01/16/2019
DUE DILIGENCE EXPLAINED
I'm a rehabber. Because of that, I believe I'm a better wholesaler than I would have been otherwise. I see too many posts about cash buyers complaining about wholesalers. And the most common response from wholesalers is "do your own due diligence!". So, please consider the following from a rehabber's perspective.
Of course we do our due diligence. I think the complaints are stemming from the time rehabbers and landlords are spending on due diligence when it's not even close to being a deal and the numbers are way off. If we trust the wholesaler and we know their numbers are generally in the ballpark, we proceed. Do you know how frustrating it is to show up at a property and find $40k in repairs (necessary fixes that validate the ARV) when someone says it's only $15-$20k?? It makes a deal a NO DEAL.
Sorry, I digress. Anyway, when it smells like it could be a deal, we ALWAYS go through a process:
1) Is it a deal? Using the wholesaler numbers, does it conform to the formula I use for flips, which is pretty standard: ARV x 70% - Repair Estimates. If yes, I continue. Some may use 75%, whatever, but I don't use much or any of my own money, so I use 70.
2) What's the ARV? I run my own comps. Same style house, same neighborhood if possible, otherwise +/- .5 miles, same number of beds and baths, square footage +/- 15%, same school district, similar lot characteristics (main road, etc), sold within the past 3-6 months if possible. When I don't get enough results, I expand those just slightly. If the ARV is close, I proceed.
3) Look at the property and estimate repairs. I do a video walkthrough, outside first, then inside, and I narrate to myself so I don't forget anything. Using an estimator tool, plug in the repairs and add 10% contingency. If the repairs are close, proceed.
4) Run all my numbers through a deal analysis tool and see how it shakes out. The deal analysis would include these additional costs:
-Buyer's closing costs
-Lender's Title Insurance (in the case that any of my private lenders require it).
-Escrow and recording fees
-Property Taxes (non homestead)
-Interest paid to lenders
-Seller's closing costs (for when the house sells later)
-Owners Title Insurance
-Transfer Taxes
-Escrow and recording fees
-Realtor sales commissions (we always have to assume the house will be listed by an agent)
-Staging costs
-Home Warranty (many buyers want this on older homes)
-Other/Misc
As a rehabber, looking for minimum $25k profit and 15% ROI for up to three months rehab plus selling time That might sound low, but guess what? It's not my money and I don't do much work, I spend my time finding deals and finding money. So this project is running through a General Contractor and we meet weekly. My personal ROI is more like 400% to 500% because my $5k investment profits me $20k to $25k.
Back to due diligence. Again, if the numbers are close, I now trust this wholesaler. I know he/she has a vested interest in helping investors find win-win deals. I know I'm not wasting my time doing any due diligence when they send me deals!!
If the numbers are way off, then I'll always assume they're way off from this person. You're wasting my time and everyone else's, even your own.
I hope this helps. I love reading this group's posts daily, seeing the deals, learning, contributing, and I hope we can all work together to improve what we're doing every day. Now, back to finding money and finding deals.........
