Wholesale House Flipping 65% Rule (The Big Myth)
This is my very first article. I am just now catching up to the internet world. I played specialized golf most of my life, but have been an active real estate investor and wholesaler for around 22 years.
I have contracted over 200 homes in that period of time. Most of those homes I have flipped to other investors / rehabbers and made a very quick and fairly easy profit. I have also kept many homes to rehab and retail out and many of them I kept for rental character, to build long term wealth.
I have used several different exit strategies when I buy homes. Owner financing , lease options and rental character. This is the beauty of being a specialized real estate wholesaler. It gives me many options on character that I have bought at big discounts. If I keep the character for rental, then I have a great piece of real estate that has huge equity and certainly is not as effected by downturns in the real estate market.
I rarely deal with foreclosure character. In most situations there is very little equity to work with. I don’t look for a paltry amount of cash flow from a home. Rental management is too much work. Too many people and legal problems to deal with. Now, if I have a house with 25 to 50 percent equity, I certainly don’t mind the hassle as much and I am not effected by the market. Besides, I can flip a contract on a house and make a profit greater than possibly 20 rental houses will make me. I might flip five houses in one month. That is a much better scenario than leaking faucets, broken hot water heaters, leaking roofs, etc.
I have spent over one and a half years working on my educational information that is obtainable on the web.
I live in Dallas, Texas and do strong advertising for motivated sellers in our metroplex are of Dallas/Ft.Worth. I get calls everyday from many people that have nothing to do with selling their home. The calls are from people that have taken expensive Wholesaling courses from big gurus in the business. People with some knowledge, but no mentoring. People who have spent a fortune to learn my business. Most all of these people are nevertheless in the fog. They have no clue which way to go. They seem to know the basic structure of wholesaling, but just can’t put it all together. No experience or training in applying exit strategies They have been given plagiarized facts about the wholesaling business and no sustain. No mentoring. If they do get offered some kind of mentoring, it will cost them a bunch more money. It seems like they get piecemealed to death.
All seem to have this mindset that a wholesale price for real estate is 65 percent of the retail value (After repair value) , minus repairs and minus their determined assignment fee. Then they are supposed to find an investor/rehabber that will buy their contract for 65 percent of the retail value minus those repairs and your assignment fee.
Example: House value $100,00.00 x.65% = $65,000.00 -the repairs – $25,000.00 – assignment fee -$5000.00 What you offer the seller = $35,000.00
I agree that you should try and buy a home for a low a price as you can get it, but many homeowners are just not going to sell their home that cheap. That is where most of the callers end up. No contract on a home. No assignment fee and no living. The above example is a great scenario to follow if you can get the seller to agree. Many won’t. This is where I see the without of understanding and training that they have been given. These guru educated students don’t have a clue what to do at this point. No negotiating skills.
Many homes that I have gotten under contract were homes that wholesalers made offers on and didn’t get, because they are stuck on this 65 percent rule that they are taught. A rule that just doesn’t work all of the time.
I prefer to give the seller more for his home and give the investor a lower percentage of return. I have investors that don’t necessarily apply the 65 percent rule when it comes to rehabbing a home.
In the example I used above, why should an investor always make 35 percent profit on a deal. I am not here to make investors high. I just want to give them a good profit margin for 60 to 90 days of rehab work. I found the house and the seller. Without those, the investor makes nothing. I would certainly think that if an investor made 20 percent profit in a short period of time, that is a terrific return on their investment. Can any of you tell me where I can make 20 percent return on my investment in that period of time? You can’t. Besides, if they know what they are doing, they can get good tax benefits on the investment.
Find investors that are willing to be reasonable about their profit margins and you will contract more houses. I guarantee it.
People that are truly trying to learn our business are not being educated the correct way. They are stuck , like being trained by the government; Follow the rules in the book , NO EXCEPTIONS. You will never accomplish your goals with this mindset.
You have to negotiate. You have to negotiate with buyers and sellers. Our business is negotiations , not lost in the fog.