Wholesale House Flipping: The Big 65% Rule Myth
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In my over 22 years worth of experience in investing in and wholesaling real estate, I am only now getting up to speed with the online world. I have in that time contracted more than 200 homes. Most of the homes have been flipped to another rehabber/investor and I was able to make some very quick profits fairly easily. In order to build some long term wealth, I’ve kept a number of properties to rehab for retailing out and many of them I have kept as income earning rental properties.
There have been a number of different exit strategies I have used when buying homes. Lease options, owner financing and rentals just to name a few. The great thing about being a wholesaling real estate is the number of options I have on properties that I bought at huge discounts. By keeping rental property, the real estate has a lot of equity and is not affected by real estate market downturns.
I don’t typically need to deal with any foreclosures and in a lot of instances there is not much equity with which to work. Managing a rental property is too much work to accept properties that will bring in a paltry amount of cash flow; there are just too many legal issues and people to contend with. If a house happens to have equity between 25 and 50 percent, the hassle is not too much of a bother and the market does not affect me. A flip of a house can actually produce more profits than 20 rental homes. A much better situation than leaking faucets and roofs and busted hot water heaters would be flipping five houses in a month.
The internet has so much information on this topic that I have spent more than a year and a half educating myself. I do a lot of strong advertising for sellers who are motivated and receive calls daily from people that have absolutely no interest putting a home up for sale. Most of these calls are from the people who have taken pricey courses on Wholesaling from big business gurus. These people have some knowledge, but have had no mentoring; these people have spent and arm and a leg trying to learn my business. Most of the people I hear from are stuck in a fog and rooting around directionless. The basic structure of wholesaling is all the knowledge they have with no information on how to put it together. They have been sold facts stolen from other sources about the business and left with no support, no experience and no training in applying exit strategies. And for those that have been offered mentoring, it usually comes with a hefty price tag.
The collective mindset seems to be that a good wholesale price is 65% of retail after the repair value and subtracting any repairs and assignment fees. So, for a house valued at $100,000 the wholesale price is to be 65%, or $65,000 subtracting the repairs which may be $25,000, subtracting the assignment fee which would be approximately $5,000 and offering the seller $35,000.
You should try to purchase a home for the lowest amount possible, but the owners are not going to just give it away. If you can get a seller to agree to this price, great! But, since many homeowners won’t agree to this, where most people end up is with no contract, no fee for the assignment and basically no income. This is where the lack of training and lack of understanding come into play. These students of those big gurus have no idea what to do when they get to this point, they are lacking in negotiating skills. In fact, most of the most I have gotten were ones that these wholesalers, stuck on the 65% rule, had made offers on and it just didn’t work.
What I prefer to do is give the owner more and give a lower return percentage to the investor. There are investors that I have that don’t necessarily apply this 65% rule when rehabbing.
The above example is ideal for becoming rich; but, it just doesn’t always work. An investor should look to make a decent profit for the number of days, 60 or 90, that the rehab work took. My job was to find a house and a seller, which I did. The investor should be happy by making a 20% return on their investment in as short an amount of time as that; not only that, if they know what they’re doing they have the ability to get some great tax benefits on their investment.
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