Off-market properties are great due to the fact that the competition to purchase is lower and they are typically priced below market value. Sometimes you find very unique opportunities and there is the upside of eliminating the 6% in commisions.
BUT.... as investor's we should be compelled to ask: is every off-market deal a wholesale deal?
We have all seen the FSBO where the seller wants $649,000 for his $360,000 home. OR the first time wholesaler (I've been there) as they throw something against the wall and hope it sticks. Every now and then you will find a great opportunity, sometimes you will find an over priced piece of property, and other times it just may not be feasible as an investment opportunity.
So what qualifies a property as a 'wholesale deal'?
1. It is a property that is purchased below fair market value.
2. It should leave profit margins/returns for you and/or your client
3. It is a desirable property - you want it to sell or rent as quickly as possible
Other things to note:
1. A wholesale deal can be off-market or on the MLS
2. Most investors will tell you, 70% of fair market value
3. Anyone and everyone's opinion of value is just that, an OPINION. Due your own due diligence and if you are a wholesaler, learn your clients formula.
4. Wholesale propertys are generally purchased and sold AS-IS
5. You can expect to close quickly and typically with cash or hard-money.
The important thing to look at when deteremining if you are looking at a wholesale deal is ROI (return on investment). Every investor has a different formula. One may specialize in building duplexes or tri-plexes which constitutes a much larger hold time (especially in Austin). The others primary objective is to do high end remodels with landscaping, granite counter tops, and stainless steel appliances. Or another investor may like to buy properties that are already remodeled, then rent it out, and collect cash flow every month. Then you have the multi-family and commercial developments but that is a whole other blog post. One investor may get 5% on their loans and another may pay 14%. A number of variables determine whether the property will work for one or the other.
On average, a real estate investor is going to be looking for a 20% return after everything is said and done.
As an investor, we want to make sure OUR formula works with the property. Yes, 70% of fair market value is nice but DO NOT use it as a rule of thumb. What are your holding costs? Any broker/agent fees? Are you placing a cushion in your calculations for unexpected hold ups/expenses?
As a wholesaler or as we like to say, acquisitions specialist, get to know your clients formula (yes I said it twice). Ask them. Take them to lunch. Ask them what their costs are and what kind of return they would like to see on each project. This will build your credibility and also ensure that you are acquiring desirable property. And remember, the more VALUE your bring (the more money you make your clients and investors), the more you get paid.
So, just because it is 'off-market', it doesn't mean that it is a wholesale deal. Do your homework. Be the person that knows the most about the property and then determine if it is A) a wholesale deal that you want to purchase or B) make sure that there is enough value in it, that it is marketable as a wholesale deal. The more you know, the better you look, and the more money you make.