How To Calculate A Real Estate Wholesale Deal

Alright guys, in this video I'm going to give you the basics of underwriting a property so you can understand what your ARV is and what your MAO is. So this is going to be a very important thing to learn how to do. Underwriting is going to be crucial to making sure that you're getting good deals that you're going to be able to sell, and that you're going to be able to sell, you're going to be able to make money, and then whoever you sell the deal to is going to be able to make money. Alright, so one quick thing to know, the only things you'll ever need to edit are going to be here in blue. Um, so the start is the ARV. So first we're going to calculate ARV. No worries, I'll show you how to do that in the upcoming 3 videos where I'll show you 3 different examples of properties that I'm going to go ahead and comp from start to finish, where I'll go through, we'll calculate ARV, we'll calculate the repair costs, and, um, we'll go ahead and calculate our MAO. But first thing you'll change is the ARV. Next thing you'll change is the square footage. And here's how we're going to estimate the repair costs. I'll cover this in a second. We're going to pull the information from here to here to actually get the repair costs into your formula, investor profit, and holding costs. So let's just kind of go from top down and explain what it is we're doing here. When we're underwriting, we're always looking at the property from the perspective of who we're going to sell the property to. Excuse me. Most of the time, the person we're going to sell the property to is going to be a fix and flipper. So somebody who's planning on buying the property, renovating the property, and then selling the property. So we wanna look and we wanna figure out and make sure that that person is gonna get an amazing deal if they buy the property. And the way we're doing this is by looking at it through their lens. We're gonna say, okay, at what price do we think this will sell for? If we were to flip it, when we sold the property, how much is it gonna cost us to sell it? How much is it gonna cost us to get the property into ARV condition? And if we sell it at the maximum cost and we have to spend X amount of money to rehab it, are we going to make any money? Or how much money are we going to make? What do we need to buy it at? So the way we do that is just by backwards engineering, by first figuring out ARV. So once we can figure out what this property will sell for, we then need to back out the selling costs. And this is going to be when they list the property on the market, they're going to use a realtor and they're going to have to pay commissions. They're going to have to pay closing costs. That's typically going to be about 8%. So we're gonna back that number out of the ARV. Then they're also gonna be paying closing costs on the buy side. Remember guys, we are telling our sellers that, um, we're paying all the fees and commissions. Now it's not actually us who pays for them, it's gonna be the end buyer. So we need to calculate that into their purchase price as well. So again, we know that they're getting a great deal. Next is the repair costs that is gonna be calculated based on a function of square footage. So what you do here is enter the square footage of the property, and then here gives us the estimates of how much it's gonna cost us to do certain levels of repairs. If it's a very light repair, all we're doing is redoing the floors and the paint, it's gonna cost typically about $12 a square foot. So if it's a 1,000 square foot house, it'll cost us about $12,000. If we're gonna do the same thing but also add in cabinets, it's gonna be about $21 a square foot. So about $21,000. If we're gonna do a full renovation on the interior, it's gonna cost about $35 a square foot. Or $35,000 for a 1,000 square foot house. And it's going to be a full renovation with the interior and the exterior. It'll be about $45 a square foot or $45,000 for a 1,000 square foot house. Quick little note about these numbers. These will serve well as a baseline. Are they 100% accurate? No, not in every single market. In some markets, you'll be able to get— you'll be able to do a full interior renovation for $25 a square foot. In other markets like Arizona, California, and Las Vegas, it's going to be a lot closer to $45 a square foot. One other quick little number that I want to give you guys is if it's going to be a full gut rehab, I want you to estimate for $60 a square foot. And again, that's just a simple calculation you could do. If it's a 1,000 square foot house, you'll just multiply 1,000 by 60, and that'll give you the Anyway, I'll cover more of this and it'll be easier to understand once I'm doing— once I'm showing you the examples. But also, guys, part of the reason why you're in this community is to have help with questions like this. So if you have a property that you've spoken with the seller and you're trying to figure out if the price works and you need help comping, post about in the community and me or others will be able to help you. So that's how we calculate our repair costs. And, um, quick note here: we always want to err on the side of caution, and we would rather overestimate than underestimate. So what I mean by this is, on ARV, if you're not sure, underestimate, because it's better if you plan for— if you plan for $120,000 ARV and it ends up being $140,000, rather than planning for $140,000, it's actually only $120,000. $20,000. Do you see what I'm saying? On repair costs, I'd rather you budget for a full interior remodel and it be $35,000, and then it only ends up being a floors, paint, and cabinets, and it's only $21,000. This way you just have bigger built-in spreads for you