405 Linden Ave, Woodbury Heights, NJ
Wholesale Industry Analysis
This short article was written purely to explain wholesaling in real estate as well as to show others how to properly conduct a wholesale analysis.
What is Wholesaling?
The question is, what is wholesaling?
For those of you who don’t know, wholesaling is buying a property and immediately, without doing any rehab, selling it to another investor/flipper coined the “end buyer” for a small fee. Sounds crazy right? Nonetheless, it is a well-accepted real estate practice.
Benefits of Wholesaling
- It is a relatively inexpensive way to get started in real estate,
- It offers quick and easy turn around (i.e. wholesalers don’t deal with rehab, tenants, or even lenders),
- Financing is never required seeing as wholesalers never actually purchase properties; they assign them to a purchase and sale contract.
Why Does Wholesaling Work?
You might be wondering why these end buyers don’t go out and find these deals themselves, which is a very valid question.
The answer is surprisingly simple, they either aren’t good at it or flat out don’t want to. The end buyer, in most wholesale contracts, tends to be another investor. These investors are usually flippers, whose attention is better focused on the rehab and re-sell.
Let me give you a hypothetical example:
Imagine you were flipping a house and managing the flip yourself. You would be responsible for:
- Making sure your contractors are showing up on time
- Making sure they are doing quality work
- Making sure they are working in conjunction with other contractors.
You would need to resolve issues between contractors or regarding materials as well as making sure the entire project stays on budget and on schedule. If you were finding your own deals, on top of all the priorities associated with your current flip, you would need to be worried about finding your NEXT flip. To lessen this burden you could find someone to bring the next deal to you, and that is where wholesalers come in.
All in all, overseeing a flip entails a lot of hard work; which is exactly why lots of flippers don’t want to be worried about finding the properties. These flippers can better allocate their resources and their efforts when they have someone bringing them A+ deals and they can focus on managing the ongoing flip project.
What Separates Us From the Wannabe Wholesalers
If you are familiar with the real estate world or have heard anything about wholesalers, chances are it wasn’t positive.
Wholesalers can’t find good deals, wholesalers can’t estimate costs accurately, wholesalers mess up ARVs, wholesalers are ugly, wholesalers are the worst people in the world.
Nobody seems to like wholesalers. A lot of respected individuals in the real estate community across all different real estate niches caution working with wholesalers. By speaking to local investors/contractors and researching online, we have determined the two main reasons why they warn against dealing with wholesalers, wholesalers cannot accurately estimate rehab costs or wholesalers cannot accurately estimate ARVs.
Let’s put these considerations to bed.
- We aren’t like other wholesalers. We have built our own rehab cost calculator using tools like J.Scott’s “The Book on Flipping Houses” and “The Book on Estimating Rehab Costs” as well as internet resources like www.biggerpockets.com and local contractors to develop the most comprehensive and detailed calculator. We want all real estate investors to have this incredible tool, which is why this calculator will be available for purchase soon.
- We use the most recent sales comparables to estimate our ARV. So we find 5 or more properties that have sold in the area of the property in question (PIQ) and that are similar to the PIQ. We then adjust these comparables to better understand how much the PIQ will be worth. This consists of documenting bedrooms, bathrooms, square feet, the date sold, sold price, and all features of the property that are different from the PIQ. We then scale the sold price based upon how we adjusted the comparable to the PIQ; up or down. For example, if the PIQ has 4 bedrooms but the comparable only has 3, we would scale that sold price up based upon how much we determined an extra bedroom to be worth in that given market.
Step 1: Finding the Property
Since we are looking to analyze a wholesale, we started by searching for distressed homes. Specifically, we were looking into For Sale By Owner(FSBO) properties that needed fixing up.
We did this by going to www.zillow.com and plugging in our search parameters. Within 2 minutes, we found 405 Linden Ave, Woodbury Heights, NJ 08097. A dilapidated home that was FSBO and within our market. We established it as the PIQ.
Step 2: Establishing Property Specifics and Finding Comparable Properties
By researching the property we found the property specifics which are displayed below:
Based off of the information we collected above, we began finding comparable properties. We did this by going back onto www.zillow.com and searching for recently sold properties within Woodbury Heights, NJ, that had very similar criteria to the PIQ. Our results can be seen below:
This entire process took just about 10 minutes.
Step 3: Adjust the Comparable Properties to the PIQ and Establishing an ARV
Next we began scaling the comparable sales prices we had found using the comparable properties list. We scaled the prices according to average values suggested for our area.
To do this we laid out the PIQ and the comparables next to each other. For property specifics that the PIQ scored higher on, we added to the overall sales price. For property specifies that the PIQ scored lower for, we subtracted from the overall sales price.
We then found the average of these adjusted sales price to establish the ARV.
This step took about 12 minutes.
Step 4: Determine Rehab Estimate and Fixed Costs
We used pictures found on www.zillow.com to determine the scope of work for this property. Before actually buying a property we would strongly suggest physically walking through the property to inspect it. However, for the sake of this exercise pictures will suffice. By using our own rehab cost calculator, we determined the total rehab cost, including labor, to be $78,266.51.
Along with our rehab estimate, we determined the fixed costs for the project. This includes costs associated with buying the property, holding the property, and selling the property. By assuming a 6 month holding period, we determined the fixed costs of this flip project to total $16,843.41.
This step took just under 10 minutes.
Step 5: Finalizing the Deal Specifics
Now that we have accurately established our ARV, our total rehab cost, and the total amount of fixed costs, we can use the numbers to decide whether or not to pursue this property. By accounting for a rehabber profit of $20,000 and assuming $10,000 in profit for finding the deal, we have established the Maximum Allowable Offer to be $62,070.08. Seeing as this property is listed at $89,900, we would pass on this deal. In total, we spent just under 35 minutes analyzing this deal- time well spent practicing our analysis skills.