How Much To Offer on a Wholesale Deal

Posted on June 28, 2010 by Torrey

In real estate investing, you make money when you buy and you collect that money when you sell. Offering too much for a property is the number one mistake made by novice wholesale investors. Making offers is very simple, basic mathematics once you have all the required information. Your offer amount should have enough room in it so that you can add your fee onto the price and the wholesale price is still a great deal. A wholesale fee can be anything from $3K – $10K+.

In order to make an offer on a property, you must first know your market. All markets are different and what’s a great deal in my area may not work for investors in your area. Find out what the average sale price is for your target area. Once you have studied your market, acquire some good comps from an agent to determine the “After Repair Value” , or ARV for the property. Having an accurate ARV is very important for determining an offer. If you overprice a property by $10K that is surely valued under $100K, then you will end up offering too much and you probably won’t be able to wholesale the property. I recommend that you always double check the ARV for a property to be sure you are in the range of a few thousand dollars. Or better yet, have your partner or someone else come up with an ARV and see how close your numbers are.

The formula to calculate an offer amount for a wholesale property is the Maximum Allowable Cash Offer or MACO formula. In this formula, you need to know the ARV and an estimate on the repairs. I use $10K as the minimum repair estimate on every house unless it is brand new. This gives me some cushion in my offer, besides nearly every house can stand some upgrades. For wholesale deals, always factor in an assignment fee of $10K. Using the MACO formula is a safe way to calculate an offer price as along as you have an accurate ARV and repair estimate.

Say we have a home with an ARV of $100K based on the comps. The home needs approximately $15K in repairs for it to be in great condition. Here are the numbers:

MACO = Maximum Allowable Cash Offer = ?
ARV = After Repair Value = $100K
RE = Repair Estimate = $15K
AF = Assignment Fee = $10K

MACO = (ARV x 0.65) – RE – AF

MACO = ($100K x 0.65) – $15K – $10K

MACO = ($65K) – $15K – $10K

MACO = $65K – $25

MACO = $40,000

The Maximum Allowable Cash Offer is $40,000. If you are not ashamed of your offer, then it is probably too much. Your initial offer is always zero because you should never be the first to state a sale price. Allow the seller to state a sale price first. He who speaks first looses = ) . That’s an entire different post. Sometimes you won’t be able to make that $10,000 fee. This is fine, you can’t hit the ball out the park on each deal, but you can try. Your fee may be any where from $3K – $15K. I’ve closed several deals where I’ve only made $3K. The idea is that you can make money if you know the market and stick to the formula. Always be sure to include a contingency clause in your purchase agreement in case you need to renegotiate the sales price or back out of the deal.

Remember, great deals are made, not found. Happy Investing!!