How to Determine if a Property is a Good Wholesale Deal
When it comes to real estate wholesaling, knowing how to determine if a property is a good wholesale deal is essential. A successful wholesale deal typically has a strong margin for profit, favorable market conditions, and a motivated seller. Here’s a simple breakdown of the factors to consider.
1. Calculate the ARV (After Repair Value)
The ARV is the estimated value of the property after all repairs are completed. This is essential because it helps you see what an end buyer might be willing to pay. Knowing the ARV helps you set a target sale price and calculate if the deal will be profitable. To calculate ARV:
Research comps in the area similar to the properties of interest.
Compare properties based on size, age, and condition.
Look for properties sold within the last 3-6 months in the same neighborhood.
2. Estimate the Repair Costs
Estimating repair costs is a crucial step in determining if a property is a good wholesale deal. Walk through the property, noting all visible repairs and upgrades required. Consult with contractors or use a repair estimate guide to calculate:
Structural repairs (roof, foundation, plumbing)
Cosmetic updates (paint, flooring, kitchen, and bathroom renovations)
Permits or special requirements for major renovations
Understanding repair costs helps you determine the true investment needed and allows you to negotiate a fair purchase price.
3. Use the 70% Rule
The 70% rule is a quick calculation to help gauge a property’s profit potential.
Here’s how it works:
Multiply the ARV by 70% to get the maximum price an investor might pay.
Subtract estimated repair costs from this amount to set your maximum allowable offer (MAO).
For example: if a property has an ARV of $200,000 and repair costs are estimated at $30,000:
$200,000 x 0.70 = $140,000
$140,000 - $30,000 = $110,000 (maximum price you should offer)
In order to make a profit for an assignment fee, the goal is to try and negotiate even lower than the $110,000. Following this rule helps protect your profit margin when negotiating with sellers.
4. Assess Seller Motivation
A motivated seller is crucial for closing a wholesale deal quickly. Sellers in challenging situations, such as financial difficulties, pending foreclosures, or inherited properties, are often more willing to negotiate and sell below market value. Connecting with motivated sellers can help you secure better deals and boost your profits. Look for indicators like:
The property sitting vacant for extended periods
Blue tarps on the roof
Unkept lawn
Out-of-town or absentee ownership
Pending legal issues, such as foreclosure
5. Analyze Market Conditions
Finally, analyze the local market to see if it’s favorable for wholesaling. Check factors like:
Average days on market (DOM) for similar properties
Trends in home prices (increasing or stable is ideal)
Inventory levels and demand for properties in that area
Strong market conditions increase your chances of a quick sale and ensure you can assign or sell the property at a profit. Following these steps will improve your success rate in identifying profitable wholesale properties.
The information in this article are of the opinion and experience of the author, due diligence should always be done before investing in real estate.
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