Pricing Wholesale House Deals As The Market Changes
How should real estate wholesalers be pricing houses as the market changes?
There are a lot of rules of thumb thrown around about how much wholesalers should offer on homes. The truth is that there shouldn’t be any hard rules. This is a factor that must change over time. If you’ve been bidding 40% of ARV over the past few years, your deal flow has probably been pretty thin. If you were still bidding at 90% or 100% in 2006, there’s a good chance you got stuck with some properties you couldn’t resell.
Price trends are different all over the map too. They may already be in deep dive mode in some cities and neighborhoods already. Others may keep going up for a few years. So, be wary of hard rules.
Be flexible. Be ready to change your offers based upon:
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Competition
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Direction of the market
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Who your end buyers are
There are wholesale buyers and house flippers out there who claim to be offering near market value. Some might get away with it. Some are able to do it for now because the are making money on deals in so many different ways. Though you have to be careful not to get stuck with a stable full of houses that you can’t get rid off. Expect that scenario to take down some very big real estate tech startups in the near future.
If you are buying at the top of the market, there are repairs to do, prices are down 10% and heading down another 10%, wise investor buyers aren’t going to want to be in for more than 70% of ARV. More likely 50-60 percent of ARV. As a wholesaler you may see deals go even cheaper as more foreclosure inventory mounts up.
Of course, having no income is a huge risk too. If there is a lot of competition, you will have to bid aggressively to keep deals flowing. Fortunately, in hot markets you may also be able to flip faster and for more to other investors (landlords and flippers). They may still be willing to pay 90% of ARV or more. You still need to be under that to make a profit.
The most important factor is really going to be knowing who your end buyers are, and who they are going to be when you are ready to close on the B to C side transaction.
Are they house flippers using hard money? Buy and hold investors using cash and retirement funds? Big real estate funds and tech companies? Or retail home buyers needing high LTV home loans?
Buy and hold investors need to make sure they can cash flow, even if rents float down a little. Use the 1% rule as a very rough rule of thumb. That means a $100,000 property should rent for at least $1,000 per month.
Retail buyers may be facing more challenges ahead as mortgage lenders tighten underwriting to reduce risk exposure. We’re already seeing that with government loans. Expect LTVs to come down as lenders identify declining markets. Your buyers will need to be those who have some cash for a down payment, and may be willing to come out of pocket above the appraisal.
How much are you offering on wholesale deals relevant to ARVs today? How are you pricing in downward pressure on prices or surges in competition?
