A Formula Doesn’t Always Work

I got word yesterday that a buyer is ready to move forward with a property I have under contract.  Always great news!!  But if I’d followed the typical wholesaler formula that is plastered all over the internet, I probably wouldn’t have this deal.

Here’s why.

The typical formula a savvy beginning investor would find out there for wholesaling looks like this:
ARV (After Repair Value) x .60-.70 – Repairs – Your Assignment Fee = MAO (Max Allowable Offer)

Take the neighborhood below, for a typical 3/2/2, following the typical formula:
$110k x .70 – $20k – $5k = $52k MAO

But look closely  at the properties that have sold in this neighborhood:
Screen Shot 2014-06-23 at 8.40.17 AM

First notice that I didn’t cross a major street for comps.  I also stuck to recent comps, no older than a year, putting more emphasis on the most recent ones.  So the average ARV is about $110k, and the average investor purchase price is in the $70’s.

Most of these sold comps had pictures or good descriptions of the condition.  The ARVs usually had replacement windows, but only basic upgrades; all had new paint and were fresh and clean. Most of the investor comps  were in decent condition, only outdated and possibly needing a couple major repairs like a new roof or heating and air units.

Based on this information, an end buyer could pay up to $75-77k for the house.  That’s over $20k MORE than my formula told me.  So in this case, you could get it under contract for $70k and still flip it for $5k. (Get it under contract for less and make  more! But $5k is a good average wholesaler’s fee.)

I’ve been outbid 3 times in the last two weeks and that’s frustrating!  But it reminds me to pay closer attention to the comps and hold loosely to my formula – the market determines what we can pay and nothing else.

Advertisements

4 Comments

Filed under Comparable Analysis, Deals, Education

4 responses to “A Formula Doesn’t Always Work

  1. Congrats on the deal Kelly.

    Sharon

  2. Hi Kelly. I enjoy your blog. Have you had good luck using Zillow for your comps?

    Also, I just moved to Tulsa and am looking to start flipping some homes. Let me know if something comes your way. I’d love to partner with you on a deal.

    • Hi Ryan,

      Thanks for reading the blog! Yes, I’ve had a really good experience using Zillow for comps. I know there are other (even free) options out there, so this is my limited perspective. And of course, it’s clearly inferior to the MLS (if that’s something you have access to).

      I don’t trust it for values, but I don’t really trust any value I see for the most part. Good luck! And please email me your contact info and what you’re looking for! (kellypay@gmail.com)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s