Last week, we discussed how I made $27,600 on a wholesale property I double closed. Yes, we also wholesale properties, so the same principles outlined here apply to us.

Let’s dig and discuss further and review the benefits and disadvantages to working with wholesalers.

PROS

Finding Properties
As a busy investor flipping properties every month, you might not have time to search for new ones to purchase. This is where wholesalers provide significant value. They reduce the time required for your next flip project by spending considerable time marketing, advertising, analyzing, negotiating, and securing contracts on properties they wish to assign. Some spend thousands of dollars each month advertising to find that one property that suits your needs.

Speed and Convenience
Wholesalers can often facilitate quick transactions, which is beneficial for investors looking to act swiftly in a competitive market. Their goal is to “gift wrap” a property by negotiating with sellers, securing contracts, and conducting preliminary due diligence, making the process more convenient for you.

Discounted Price
Wholesalers offer properties with equity priced well below market value, potentially resulting in substantial future profit for you. This requires pricing the property at a maximum of 75% of the after-repair value (ARV) including renovation costs. For example, for a property with an ARV of $100,000 requiring $20,000 in renovations, your offer price would be $55,000 ($100,000 x 0.75 = $75,000 – $20,000 = $55,000). Obviously you want a much lower price to give you as much of a cushion on holding, renovation, and selling costs but this is the gold rule.

CONS

Lack of Transparency
Some wholesalers might not disclose all pertinent information about a property, such as hidden defects or title issues, which can lead to unexpected costs or legal problems. I would agree that they have a responsibility to reveal any title issues before you go to contract. However, it’s not their job to tell you what needs to be done at the property. That is for you to determine.

Inflated Prices
While wholesalers offer properties below market value, their assignment fees can sometimes make the overall cost higher than if you had negotiated directly with the seller. Personally, I don’t mind how much a wholesaler earns as long as the numbers work for me. However, some investors may be put off by a wholesaler potentially earning more than they do on a flip. To solve this concern, a good wholesaler will double close the property. Neither the buyer or seller will really know what the wholesaler made until well after closing assuming they really care to know.

Unreliable Comps
Never trust a wholesaler’s comparables, as they often cherry-pick the best ones, which may not accurately reflect the property’s value. Many overvalue the ARV of the property.

Here are my tips for comping a property:

• Look within a 1-mile radius of the subject property.
• Focus on sold comps within the last 6 months, though active and pending comps can also provide market insights.
• Remove the highest and lowest comps to find the median average of sales.
• Ignore “as is” properties requiring significant repairs. Look for properties that are either fully renovated or well-maintained by owner-occupants.
• Assess the quality of renovations in other investor flips that sold.
  Match the number of beds and baths, unless a property with fewer bedrooms has a similar square footage to the subject property.
• Use properties within plus or minus 300 square feet.
• Use properties within plus or minus 10 years of age.
• Prioritize comps in the same subdivision and school district.
• Consider other factors that may affect the property’s value, such as a finished basement, garage, deck, large yard, pool, etc.

Construction Experience
Most wholesalers lack experience with construction costs. Unless they have fixed and flipped properties themselves, they shouldn’t suggest a construction budget. If they include a construction budget, it’s likely based on an inexperienced estimate, which may be passed on to you. Never trust a wholesaler’s renovation cost estimates, as they often underestimate these costs.

Good wholesalers will provide:

• Their recommended ARV of the property (validate using your own comp analysis).
• A link to photos. If not provided, the property likely isn’t worth your time.
  A brief overview of the property, including age, size, and number of bedrooms and bathrooms.
  Access instructions.

If a wholesaler can’t provide this information, it’s best to pass on the property.

Remember, your offer price depends on the cost of renovations. Lower renovation costs allow for a higher offer, while higher costs necessitate a lower price. You should aim to be all-in at no more than 75% of ARV. While other factors can affect overall profitability, accurately calculating costs should help account for any unforeseen expenses during renovations.