In part one of my Running The Numbers On Wholesale Deals series I discussed how important it is to mind due diligence. You must have an idea of how to move forward if you hope to accomplish anything at all.
You must run the numbers to even determine whether or not a deal is worth pursuing. Before you can even start running the numbers on a property, there are a few things you should know. That’s right; prior to minding your own due diligence you must, well, mind your due diligence.
A proper knowledge base is integral to flipping houses with any degree of success. At the very least, I recommend having an understanding of the following before you move forward with a respective wholesale deal:
- The seller’s contact info
- The general information of the property in question
- The current status of the property
- The property’s listing information
- The condition of the property
- The seller’s motivation
- Any debts against the property
- The lowest price the seller is willing to accept
Only once you have this information can I condone moving on to the desktop evaluation portion of my Running The numbers On Wholesale Deals series.
Wholesale Deals: The Desktop Evaluation
Part 1 of this series determines whether or not the deal you are looking at is a viable lead. By the end of Part 2, however, you should be able to tell if the deal is worth your time, or if you are better off moving on to the next one.
Use the following steps to run the numbers on your next wholesale deal:
Step 1: Confirm The Property Details
Before you can even consider running comps (comparables) on the property in question, you need to confirm that the details the seller gave you in Part 1 are accurate. You must, therefore, take anything they tell you with a grain of salt and discern whether or not what they told you was true. With everything that is on the line, you are only hurting yourself if you don’t follow-up the property’s details.
I recommend pulling the property card, which represents the city’s records about a property associated with a specific deed. The property card should give you insight into the following information:
- Who owns the parcel
- What, if any, improvements have been made
- Sales price history
- Assessed values
- History of ownership
- Land use, zoning approvals, and construction permits
- Land line valuations
- Building valuations
- Construction details
- Extra features that may be present
Nearly every state, with a few exceptions of course, will allow you to access the property cards of homes online. To find out if the state you are in allows public access, contact the local tax assessor’s office in your area.
If you are in a state that doesn’t allow public access to this information, there is a chance your local MLS (Multiple Listings Service) will accommodate your needs. If you live in a state that doesn’t disclose the information above, you will need to contact the private entity in charge of maintaining real property ownership records, only then will you be able to get an idea of the current state of a property.
Compare the information you glean from the property card with what the seller told you, but be sure to leave some room for adjustment. There is a good chance the numbers won’t match up exactly – and that’s OK. As long as they are similar, you will have an idea of the numbers you are working with. The only time you should be concerned is when the numbers are significantly different from one another. If that’s the case, it may be time to look further down the road for another deal.
Step 2: Pull The Listing Sheet
In the event the property you are looking at is listed with a real estate agent, you will want to make sure you pull the listing sheet for your records. If for nothing else, the listing sheet will give you important information entered into the MLS by the same agent that is representing the seller.
In obtaining the listing sheet, you will be able to compliment the information found on the property card from the previous step. It is also the best way to understand every aspect pertaining to a property, as agents using the MLS are required to input very detailed information and pictures about the home. Think of this step as another way to confirm the details you are going to work with moving forward.
Step 3: The Sales Comparison Approach
The sales comparison approach, otherwise known as the market approach, is a methodized system put in place to compare a subject property with those that have recently sold. In other words, step three in running the numbers on a wholesale deal involves determining a home’s after repair value (ARV), or what it will be worth once it is remodeled and in pristine condition.
In determining a home’s ARV, I recommend pulling the information on three or four like-type comparable sales in the vicinity of the subject property. I have had great luck looking at properties that are currently for sale or that are under deposit. If no such properties exist in the neighborhood you are currently looking at, pull the most recent sales information of similar homes that sold close by.
My search criteria will typically include the following:
- Homes that have recently sold, are under deposit or are currently on the market.
- Homes with distinct similarities to the subject property.
- Homes that have sold within the last six months.
- Homes that are less than a half-mile radius away from the subject property.
- Homes that are 80-120% of the square footage of the subject property.
- Homes with the same number of bedrooms as the subject property.
Narrow the candidates down to the four that match your property the best, and understand that these homes will be used to determine how much yours will be worth, and ultimately if the wholesale deal is worth pursuing. I have yet to find a better litmus test for determining a home’s potential more so than analyzing the comps.
This portion of the deal evaluation system is designed to give you everything you need to formulate an offer. That said, you can never take a seller for their word; you must mind your due diligence and run the numbers yourself. Only then can you be sure that you are on the right path.
This is the second intallment of a 3 part series on Flipping Houses: Running The Numbers On Wholesale Deals.
Click Here for: Flipping Houses: Running The Numbers On Wholesale Deals (Part 3)