to get a bigger assignment fee and for the person you're selling the property to, to go make a bunch of money and want to buy more properties from you in the future. So after we back out of the ARV, we're going to back out the selling costs. Remember, this is when you list the prop— or when the— whoever you sell the property to, they flip it, they're going to list it on the market and they're going to be paying fees and closing costs. We're going to back out the closing costs from when they buy it from you. We're going to back out the repair costs. Then we're going to back out the investor's profit. And this is how much money the person you're selling to should be able to make. Typically 15% now is what this is. This is just a function of the ARV. So we're calculating for them to make 15% of whatever they're going to sell the property for. Typically this works. Now you may need to adjust this. I would always try and make sure that they're getting at least $25,000. Few people are going to flip a property if they're not going to make at least $25,000. So in here, let's see, we just go and update that to 18, and then that would be a good number for us. Um, now you do not want to say if somebody— let's say that it's a $550,000 ARV. What I'm not telling you to do is change this down to like, what is— what would that be, 5%? No, you want to keep it still here at 15%. If somebody is going to have to spend the money it's going to cost to flip a house, it's going to be worth half a million dollars. They're going to have to put up more money to get their hard money loans. They have to put more money for the renovation. They're going to expect a bigger payout. So about $82,000 is going to be correct. So once you back out all the costs, you're going to get the subtotal. So $360,000. Now what this number is supposed to represent is going to be their all-in costs, meaning they would need to get a loan for $360,000 to buy the property, fund their rehab, everything like that. And after that is going to be the holding costs. And what I mean by that is when flippers are buying properties from you, most of them are going to be getting hard money loans. Hard money loans are short-term loans. They're high interest rate and they don't require any kind of like credit score or anything like that. It's what most flippers are using to acquire properties, and we're gonna underwrite for those hard money loan interest payments. Now, typical hard money loans are at 12% interest, and what this holding cost right here is, this variable number is the number of months it should take the rehab to do. We always wanna estimate for at least 4 months, but depending on the size of the project, it could be closer to 6 months. If you always just estimate at 4 though, you should be good. So this is calculating for their interest payments for their hard money loan. So quick little review, once we take the ARV and we back out all the costs associated with the property from all the fees involved from selling it, rehabbing the property, the amount of money they're going to want to make, we're going to get our dispo price. Now our dispo price is what we're going to be able to sell the property for. So technically anything underneath this should be profit for us. Now I always want to make at least $20,000 on a wholesale deal. So we just put in our desired wholesale fee here and that will give us our MAO. On this, look, it's really simple and it's meant to be simple. Don't make it any harder than it needs to be. The important things to know are to always look at the property from the eyes of the person you're going to be selling the property to. And what I mean by that is you want to be able to have a conversation. Let's say you have this property locked up at 3 $328,000. You want to be able to have a conversation with your prospective buyer and say, hey, look, when you sell this property, it's going to be worth $550,000. Now I know you're going to pay— you're— I know, I know you're going to have to pay realtor fees and closing costs when you sell it, and you're going to have to pay the closing costs when you buy it. And I know it's going to cost you about $60,000 to flip it up, to fix it up. But if you saw it at that $550,000 and then you show them the comps that tell that story of like, hey, look, there's this house that sold for $550,000 that's similar, there's this one, "Right? If you do that, you should stand to make over $80 grand. How good of a deal is that?" Then you're like, "Yeah, it's an amazing deal. Let me buy this from you at $350 grand." And then boom, you've made yourself $20,000. So remember, look at it from the eyes of the investor and then always err on the side of caution. So be more conservative. And what I mean by that is overestimate on repairs if you're not sure, or underestimate on ARV if you're not sure. Follow those steps and I will show you more in the next 3 examples where I will go through and I will show you some different properties of how to comp them. All right guys, in this first example, I'm going to go ahead and show you how we'd comp a house. I'm just going to pick a random house. I'm doing different markets every single time. This one, we'll just do Phoenix because it's very similar to a lot of markets. Let's just pick a random house over here. Let's see. Zoom in. How about this one right here? So step number 1 is going to be to find ARV. Now how we're going to do that is by analyzing the characteristics of this house and then finding similar houses that are the similar bedrooms, bathrooms, and square footages that are going to be fully remodeled or whatever is selling at the highest price point. So as we can see here, this is a 4/2, it's 1,600 square feet. Let me, I'm just going to go ahead and