Friday, July 22, 2011

What Is Wholesale, What Is Not?

REI of Roanoke has some posting guidelines pertaining to property that is bulk emailed to the membership. In order for a property to be sent to the group it is required that the property is being sold at what would be considered a wholesale price.

So that leaves the question to everyone, what is wholesale as it is a relative term that is based on personal perception.

I am writing up some guidelines that can be used as a general rule of thumb so you can get an idea if it will be a good one to send to me or not. If your property can not meet this criteria you will be best off marketing it another way as there is no investor in our group that is interested in reading emails about retail value property.

REI of Roanoke is an educational organization and is not interested in leading a novice investor the wrong way towards a property that was recommended by the group that they are going to lose money on. It is important to our group to have very strong moral and ethical standards and for every member in our group to succeed in their endeavors. That's what we are all about, working together and combining our collective knowledge to ensure that all of our members make responsible real estate investment decisions.

There are a couple different formulas we will use to determine if the property is wholesale or not. One for rental property and one for flips. Renal property MUST cash flow. If it does not cash flow it can not be considered wholesale. A passive investment is not a wholesale property. A passive investment is a full market value property sold to passive investors. I am not saying a passive investment will not ever make you money. I am saying a passive investment will not make you money until the house is paid for therefore it is not wholesale.

The maximum value of a rental property that can be bulk emailed to the REI membership is Rent X 50 minus the cost of any repairs that are needed. This is no where near what I pay for property but it still will cash flow by a very small amount so it will be accepted. If you saw my presentation to the group on doing a cash flow analysis you are aware that it is not possible for a property to cash flow over this amount.

For flips we will use a formula called the Maximum Allowable Offer formula. Most investors across the country that I talk with will not purchase a flip property unless it is priced 65% or less of the After Repair Value (ARV). These days when times are tough that number is often much less than that as your holding costs will be higher due to an extended time on the market. But REI will consider 65% of the ARV as being the MAXIMUM value that a property can be priced at in order to market it through the organization.

First determine what the After Repair Value will be conservatively.
65% of the ARV - Cost of Repairs = Maximum Allowable Offer
So lets break that formula down.

So you have confirmed that your property value will be $100,000 when fixed up and it will need $15,000 to fix it up.

65% of $100,000 - $15,000 = MAO
$65,000 - $15,000 = MAO
$50,000 = The Maximum Allowable Offer. So if you are selling that property in this scenario for $50,000 then REI will market it for you.

The ONLY exception to this is if you are selling an expensive flip. A $200,000 or more property. Some investors would be willing to pay a little more for a flip like this due to the larger spread.

If you are having difficulty determining if your property meets the criteria, contact me with the ARV and an approximate dollar amount of repairs and I will help you determine what price REI considers the maximum wholesale amount that can be marketed through our group.


Barbara Boers said...

Excellent article - offers much insight and provides clear guidelines for investors.

Dallas ® on August 3, 2011 at 11:28 AM said...

Thanks Barbara!!!

Mike on January 14, 2014 at 4:33 PM said...

Thanks! This will help some people figure out how to compute a wholesale deal. Although, sometimes it's a little tough to find comps in some areas.

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