate market are all - and continue to be - extremely volatile. Rest assured, in today’s environment almost everything on earth has experienced large up and down boom and bust cycles.
The question is, however, what can you - an aspiring real estate investor and budding financial voyager - do to maintain your edge? How can you navigate the troubling waters and maintain profits, attractive rates of returns, and appropriate risk management - all while ensuring you don’t lose your shirt in a volatile market?
Three words. Real Estate Wholesaling.
Real estate wholesaling is every investor's dream. A truly talented, professional real estate wholesaler will undoubtedly make money in both rising markets and trying markets. It is a tried and true recipe for success for both full-time and side-hustle-oriented investors.
All that separates the average Joe from the rockstar real estate wholesaler is one simple formula and one simple wholesale deal. With this real estate wholesale formula as a starting point, you’ll never see a bad wholesale property deal. Iron out the kinks, and you’ll become a successful wholesaling business owner in no time.
Let’s dive in.
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The successful real estate wholesaler will research the market for mispriced properties, contact real estate agents, reach out to the seller to negotiate an appropriate purchase price, and simultaneously go under contract with a different buyer for the same property using a wholesale real estate contract at a slightly higher price - thus generating a modest profit.
In doing so, the wholesaler clips a steady percentage off the top of the purchase price without actually putting any money down.
A successful real estate wholesaler has to act swiftly, though. Sometimes, wholesalers will actually go under contract with a different buyer on the very same day they locate a property. In a blink of an eye, the wholesaler turns into the ultimate matchmaker between the seller and the true buyer.
How is this done? It’s simple. With a real estate wholesale formula.
*Want to start your wholesaling career today? Watch the CEO of Real Estate Skills, Alex Martinez, share the 12 Steps for How To Wholesale Real Estate In 21 Days or Less!
A real estate wholesale formula is a quick formula wholesale buyers use to size up a potential acquisition to determine if it is a viable investment deal. Key questions that are answered by the formula are:
The wholesale equation will typically look like this:
Maximum allowable offer (MAO) = After repair value (ARV) - Fixed Costs - Rehab Costs - Desired Profit or Equity
Let’s take a look under the hood. First, is the maximum allowable offer.
The MAO is the most an investor would be willing to spend on a property to ensure he or she maintains a high likelihood of profiting from the overall life of the investment.
Real estate investing is not without its fair share of risks and market challenges. Abiding by a maximum allowable offer can ensure investors maintain a cushion after completing the purchase, renovation, and sale of the property.
To compute the formula, the after-repair value (ARV) - or the anticipated market value of an investment after it is renovated - is analyzed. As long as one pays less than the ARV - and all the costs associated with achieving the ARV - he or she might have a nice opportunity on their hands. Another way to look at the formula is:
Maximum Allowable Offer (MAO) = 70% x After repair value (ARV) - Rehab Costs - Wholesale fees
If a broker approaches an investor with a property, the investor should take a disciplined approach and input the necessary variables into the MAO formula and determine if the result matches, exceeds, or falls short of the price being offered. If the offer price falls at or below the MAO, you have a good deal on your hands and it might be time to pounce.
The next term to define is rehab costs.
Rehab costs are the expenses that go into the restructuring and re-stabilization of an investment.
A dilapidated single-family home with holes in the drywall, scuffed-up carpet, and poor landscaping that you’d like to turn into an immaculate duplex with floor-to-ceiling windows, new appliances, and granite countertops will need to be renovated. These costs - e.g. the demolition, new carpets, landscaping, countertops, and new appliances - will all fall under the rehab costs of your MAO formula.
Costs can include soft expenses such as architecture fees, environmental reports, and inspection reports, or they can include hard costs such as demolition, painting, landscaping, and plumbing.
Regardless of the nature of the expense, all rehab costs need to be estimated and monitored very carefully in order to calculate an appropriate MAO.
Because if you underestimate rehab costs, you can be stuck with a newly renovated investment that simply can’t withstand the prevailing market prices. Although you might be sitting on a newly renovated, beautiful property, if you paid $300,000 for a property that can only sell for $250,000, it won’t matter how beautiful the property is, you’ll still lose money and have a horrible return on investment (ROI).
The MAO formula is designed to ensure an investor can maintain a cushion throughout the investment process. Now, if - or when - rehab costs run a bit over, the investor will still end up in the green.
Finally, the wholesale fee is calculated.
The wholesaler provides an invaluable service of connecting willing sellers to eager buyers. Every wholesaler - like all shrewd investors - wants to get compensated for the services they provide. However, The question is, what is an appropriate fee to bake into the MAO formula?
Truthfully, only you, the wholesaler, can really determine that answer. You’ll see that fee structures and pricing usually will shift on a case-by-case basis.
Starting out, a newly minted wholesale flipper might be willing to receive just $ 3,000 to $ 5,000 on a simple residential real estate wholesale flip. However, as the wholesaler becomes more experienced and moves up the value chain, he or she may want to get compensated $ 10,000 - $ 15,000 per transaction. It’s even possible, for some residential and commercial real estate deals, to make as much as $ 50,000 - $ 75,000 on a single wholesale contract flip transaction.
