Wholesale deals have become synonymous with due diligence; you only have yourself to blame if negligence results in failure. That said, it’s no coincidence that the most prolific wholesalers in the last decade are also the most diligent in their efforts to analyze a deal. Those who want to experience any degree of sustainable success should, therefore, take the appropriate steps to ensure they can properly evaluate a subject property before committing to it.
Fortunately, it is entirely possible to mitigate risk and place the odds in your favor. Establish proven systems and solidify your knowledge in a specific area before moving on, and you will find that running the numbers on wholesale deals is an essential part of any transaction that doesn’t need to be overly complicated.
That’s why every step up to this point has essentially laid the groundwork for whether or not a deal is worth pursuing, as opposed to taking it head on; you must know what to expect before you even take on a project. To do anything else is a practice in ignorance.
At this point, you should already have an idea of how to identify important market metrics (Part 1) and spot a potential deal (Part 2). In the third part of my series on wholesale deals, you will learn how to take due diligence to a whole new level. Once you have narrowed down your search results, you must visit the property to confirm everything you have learned up to this point. At this stage of running the numbers, it is on you to evaluate a subject property and the “comparables” in person. Only then should you finally commit to the deal.
Prior to visiting a subject property, I highly recommend driving by the home with the intentions of learning more about the entire neighborhood. Again, this method is more about familiarizing yourself with the street and the houses closest to the subject property more than it is about the deal itself. Take note of anything that stands out, good or bad, and discern whether or not it will impact your impending acquisition.
After you feel you have a good understanding of the neighborhood, proceed to drive by the comparables you landed on from your research in the second part of this series. Again, take note of the condition they are in, the houses in close proximity, and the overall feel of the neighborhood. Remember, you want to discern whether or not it is similar to your subject property and if it will help you determine an accurate after repair value (ARV). Subsequently, you need to be able to prove to any potential rehabbers that may be interested in your property that he or she will be able to make a profit should they follow through with the transaction.
At this point, I encourage you to dig a little deeper than what the homes are physically showing you. Listen to what the local market metrics are telling you. Take note, for instance, of how many homes are for sale. If for nothing else, prices will be determined by the amount of available inventory.
By the time you are ready to return to the subject property, you should have a good idea of what it will be worth once repairs have been made to it. Again, the more accurate your comparables are, the more likely you will land on an accurate ARV to give to potential rehabbers.
That’s not to say that each comparable you decide to use will be a perfect representation of the subject property; there will always be discrepancies between your property and those you are comparing it with. That said, the accuracy of your ARV is more contingent on predetermined categories you have decided to make adjustments or improvements on rather than the property as a whole.
It’s important to note that the adjustments you make to the value of each property are not simply the cost to construct that feature, but rather what a buyer will be willing to pay for said feature. Never assume the features you adjust will return 100 percent of their initial cost. In fact, they rarely will. It is therefore imperative that you understand how much people are willing to pay for the improvements you make. Only then will you be able to determine an accurate ARV. The adjustment value made will depend on the price points of the properties you are examining, the market you are in, and the relative difference between the properties.