The defining attribute of a successful wholesaler is the inherent ability to accurately analyze real estate wholesale deals. Valuing real estate is a major cornerstone of success for any investor, as it will not only determine the profitability of a property, but also what type of offer you should make moving forward.
While the process of assessing real estate wholesale deals may seem foreign to unseasoned investors, as it’s quite easy to get confused with everything that can be thrown at you, it’s an essential component to achieving success. Understanding how to analyze wholesale real estate deals will not only save investors a tremendous amount of time and help to make transactions more efficient, but ultimately allow them to make more money.
Assessing Real Estate Wholesale Deals
Appraising a real estate deal is among the most important skill sets a wholesaler can exhibit. Every investor will have their own approach to evaluating real estate wholesale deals. Those just starting out may find the process of assessing a new property to be overwhelming, or have the tendency to overthink certain deals. Don’t. The more properties you look at, the more you’ll learn how to evaluate them. You’ll acquire different things along the way, learning what to pay attention to and what not, while eventually establishing your own approach to evaluating real estate deals. Below highlights the three most common approaches to evaluating real estate:
The Cost Approach: This concept aims to ensure investors never pay more for a property than they would to build an equivalent property from scratch. Used for one-of-a-kind, special-use properties, and where market data is scarce, this appraisal method adds up the separate values for both the land and the improvements. In order to evaluate a property’s worth using the cost approach, there are a few things to take into consideration: assessing what a vacant property is worth; estimating the current costs of building a structure and adding those cost to the value of the vacant land; and estimating the amount of depreciation the property has accrued.
The Income Approach: This deal evaluation method is used to value income-producing properties that are greater than five units. Generally speaking, the value of the property is related to the market rent or income the property will produce, including the resale value of the property.
The Sales Comparison Approach: As a wholesaler, a majority of property evaluation will include a sales comparison approach. This method is used to determine the value of a property by comparing it to others, including those that have recently sold within a close proximity to the property. In essence, a property will be itemized and compared to other properties in the area in order to determine a comparable sale. Generally, this will consist of seven categories of comparison:
- The type of property rights conveyed
- Financing utilized to purchase the property
- Terms and condition of the sale
- Market condition in the local area
- Location components of the property
- Physical characteristics of the property
- Economic characteristics
For those seeking the answers to evaluating real estate wholesale deals, the following outlines a three-stage deal evaluation system to getting started. This evaluation system will help to gather information on a property, understand how to perform the necessary due diligence, as well as appraise the after-repair value of the property.
Deal Evaluation: Gathering Information
The first thing you’ll want to do when evaluating real estate wholesale deals is gather as much information as possible. This will include, but isn’t limited to, the following aspects:
Sellers Information: For obvious reasons, it’s important to gather as much information on the seller as possible. This will include the property owner’s name(s), their phone number(s), email address(s), and contact person for owner, if there is one.
Realtor’s Contact Information: Along with the seller’s information, it’s important to have the realtor’s contact information as well. This will include the real estate agent’s name(s), their phone number(s), and their email address(s).
General Property Information: Not only do investors need to collect as much information on a property as possible, but they also need to verify it. This can be done by checking the information against the property card online and at the property itself.
- Address of the property
- Type of property (single-family, multifamily, commercial, etc)
- Square footage
- # of bedrooms
- # of bathrooms
- Lot size
- What amenities does the property have?
- Are there any special features? Does it have a view or located in a special area?
- What subdivision is the property located in?
Status Of The Property: Another component to gathering information on a property is uncovering the current status of an Owner-Occupied Property. When evaluating a real estate wholesale deal, it’s important to take note if the owner currently lives in the property, as this could help to uncover the seller’s personal attachment to the property, their motivation for selling, and whether or not you’ll have to arrange buyer showings around the seller’s schedule.
If the property is vacant, it’s important to understand how long the property has been vacant; who was living in it before it was vacated; and when is the last time the seller has been inside the property. Answering these questions will help investors to understand the background on a vacant property. In addition, the same thing goes for rental properties. If the property is currently rented, investors will want to find out information on the tenants. This will include: who they are, how long they’ve resided in the property, how much rent they pay, and what the terms of their rental agreement are.
Listing Information: As part of the information gathering process, it’s important to identify whether or not a property is listed with a real estate agent. This is critical because communication and negotiations, if you decide to move forward, will be held with the real estate agent, not the seller. As a wholesaler, you’ll want to find out:
- Is the property currently listed by a real estate agent? If so, what is their name and their contact information?
- How long has it been listed?
- What is the list price?
- Has the listing price dropped?
- Have there been any offers on the property? If so, what price did the offer come in at? Why didn’t the seller accept the offer?
- When does the listing expire?
Property Condition & Repairs Needed: When evaluating a real estate deal, it’s important to get a feel for the current condition of the property as well as what repairs need to be made. (Even for an alternative strategy such as tax lien investing, which doesn’t actually involve you purchasing property.)
Along with what repairs the property needs, it’s important to uncover whether the property has been updated in the last few years, and what the estimate in repairs would cost. Although investors can ask the seller or agents these questions over the phone or via email, it’s critical for investors to view the property in person.
Seller Motivation: The motivation of a seller plays a huge role when wholesaling. In most cases, you won’t find a great deal on a property unless the seller is motivated. In order to learn the varying degree of motivation within a seller, it’s important to ask smart, well-crafted questions. Although this can be difficult with an agent, as they won’t disclose too much information, investors should ask the following questions:
- Why does the seller want to sell at this time?
- How quickly are they looking to sell the property?
- What is their ideal closing date?
- If the property doesn’t sell, what is the seller’s recourse?
The first component of evaluating real estate wholesale deals is the gathering of information. This will help to not only identify which deals to walk away from, but also uncover a seller’s true motivation for selling. In addition, the importance of understanding how a real estate wholesale contract works is vital; Not every deal will be a homerun, but learning how to better analyze and evaluate real estate deals is the first step to becoming a successful investor.