Each individual needs to determine what fee is appropriate for the time spent on the transaction. Once that fee is determined, it should be baked into the MAO equation to ensure the purchase price can withstand all the input costs.
So, in summary, the MAO consists of an accurate and honest assessment of the after-repair value of the property; a full-scope analysis of the expected rehab costs needed to deploy in order to achieve the desired ARV; and an appropriate wholesale fee.
Read Also: How Much Do Real Estate Wholesalers Make?
So, what about the 70% Rule? As stated earlier, the MAO should not exceed 70% of the calculated ARV. Although the standard formula is to only offer 70% of the after-repair value, that number can scale up or down based on market conditions and personal preference.
Every investor and wholesaler has a different risk tolerance. It is important to note, that this equation, and the inputs therein, is not an end-all and be-all equation.
For example, in today’s market - an unpredictable one - it might be beneficial to change the standard MAO formula from 70% of ARV to 65% of ARV. By lowering the percentage, you will give yourself some added cushion to account for some of the higher construction costs and borrowing fees we have been experiencing since the pandemic started three years ago.
Or, if you would like to be more competitive, you might be okay with offering 80% or 85% of the ARV instead. Although your profit margins and the safety net will get slightly compressed, you’ll be a more competitive bidder and you might receive a higher volume of deal flow long-term.
The ball is in your court.
As the investor, you get to choose the MAO formula that speaks best to you and your investment philosophy. In other words, your fate is in your hands.
That is what makes a market.
Let’s dive into an example to really hone in on the essentials of the real estate wholesale formula.
Here is the equation again:
Maximum allowable offer (MAO) = 70% x After repair value (ARV) - rehab costs - wholesale fees
Let’s say you are walking the streets of Jacksonville, Florida on vacation with your friends. You rent an Airbnb in a local town and notice there are a handful of properties on your street with a “for sale” sign. At first glance, you like the market and want to dive a little deeper to see if there is some profit potential for wholesaling in Florida and executing an investing strategy.
How do you start with your analysis? How do you get from the idea phase all the way to the real estate business tycoon phase?
The property is a 3-bedroom, 2-bathroom ranch-style house in average condition. You reach out to a Realtor on Zillow and do a comparable analysis of the surrounding market. You determine that similar properties - or real estate comps - have recently sold for $300,000.
So, utilizing the 70% rule, you calculate that you would be willing to offer a maximum of $210,000 (70% x $300,000) on a property before discounting rehab costs and wholesale fees.
After seeing a handful of pictures from the broker, you believe the house needs updated carpets and a new kitchen to turn it into a successsful rental property. You estimate these initiatives to cost $25,000. However, because the market is very challenging right now, you want to add a 10% buffer in the event of cost overruns.
Overall rehab budget: $27,500 ($25,000 + 10%)
Since this is only your first foray into the wholesale market you are willing to make a modest profit. You’d be satisfied with a $10,000 profit to compensate you for your efforts.
So, putting it all together you’ve calculated the following scenario:
MAO = 70% X $300,000 - $27,500 - $10,000. Therefore, your MAO for this property is going to be $172,500.
If you can manage to reach out to the homeowner and purchase this property for a sale price of $172,500 or lower, you’ve got yourself an attractive deal.
Now that you know your MAO, all you have to do is look at your buyer’s list, find a cash buyer or rehabber looking for investment properties, and reap the attractive cash flow once you’ve made the ultimate seller and end buyer connection.
*Check out this YouTube video below on how to appropriately calculate return on investment for various real estate transactions.
The real estate wholesale formula is not without its challenges. There are multiple moving parts within a typical real estate transaction that aren’t accounted for in the formula. For example, title fees, mortgage recording taxes, insurance, brokerage fees, lender or hard money fees, holding costs, and closing costs are not included in the equation.
However, that isn’t necessarily an issue.
The formula is designed to provide a ballpark MAO when flipping houses or looking at potential transactions. A truly successful wholesaler - whether a beginner or an expert - will scan the markets constantly for new opportunities. The real estate wholesale formula should be used as a guide, rather than a heaven-set rule of life.
Wholesale fees are the final input of the formula.
While many wholesalers on average charge a fee of $10,000 to $15,000 per transaction, many in the industry have made close to six figures on certain transactions. It’s all about how much meat is on the bone for the end buyer.
If a wholesaler identifies a property that can be retrofitted, expanded, renovated, and leased to a high-quality tenant, all while keeping costs, he or she can likely charge a pretty penny to the wholesaler.
A good rule of thumb to keep in mind is that wholesalers have room to charge up to about 50% of the projected profit for the end buyer. This means that if the end buyer is set to make $50,000 off of a distressed property flip, a wholesaler can potentially charge up to $25,000 for the transaction.
A real estate wholesale formula is a great way to quickly analyze real estate deals. The market is fast-paced and moves at the speed of light. Only the most eager wholesaler, with the quickest analysis, is going to be able to seize opportunities.
By utilizing a basic MAO formula you’ll not only protect your downside exposure, but you’ll also learn to make quick, back-of-the-napkin analyses, to ensure maximum speed and profit potential.
If you’re looking for a step-by-step process to help you start and grow your wholesaling business, check out our brand-new free training and start scaling your real estate business today!
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