Dallas-Fort Worth Real Estate Investor Club

(Wholesaling) Why would a home owner agree to our offer?

  • 02 Aug 2012 8:24 PM
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    Message # 1035251
    Deleted user
    Hello, please help me get over this mental hurdle. If we follow the standard formula on the highest maximum offer, why would a home owner accept an offer that allows for a profit?
    Wouldn't they continue to call around until someone presents a respectable offer?

    I hear stories where people make 20K-40K in 1 wholesale deal...Can you please tell me how this happens? Who is bascially giving away houses??

    If you have consistently wholesaled properties, can you please let me know 1. What is the buyers reason for accepting your low offer  2. What exactly do you say to the homeowner once you've crunched the numbers?

    THANK YOU SO MUCH. Once I can wrap my head around this, I can move forward.
    Last modified: 02 Aug 2012 11:13 PM | Deleted user
  • 02 Aug 2012 10:37 PM
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    Reply # 1035422 on 1035251
    Michael Mixon
    I too am having difficulty wrapping my head around this.

    Assuming the standard formula OFFER = (ARV * .60) - REHAB you come out with very low numbers for an offer.  Say we take a 1,500 square foot house, with an ARV of $100,000, you'd come up with an offer of $51k?  Looking at the numbers i'd LOVE to buy the house at that price, but why would they love to sell it to me?

    1,500 sq ft
    Paint = 3,750
    Flooring = 1,875
    HVAC = 3,000 (or any other major system that happens to need replacing)
    Total Rehab = $8,625

    ARV = $100,000
    x .6
    = 60,000
    - 8,625
    = 51,375

    This would leave room for $48,625 profit.  Even after I take a $5-7,000 cut, the rehabber is still looking at $40,000 profit.  Surely the seller could find someone to offer more.  Even if they threw it on the market for $75,000, they'd find a buyer quicker than a wholesaler could find them, wouldn't they?
  • 02 Aug 2012 11:19 PM
    Quote
    Reply # 1035438 on 1035251
    Deleted user
    RJ Texas wrote:Hello, please help me get by this mental hurdle. If we follow the standard formula on the highest maximum offer, why would a home owner accept an offer that allows for a profit?
    Wouldn't they continue to call around until someone presents a respectable offer?

    I hear stories where people make 20K-40K in 1 wholesale deal...Can you please tell me how this happens? Who is bascially giving away houses??

    If you have consistently wholesaled properties, can you please let me know 1. What is the buyers reason for accepting your low offer  2. What exactly do you say to the homeowner once you've crunched the numbers?

    THANK YOU SO MUCH. Once I can wrap my head around this, I can move forward.
    It's all about finding Motivated Sellers and formulating a Win-Win deal for the seller and the investor. Reasons for a person being a Motivated Seller are numerous, if not infinite.

    Some people are motivated by a lack of time. Some people are motivated due to impending financial disaster. Some people just don't have the desire to bother with everything that is involved in getting a house ready to sell, then listing with a Realtor, then dealing with offers, then dealing with contracts falling through, all while still making house payments, fixing things that go wrong with the house, having to put their future on hold until the house sells, on and on and on. Some people don't have the money to fix up the house before it can be sold. Some people don't want to deal with finding people to fix their house. Some people have legal issues and need to sell now and don't have time to wait. Some people inherit houses and just want to cash out ASAP and don't want to deal with Mom's old house. Some people get behind on payments, are going to get foreclosed on and don't have money for future mortgage payments and penalties and just want out from the nightmare even if they give up some equity, but maybe save their credit.

    Anyway, all of that is just the tip of the iceberg. I recommend taking some of the classes offered by DFW REI or other places around the area and I'm sure that will fill in some of the gaps for you. There are also Sat. morning meetings each week that allow you to network and pick up bits and pieces of information each week that you might find helpful.

    Joe Stone /Realtor / Investor
    Exclusive Homes Realty / Texas Blueline Properties

    Please "LIKE" my Facebook page
    Last modified: 02 Aug 2012 11:56 PM | Deleted user
  • 02 Aug 2012 11:29 PM
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    Reply # 1035448 on 1035422
    Deleted user
    Michael Mixon wrote:I too am having difficulty wrapping my head around this.

    Assuming the standard formula OFFER = (ARV * .60) - REHAB you come out with very low numbers for an offer.  Say we take a 1,500 square foot house, with an ARV of $100,000, you'd come up with an offer of $51k?  Looking at the numbers i'd LOVE to buy the house at that price, but why would they love to sell it to me?

    1,500 sq ft
    Paint = 3,750
    Flooring = 1,875
    HVAC = 3,000 (or any other major system that happens to need replacing)
    Total Rehab = $8,625

    ARV = $100,000
    x .6
    = 60,000
    - 8,625
    = 51,375

    This would leave room for $48,625 profit.  Even after I take a $5-7,000 cut, the rehabber is still looking at $40,000 profit.  Surely the seller could find someone to offer more.  Even if they threw it on the market for $75,000, they'd find a buyer quicker than a wholesaler could find them, wouldn't they?
    You have left out lots of potential expenses.

