Onset Part 3 | The 70% rule with real numbers
Ryan: I'm back with Mike, and we're talking about the onset property which you picked up for $65,000, $20,000 of which went to the wholesale fee, which is not typical from what we're learning here. Now, Mike, how did you know when you got into this deal for $65,000, that at the end you were going to come out on top and make a profit?
Mike: That's a great question, Ryan, and I really wanted to know that myself. This is actually my first deal with this particular wholesaler who is very experienced; and like I mentioned earlier, I tried to see if he would take $60,000. He was pretty quick to say no which meant he had other investors that were lined up to buy it at that price. I learned right there that we were not going to negotiate much, and I definitely wasn't going to find out how much money he was making on this deal.
What I had to do as an investor is see, well do those numbers work for me? Because how much the wholesaler makes is really irrelevant. He could have the house for free for all I know. Is $65,000 a good deal? So, what I typically do, in this case, as I do in any case, is I apply what is known as my 70% rule, to see if those numbers work.
Very simply, and I'll show you how I do that. We first determine what we can sell that house for, and we'll get into maybe some other videos in answering how do we determine that - but basically it's what known as the ARV or the after repair value. So we determined that house was going to be $206,000. Well I wouldn't say we determined it at $206K, I think we maybe came in at 205 or 210, I don't remember the exact number.
Ryan: How did you get that number?
Mike: That number was derived like I mentioned. Oh, how we got that number? That number is determined by doing what is known as real estate comps, or a compilation, or a CMA which is a competitive market analysis. You can do it yourself, but I would highly recommend you use an experienced real estate agent that knows your area. Someone who can determine exactly what that house can sell for.
We'll get into a lot more details on that, but for this particular purpose, I'd like to explain to you how we arrived on deciding whether or not that was a good deal.
So we take our CMA or our after repair value of $206,000, and we simply multiply that by 70 percent or .70, and we arrive at a price of $144,200. Then what we have to do, is really understand what the costs of repairs will be. We don't want to underestimate that.
So we came up with the cost of repairs for this project at $79,000 which puts the typical wholesale price at $65,200. So you can see that particular wholesaler really understands how investors work, because he pretty much nailed it at the price that I would pay. At that point, I realized, this is a great deal. It meets my investment criteria.
It really is irrelevant what he (the wholesaler) was going to make on this deal.
However, we did find out, later on at the closing, as monies were dispersed, that there was a wholesale assignment fee because he had it under contract for $45,000 and made $20,000. But again I don't get upset at the wholesaler because that's his business and he's worked hard to develop that business, and develop those relationships with the people that bring him those leads, to get those contracts put into place.
If he was asking for $75,000, then I would have to make a decision to pay more money or let him know I'd like to talk about what he's making on this deal because as an investor, I can only pay $65,000. Most seasoned, experienced wholesalers won't make that mistake. Great question, I'm glad you asked it.
Ryan: So you did your numbers, and when you're doing your final paperwork, did they match up to how the deal actually unfolded?
Mike: Yeah. Actually this is why I wanted to use this example, because we have deals where we make a lot more than we project, and we have deals where we make less than what we project. This is a perfect example of one where we had our numbers pretty much right on, with the projection of about $205,000 to $206,000.
We sold the property at the $206 thousand mark, and typically when we get into the details of the 70% ARV, 20% of the 30% left-over is projected profit. If you take 20 percent of the projected ARV, which was $206,000 - I might as well do that out for you.
So you take $206,000 times 20%, our projected profit on that property was $41, 200. Our net profit on our profit analysis sheet, shows that we made $42,673. That one we hit right on the numbers, so in theory it was an exceptional deal that we handled well.
Ryan: Awesome. Thank you.
Mike: You're welcome.