Value Add, Wholesaling and Speculating

images

The seller doesn’t get it!  I’m reading from the end of an email chain in which the seller is blasting me for not taking his counter offer on a single family house.  A few email messages ago he discussed ad-nauseum why I  ” . . . really need to reset my expectations in this market.”   The truth is that I’m not buying the deal for one simple reason:  the deal has been stripped of it’s equity.  I have no issues with a person wanting to make a profit.  That’s par for the course.  But if a property is not in Turn Key condition (requiring no work or upgrades) paying market price leaves me no upside potential in the property.  NEXT!  I’ve been around single family deals long enough to know when a seller has priced a property for a fast sale and when they are speculating.  What’s a speculator.  Here’s an example:  A brand new remodeled home recently sells in your neighborhood for $500,000.  The house was move in condition, no upgrades or repairs needed with all the latest shiny features, materials, etc.  The seller has priced his outdated house with none of the latest features for $485,000.  Yet when I look around the neighborhood the price for comparable quality and features is more like $450,000.  As a contractor I determine that is would take a $25,000 investment to bring the outdated home to date with the $500,000 remodeled home.  If I pay $485,000 I’m speculating that an extra investment of $25,000 will fetch an even greater price than the $500,000 newly remodeled home.  However, if I pay $415,000 the $25,000 investment should bring me a $500,000 home for the cost of $440,000.  This is a value-add strategy because I have “built in” $60,000 of equity by doing the upgrades.  If I decided not to do the upgrades but still purchased the house for $415,000 another strategy is to sell the house for $450,000 (the value for similar outdated homes).  This is the wholesaling strategy which would net a profit of $35,000 minus my costs to quickly sell the property.  And as you can see from this example, if you can get an offer accepted at a discount you will have more options available should your plans ever change.  Food for thought.

Advertisements