    PURCHASE COSTS
    Inspections
    Closing Costs
    Not everybody has cash $$$$ available, so the cost of funds can be quiet expensive if borrowing Hard Money, Non-Traditional Lending Sources

    HOLDING COSTS
    Utilities
    Taxes
    Mortgage Payments
    Insurance

    UNEXPECTED REHAB COSTS

    SELLING COSTS
    Realtor Commissions
    Closing Costs

    But yes, there is money to be made, but you have to think about ALL of the costs!  In addition to the above costs, you have costs involved with running your business which can really add up too! Advertising, online services, gas, vehicle expenses, computers, training/education, TAXES 20%-35%?, book keeping costs, attorney, on and on....
     
    Joe Stone /Realtor / Investor
    Exclusive Homes Realty / Texas Blueline Properties LLC

    Please "LIKE" my Facebook page

    Last modified: 03 Aug 2012 1:32 AM | Deleted user
  • 03 Aug 2012 12:31 AM
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    Reply # 1035545 on 1035251
    Deleted user
    You have to bid as low as possible...this leaves 'wiggle room' for negotiating. 
    For example, what if you offer $50K (CASH), they counter at 75K, you settle on $62.5K. Lock it up! ...Still attractive to an investor...or two. Build your list of buyers! 
    Also, keep in mind if your end buyer is a CA$H investor, you as the wholesaler are making a CA$H offer! 
    YOU are the negotiator–(earn that fee!) LOL
    This makes a big difference to the seller. It eliminates a lot for them. Cash buyers can close more quickly.
  • 03 Aug 2012 12:52 AM
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    Reply # 1035558 on 1035251
    Michael Mixon
    Yes Joe, thank you for pointing out the "soft costs" of doing business.   It's an important subject that probably isn't discussed enough, and I'd be willing to bet is one most overlooked reasons new investors fail.  That $40,000 profit I know is not all profit, but covers the soft stuff.  

    But my point is, I'm just having a hard time with the idea of offering someone less than half what their house is worth.  Not because I think it's wrong, or predatory, but because I'd feel like a jack ass for making that offer.  This is something I'm going to have to get over to be successful, and I completely understand that.  I also understand that investors make these offers every day, and succeed, and the seller wins as well.  Intellectually I get it.  Emotionally, I continue to struggle.
  • 03 Aug 2012 12:32 PM
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    Reply # 1037979 on 1035251
    Deleted user
    Thank you for the replies. Joe that was extremely helpful, even though in your reply to Michael you mentioned extra cost that need to be added to the formula; meaning max bids will now be somewhere around 15K ;) LOL. 
    But it is good to have some ideas as to why a borrower would give away equity. (Especially when others ask me the same question). 

    Thanks again for the education.
  • 03 Aug 2012 9:26 PM
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    Reply # 1038235 on 1035251
    Tim Cook
    RJ, Michael,
    This is a great question that many of my new mentor students struggle with and inderstandably.  In addition to all that Joe contributed, I would add the following: 

    1.)  One I caution you on using ARV x 60% - repairs as your normal formula.  Most will use Arv x 70% - repairs as the MAO (Max allowable offer) so don't get greedy.  Nothing is wrong with having a little room to wiggle but if you are having trouble getting offers accepted then you might look at the formula used.

    2.)  STOP worrying about WHY people do what they do.  Prescreening is critical and LISTENING to what the seller is telling you and ENSURE your offer/solution meets and resolves their HOT BUTTON.  In other words, make sure your offer allows the seller to do what they need to do or solves their Not Button.  I stopped worrying about WHY they do what they do.  You don't really know what their motivation is.

    3.  As Joe stated, get plugged into local investor groups such as the West-DFW-REI-Group or the DFW REI Club.  There you will find alot of classes and experienced investors that can help you thru this mental block.

    To Your Success!

    Tim Cook
    Last modified: 04 Aug 2012 6:21 AM | Robin Carriger (Administrator)
  • 04 Aug 2012 4:59 PM
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    Reply # 1038682 on 1035251
    Willie Karashin

    I used to play poker professionally, and one of my biggest problems when I started playing was that I always overestimated other players' hands when there was a big pot. I assumed everyone had to have one of the very best hands possible to bet that much money. Why? Because I would have to have one of the best hands possible to bet that much money. After a bit, I realized that different people have different motivations and goals (not all people play poker to win, surprisingly enough) and by knowing those motivations, I could understand why people didn't always think the same way I did.

    I think the same logic applies here. Just because you're looking at this picture in a strictly financial aspect, does not mean that prospective sellers are too.
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