How to analyze a real estate wholesale deal

Ways to Analyze a Wholesale Real Estate Deal 

Are you keen to flip real estate wholesale contracts? Considering a wholesale deal for your next flip or buy-and-hold investment? 

New investors should carefully analyze wholesale real estate deals before they sign on the dotted line. 

In our previous blog posts, we have discussed the basics of real estate wholesaling, common mistakes that new investors make, and the nitty-gritty of real state wholesaling contracts. 

In this post, we will shed light on how to analyze a wholesale deal to minimize risks and maximize your returns. 

Evaluate the Market

  • Local Market Analysis: Analyze recent sales data, rental rates, and market trends to accurately determine the ARV and potential rental income for the property.
  • Economic Indicator: Consider broader economic indicators such as employment rates, availability of important amenities, population growth, and local development projects. These factors can influence property values and rental demand.

Carefully Evaluate the Property’s Potential

Does the house need major repairs?

A property with significant repair needs can be an opportunity to “mint money” through renovations. Savvy investors seek ways to add value, like converting an attic into a bedroom or licensing a basement as a duplex to boost rental income.

However, misjudging the repair needs can lead to unpleasant surprises down the road, whether you’re trying to sell the contract, fix and flip the property, or convert it into a rental unit.

Therefore, to avoid such pitfalls, investors should consider hiring professional property inspectors. These inspectors analyze an investment property’s condition and structural integrity before you make an offer.

Crunching Numbers on a Wholesale Deal: Calculate MAO 

When evaluating a wholesale real estate deal, you need to determine the maximum allowable offer or MAO. 

Here is the formula to estimate MAO: 

MAO = (ARV * 70%) – Repair Costs – Wholesale Fee

Here’s an example to illustrate:

  1. After-Repair Value (ARV): Let’s assume the ARV (After Repair Value) of the property is $400,000.
  2. Calculate 70% of ARV: $400,000 * 70% = $280,000.
  3. Repair Costs: Let’s assume you estimate the renovation costs to be $50,000.
  4. Wholesale Fee: The wholesaler is looking for a fee of $8,000.

Therefore, your final MAO to the wholesaler would be 280,000 – 50,000 – 8,000= $222,000.

The 70% figure mentioned above accounts for various expenses such as miscellaneous fees, taxes, commissions, the cost of financing (often through hard money loans), and the rehabber’s profit margin.

In a competitive real estate investing market, you may want to adjust this percentage slightly higher, perhaps to 75% or even 80%. But, you do need to exercise caution to maintain profitability.

Analyze Comps to Validate Your Numbers

Don’t rely solely on the ARV or potential rental income figures estimated with the help of online ARV or rental income calculators. 

Always conduct a comparative market analysis (comps) by looking at recently sold properties similar to the real estate wholesale deal you’re considering. 

This will provide a more grounded understanding of the property’s true market value after repairs. 

Analyze the condition, size, location, and selling price of comparable properties to refine your ARV estimate and ensure your MAO calculation is realistic.

Risk Management and Due Diligence

  • Property Inspection: Hire professional property inspectors in your locality to evaluate the property’s condition and structural integrity. A professional inspection helps avoid unexpected repair costs. 
  • Legal Considerations: Make sure all legal aspects, including clear title, zoning regulations, and compliance with local laws are in order. Consult with an attorney in your professional network to analyze potential legal issues, if any.
  • Financial Analysis: Perform a detailed financial analysis, including cash flow projections, return on investment (ROI), and potential exit strategies. This analysis helps determine the deal’s feasibility and profitability.

Understand the Seller’s Motivation to Structure A Winning Offer 

Is the seller facing a financial hardship, probate situation, or simply looking for a quick sale? You will be in a better position to structure a win-win offer if you understand a distressed seller’s motivation to get rid of the property. 

Consider Utilizing Vendor Take Back (VTB) Mortgages

When the seller of the property acts as the bank and finances the buyer directly, it’s referred to as a Vendor Take Back (VTB) mortgage. 

This method can be advantageous for both parties:

  • For Sellers: VTP helps spread capital gains tax over several years.
  • For Buyers: Avoids traditional bank financing hurdles and speeds up the transaction process.

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