copy this address so we don't lose it. I'm also going to take a look And I'm going to see where it's located. So it's— what is it? It's right here. So it's not backing any kind of major road. Now we're going to look around in its neighborhood and we're going to find properties that are similar. Now when we're comping, we don't want to cross any major streets. So the major streets are going to be 51st Avenue right here and Peoria Avenue. So we want to be looking right here. Now, what we're going to do is we're going to go to sold. I know I'm not going to mess with anything right here, and I want to go to sold in the last— we'll do 6 months. Let's apply. So then we can see that we have several, we have several, um, houses that have sold in our very area. I'm going to go price, sort high to low. So I have a $1.41 million. This is all the way over here though, we're crossing a road. I'm not going to include that. We have this 575. Now it's much bigger, so I'm not going to include that. It's like 800 square feet bigger. Not going to include that. Here's a 515. This is also crossing a major road. As you can see, we cross 51st. And this is just kind of what I'm doing, guys. Kind of see, I just sort by price high to low, and then I'm coming by these just trying to find a good comp. Here's a 477, 1,855 square feet, and it's in our neighborhood. Let's check this one out. Okay, boom. This is a perfect ARV comp. So this looks very similar to our property. Um, let me actually pull up— I'm gonna go up and I'm gonna pull up our property again so I can kind of do like some side-by-sides. So if we look at the street view of our property, what do we got here? 2-car garage. Very similar, right? Very similar property. Now this is a little bit bigger. But as we can see here, this house was recently remodeled. There's new paint throughout the house. These flooring— the flooring could be old, I'm not sure. But that kitchen is obviously new. This is the mark of that somebody has flipped this house written all over it. Looks like they have some old carpet in the bedrooms. That's interesting. But new paint all throughout. Nice backyard. Is there a pool? Okay, we need to take note of that pool. We need to— I need to double-check and see if our property has a pool, but this is going to be a good ARV. It's a little bit bigger, but we know the ARV is going to be somewhere around $470,000. Let me check and see, did our property have a pool? No, it doesn't. So we're going to subtract at least $10,000, but on this, I just know in Arizona that that's going to be more so around like a $20,000 to $30,000. So I'm going to subtract at least $25,000 off of what that other one was at. that. Oh, whoops, I'm going to keep that pulled up. This is our subject. So let's see what else we got. So here, um, there's another 3/2. It's 2,100 square feet. I'm going to— oh, this is across the street. Never mind. As we can see, it's across 51st. Here we go. $439,000 in our neighborhood. Very similar square footage as ours. Okay, so this is a good as-is comp. As you can see, this has not been remodeled. But it's decent, right? Like somebody could go live in here. It's not like he needs a full— okay, that is disgusting. But like somebody could go rent this out immediately, right? Somebody could live in here. They're not going to be in danger. So $440,000 is about what it would sell for as is. So I could just tell from looking at those two comps that the market for this property is going to be— I'm just going to take— let's see, this is another as is. Yeah, so the market price of this property, if they list it on the market, can be somewhere between $400,000 and $440,000. And I'd be comfortable saying that the ARV of this property, I'm going to take $475,000 minus $25,000, we're going to call it $450,000. So we're going to go $450,000 here. Now the next thing is to estimate the repair costs. Now we were what, 16, 16? Go ahead, we'll be accurate here. $1,616. Now, our ARV comp, this is how we're going to base our rehab costs, is this is a full interior remodel. We're obviously not going to— they also have done some exterior things here. We wouldn't do the same, but this can be a full interior remodel. So this is going to be one of those $35 square foot. So we're going to account, we'll do the $60 grand here. And then here's our underwriting. This is all done for us already. So we know that if it could sell at $450,000, and if a flipper's looking at this property, it sells at $450,000, they know they're gonna have 8% selling costs where they pay the realtors, they pay the closing costs. They know they're gonna have closing costs when they buy it from us. We know they're gonna spend about $60,000 on it. We know that they're only gonna flip it if they have some money in it for themselves. So right now we have 60, over $60,000 underwritten. So this is probably a little bit on the high side. We could probably get away with, something like this. Um, but either way, I would start here, and then if we need to come up a little, we could see, we could see about that. But, um, there you go. We know with 4 months holding cost that we can sell this for about $275 grand, meaning we would need to pick it up for $254,000. All right guys, for this next one, let's make it a little bit more of a challenge. Let's go somewhere outside of Arizona. Let's see, we'll just scroll out here. Let's go down. Let's do a really great market. Let's do Jacksonville. This is an awesome market. Um, all right, let's see. So let's go right here. It looks like a lot of houses right here. Let's pick one of these guys. So let's see, let's go for sale, apply. We need to remove the boundary. There we go. How about this guy right here? 3/2. So remember, step number 1, guys, we need to