How does a wholesaler determine their offer price?
So you are looking at options for selling your home and explore off-market options to see what kind of offers you might get if you take the easy route and wonder How does a wholesaler determine their offer price?.
Wholesalers, like cash home buyers, are known for providing what are referred to as ‘lowball’ offers when making offers for off-market homes. Many people wonder why their offers are so low. Let’s be honest: wholesalers do in fact make what appears to be low offers. You might be asking “Why? Are they just looking to take advantage of people?”.
In my experience, wholesalers are generally producing offers that follow a formula and represent the amount they believe they can offer and still be able to earn their assignment fee from the cash buyer they find for the house. There are probably some out there who either lack experience or character (as can be found in most every industry) and are looking to take advantage of homeowners.
While any wholesaler can use any means, method, or formula to derive at their offer prices, here is a very common formula. This may seem simplistic, and you are correct. The idea is that the wholesaler is making offers on a lot of properties and doesn’t have the time and very well may not have the knowledge/skills to produce a much more refined offer. So How does a wholesaler determine their offer price?
Starting Point: After Repair Value (“ARV” or “Resale Price” or “Resale Value”)
Formula:
MULTIPLE RESALE VALUE (“ARV”) BY 70% or 0.7 (sometimes different based on market, price band, etc.)
SUBTRACT Estimated Project Costs
SUBTRACT Wholesale Assignment Fee (profit)
RESULT: OFFER PRICE
By way of example, let’s take a quick look with the following scenario.
House Value after repairs completed: $100,000 (chosen for simplicity)
Multiple by 70% = $70,000
Subtract repair costs (let’s assume they are $10,000): $60,000
Subtract Profit for the End Cash House Buyer (just using $10,000 as an example): $50,000
Subtract wholesaler assignment fee (profit, let’s just use $10,000 for simplicity): $40,000
So, in the above example about How does a wholesaler determine their offer price?, we have a home that needs $10,000 in repairs that will sell for $100,000 after the repairs are completed. The offer price for that home is $40,000.
Why the 70% multiplier? Well, using a simple percentage is a way to quickly estimate all of the costs associated with buying, holding, and selling a property (as well as building in profit for the cash home buyer). Remember, that’s a long list and not an easy task to estimate! Take a look here:
Costs of ReSale:
Sales Concessions
Inspection repairs
Inspection negotiations
Realtor Fees
Closing Costs, Recording Fees
Title Insurance
Property Transfer Tax
Property Tax Prorations
Inspection Costs (well & septic (and pumping), pest, etc.)
Home Warranty
Outstanding utility bill balancesHolding Costs:
Home Insurance
Property Taxes
High interest Loan covering purchase price, holding costs, repairs
Utilities
Lawncare / snow removal
Project Costs:
Repair/Renovation/Updating Costs
House cleaning
Dumpster and demo/removal costs
Exterior property and house/building repairs
Profit:
Needed Profit for cash house buyer
In the above example regarding How does a wholesaler determine their offer price?, there are items for which you may not be familiar regarding How does a wholesaler determine their offer price?. Some of these are broken down here to provide further explanation. These might help you further understand How does a cash buyer determine their offer price?.
- Holding Costs: the longer it takes to finish the project and sale of the house, the more these costs rise (big area of risk to the cash house buyer)
- Home Insurance – this is typically going to require a vacant home policy which may be significantly more expensive than a policy for an owner occupant.
- Property taxes -these need to be accounted for for the entire holding period.
- Loan/Interest payments – cash house buyers often rely on hard money or private money lenders to provide as much as 100% of the costs of the purchase and project. These loans typically have high interest rates and the interest adds up fast!
- Costs of Sale: When you sell a home, there are many different cost elements to the transaction. These are broken down into a document often referred to a settlement statement for the closing. There are also other costs that might be incurred via the offer or between the time you accept an offer and the closing. Here are common examples:
- Seller concessions – it’s not uncommon for the seller to request concessions to the sale price in their offer. This would include asking for a fixed dollar amount of percentage of the sale price to be applied to the buyer’s closing costs, prepaids, etc. It can also include things like requesting money back at closing to put towards known repairs that need to be made.
- Inspection negotiations – the buyer typically relies on the expertise of a home inspector to go through the entire house and report on the condition of pretty much everything. The findings may include things that concern the buyer and may result in the buyer asking for some sort of concession such as a reduction to the sales price.
- Inspection repairs – the buyer may request, based upon the inspection report, that you make repairs prior to the close of the sale. This could be something minor such as replacing a broken light or something costly such as replacing the roof shingles.
- Realtor fees – realtor commissions and fees are not fixed and can vary. They can be a percentage of the sale price or a fixed amount and can include other fees such as administrative fees of professional photography charges.
- Closing costs and recording fees – these can vary but include things such as document preparation fees, fees for recording documents with the county, service fees, courier fees
- Title insurance – owner policy
- Property Taxes – any property tax owed yet not paid, may include prorations for the number of days you have owned the property through closing.
- Inspection costs – this can include well & septic tests, water tests, septic pumping, insect/pest inspections, and/or other requested inspections such as a structural inspection.
- Property Transfer Tax – state and/or county/municipality transfer taxes (example: on a house I sold for $141,200 there was a county transfer tax of $155.65 and state transfer tax of $1061.25
- Home Warranty – if included as part of the sales agreement
- Outstanding utility balances – outstanding balances to utility providers are often required to be paid via closing.
I hope this helps you answer How does a wholesaler determine their offer price?