Maximum Allowable Offer
How much is too much?
I'm going to be blunt because I can't think of any other way to say this... Just because you put a house under contract doesn't make it a wholesale deal.
It happens all the time to people new in the business, they start looking at houses list on Craigslist, Zillow or maybe they've spotted a house driving down the street and set an appointment to see it. They have a good rapport with the seller and ask what the price is, the seller responds with their number, and the wholesaler says I'LL TAKE IT!
Then three weeks later when there are only days left until the closing is supposed to take place and the wholesaler has a pit in their stomach because they have no buyer lined up they can't figure out what went wrong... Now they have to call the seller and tell them that they need more time, the deal is falling through, or they need a price reduction, and chances are the seller is going to be VERY UNHAPPY.
Now that I've painted that ugly picture I'll tell you how to lower significantly the chance of this happening to you by showing you how to calculate a wholesale offer on the property starting with the most common method... The 70% Rule.
It happens all the time to people new in the business, they start looking at houses list on Craigslist, Zillow or maybe they've spotted a house driving down the street and set an appointment to see it. They have a good rapport with the seller and ask what the price is, the seller responds with their number, and the wholesaler says I'LL TAKE IT!
Then three weeks later when there are only days left until the closing is supposed to take place and the wholesaler has a pit in their stomach because they have no buyer lined up they can't figure out what went wrong... Now they have to call the seller and tell them that they need more time, the deal is falling through, or they need a price reduction, and chances are the seller is going to be VERY UNHAPPY.
Now that I've painted that ugly picture I'll tell you how to lower significantly the chance of this happening to you by showing you how to calculate a wholesale offer on the property starting with the most common method... The 70% Rule.
The 70% Rule
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It's very simple, as a professional real estate wholesaler you need to develop incredible negotiating skills so you can get houses under contract substantially below market value. The 70% rule will help you achieve this by making you aware of the maximum allowable offer you can make on any property. Now, remember I just said "Maximum Allowable Offer," and that doesn't mean you shouldn't try to contract it for less.
I remember when I first started learning about the wholesaling business, and someone said if you're not scared to tell the seller your offer then it's too high... Another word when you're making your offer you need to start low, so you have room to negotiate and still get the house for a wholesale price. |
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How you use the 70% rule is quite easy, take your After Repair Value on the property and subtract 30% and then subtract the estimated repairs and your assignment fee. Let's do a quick example below to show you how this all looks on paper...
First take the houses value and calculate what 70% would be...
After Repair Value $150,000 X .70 = $105,000
Then take the 70% number and subtract your rehab costs...
$105,000 - $18,000 Rehab = $87,000
Then you take the after rehab number and subtract the amout you want for an assignment fee...
$87,000 - $4,000 = $83,000
And that's the secret sauce on how to calculate the maximum allowable offer, nothing else to it.
(These numbers are for example only, you need to calculate the ARV, Rehab Costs & Assignment Fee on each property individually)
First take the houses value and calculate what 70% would be...
After Repair Value $150,000 X .70 = $105,000
Then take the 70% number and subtract your rehab costs...
$105,000 - $18,000 Rehab = $87,000
Then you take the after rehab number and subtract the amout you want for an assignment fee...
$87,000 - $4,000 = $83,000
And that's the secret sauce on how to calculate the maximum allowable offer, nothing else to it.
(These numbers are for example only, you need to calculate the ARV, Rehab Costs & Assignment Fee on each property individually)
The "All In" Number
Everyone always talks about the 70% rule, but there is another way that I determine my maximum allowable offer on many properties. Some of my investors have an "All In" number they use on any property they purchase for both rental properties and fix & flip deal, and it looks something like this...
Let's say one of my buyers has an "All In" number of $45,000 on any properties he buys, that means the purchase price + repairs needs to be equal to or less than $45,000. So If I'm looking at a property and I know it needs $10,000 worth of work, and I want to make at least $2,500 for an assignment fee my offer can't exceed $32,500.
Knowing that I'll often go in with my first offer around the mid-'20s and negotiate a deal on the property hopefully lower than the "All In" number.
$45,000 Investors All In Number
- $10,000 Rehab Estimate
- $2,500 Assignment Fee
= $32,500 Maximum Allowable Offer
(Yes, sadly in my primary market some home values are this low and sometimes even lower)
Let's say one of my buyers has an "All In" number of $45,000 on any properties he buys, that means the purchase price + repairs needs to be equal to or less than $45,000. So If I'm looking at a property and I know it needs $10,000 worth of work, and I want to make at least $2,500 for an assignment fee my offer can't exceed $32,500.
Knowing that I'll often go in with my first offer around the mid-'20s and negotiate a deal on the property hopefully lower than the "All In" number.
$45,000 Investors All In Number
- $10,000 Rehab Estimate
- $2,500 Assignment Fee
= $32,500 Maximum Allowable Offer
(Yes, sadly in my primary market some home values are this low and sometimes even lower)
This is an excellent example of why it's important to know your investor's buying criteria well. Armed with the knowledge of what they pay for houses you can go look at properties, ballpark a rehab price and come up with a number on the spot without having to go back to your desk and calculate an After Repair Value.
That's it, short and sweet...
Now you know how to determine what you should offer on a wholesale real estate deal.
Now you know how to determine what you should offer on a wholesale real estate deal.
MAO Recap
- Importance of knowing how to calculate the MAO
- The 70% Rule
- Investor's ALL IN Number