analyze our subject property. We got 3 bedrooms, 2 baths, 1,350 square feet. Looks like it's a nice little house, right? We got a driveway, 2-car garage, roof looks good, exterior decent, decent curb appeal, um, the neighborhood looks good. Cool. So let's see what we got here. Let's go ahead, we'll save this property, um, We'll save this tab over here. We'll open up a new Zillow tab and let's look at what is sold around this property. So we're going to go to— for— we're going to go to sold, apply. We already got the 6 months. Yep. All right. Let's see what we got. All right. Nothing in our immediate little neighborhood. All right. We got— 3, it looks like. So I can't remember, what were we at? $1,350. Okay, so we have a 293. It's a much bigger property, no pics. Guys, if there's no pics on Zillow, we're just gonna go right here, triple-click. Let's go to Redfin. Let's see if Redfin's got some pictures. Nope, no either. Hold some for 293. That's interesting because I think that it's gotta have been a flip because there's— I just My instinct's telling me that this house right here did not sell for $293,000. So I don't know. Here's a $193,000, very similar square footage to ours. So this house could be a similar comp to ours. As we can see, ours is already gonna be nicer just on curb appeal, plus ours has a garage and this is a carport. So this is, right, this is somebody selling it to an investor. So this is actually good news for us. This is a really good comp for us to look at. So obviously an investor needs to buy this property. Somebody's gonna flip it. So we can see that investor paid $193,000. So we should know that we should be able to sell our property for around $193,000. Let's check this out. Another, okay, another very similar house, $180,000. So I could just tell from this information we can see on the market that our dispo price is gonna be somewhere around $190,000. But let's still look a little deeper because I'd like to have some comps. Now look guys, as you can notice, this is a main road here. So ideally I don't want to cross this, but when I just go and I go to map and I go to satellite, I can tell that this is going to be very similar product to what's over here, but I do need to keep in mind I am crossing a street. All right, another similar size, as-is, pretty bad condition, $190s. So this one's in better condition. As we can see, they put in new floors. Right? Very light remodel here. And this one got $300,000. That's interesting. That's kind of an outlier comp. $260,000. Now this is what I'm betting is going to be ARV. And yeah, so they've replaced the floors, they've repainted. Kitchen, that's got to be the original kitchen. They didn't update the kitchen. No kidding. So yeah, this flipper didn't even update the kitchen or the bathrooms. All they did was redo some flooring. And also it doesn't even have a garage and it sold for $260,000. That's really interesting. Let's see this $275,000 right here. Okay, so this is the most updated property. They got new floors, decent kitchen, super cheap countertops, but this is a very cheap remodel. So I can tell from these, ARV is going to be somewhere around $250,000. Again, I can just kind of tell that by if this one sold, this one's bigger and it sold for $275,000, we're going to lose about $20,000. $25 grand because ours is smaller, but ours does have a garage too, so that's, that's, uh, something. Oh, let's look at this. So this one is our same size, it's a 3/2, it sold for $330,000, and it's in decent condition, not remodeled. Okay, and has a pool. So I feel very comfortable at $250,000 ARV. One thing we're going to check real quick, just because we don't have any amazing comps, is we're going to look at the for sales. We have a for sale at $300,000. Very similar property to ours. It's bigger though, but very similar, and it's pending at $299,000, and we can see it's pretty as-is. So let me explain to you guys how I'm gonna— oh, here's a $290,000 in bad condition, contingent, 25 days on Zillow. Interesting. So is what I can say is already I know that we could sell the property for $190,000, something like that, but, uh, We're going to look and run the numbers at $250,000. Now I think that the property will probably end up— the ARV will be higher than $250,000 if somebody does a decent remodel. What was the exact square footage again? 1,346. Now I'm going to do a super cheap remodel because nobody is remodeling like super heavy in this area. So I'm only going to do the floors, paint, cabinets. We're going to do a $30,000 remodel. Model. And then so I can see here that here's what my numbers are coming back at. Now I'm going to bump this down because I think somebody will do this for $25,000. And here's the numbers I really like. Now if I lock this up at $145,000, I can see that other properties are selling on market in bad condition for $190,000. So I'm going to push it out at $190,000, but I'm going to fully expect that— like, I'm going to expect that it will sell for $165,000, if that makes sense. Just because this market's a little weird. We don't have any phenomenal comps, but this is a good place to start. I would start at $145,000 thinking I could sell it at $190,000. So if for instance the seller was like, "Dude, it needs to be—" I would pay up to $165,000, but I'm going to let them know, "Hey listen, in our contract we have an inspection period. It's going to need to be in good condition. If the property isn't, we might have to come back and we might have to say, 'Hey look, we're not going to be able to make that price work.'" Is that gonna be fine? If they say, yeah, that's okay, then yeah, I'd go ahead and I'd lock it up for as high as $165,000. But the number I feel comfortable buying it at would be $145,000.