Property Analysis & Deal Evaluation
The Foundation of a Good Deal: Accurate Analysis
Correctly analyzing a potential deal is what separates successful wholesalers from those who struggle. Your role as a VA is to provide the wholesaler with accurate and well-researched information so they can make profitable decisions. This module focuses on the three core components of deal analysis: determining the After Repair Value (ARV), estimating repair costs, and calculating the Maximum Allowable Offer (MAO).
Step 1: Determining the After Repair Value (ARV)
The After Repair Value (ARV) is an estimate of what a property will be worth after it has been fully renovated. This is the single most important number in your analysis, as all other calculations are based on it.
To determine the ARV, you will find comparable properties, or "comps." These are recently sold properties that are similar to the one you are analyzing (the "subject property").
How to Find Good Comps:
Use the following criteria to select the best comparable properties. You can find this data using the MLS (if you have access), or public real estate sites like Zillow, Redfin, or PropStream.
| Criteria | Guideline |
|---|---|
| Location | Within a 0.5-mile radius of the subject property. In rural areas, you may need to extend this to 1 mile. |
| Time of Sale | Sold within the last 3-6 months. The more recent, the better. |
| Property Type | Must be the same type (e.g., single-family home, condo, duplex). |
| Size (Sq. Ft.) | Within 10-15% of the subject property's square footage. |
| Bed/Bath Count | Should have the same number of bedrooms and bathrooms. |
| Condition | The comps should be properties that have been renovated or are in good condition. |
Once you have found 3-5 strong comps, you can calculate the ARV by averaging their sale prices.
Example ARV Calculation:
- Comp 1 Sold Price: $255,000
- Comp 2 Sold Price: $265,000
- Comp 3 Sold Price: $260,000
- ARV = ($255,000 + $265,000 + $260,000) / 3 = $260,000
Step 2: Estimating Repair Costs
Estimating the cost of repairs is crucial for determining the profitability of a deal. While a contractor's bid is the most accurate method, you can create a reliable ballpark estimate.
Price Per Square Foot (PSF) Method:
This method provides a quick estimate based on the overall condition of the property.
| Rehab Level | Description | Cost per Sq. Ft. |
|---|---|---|
| Light Cosmetic | Needs paint, new carpet, minor fixture updates. | $15 - $25 |
| Moderate Rehab | Needs new kitchen, bathrooms, flooring, paint. | $30 - $45 |
| Full Gut | Needs extensive work, including systems (HVAC, etc.) | $50 - $70+ |
Example Repair Estimate:
- Property Size: 1,500 sq. ft.
- Condition: Needs a new kitchen and bathrooms (Moderate Rehab).
- Estimated Repairs = 1,500 sq. ft. * $40/sq. ft. = $60,000*
Step 3: Calculating the Maximum Allowable Offer (MAO)
The Maximum Allowable Offer (MAO) is the highest price the wholesaler can offer the seller while still making a profit. It is calculated by working backward from the ARV.
The MAO Formula:
MAO = (ARV x 70%) - Repair Costs - Wholesaler's Fee
- The 70% Rule: This is a common rule of thumb in real estate investing. It means that an investor (the cash buyer) will typically not want to have more than 70% of the property's ARV tied up in the purchase and repairs.
- Wholesaler's Fee: This is the profit the wholesaler wants to make on the deal. This can range from $5,000 to $20,000 or more, depending on the deal.
Example MAO Calculation:
- ARV: $260,000
- Estimated Repairs: $60,000
- Desired Wholesaler's Fee: $15,000
- Calculate 70% of ARV: $260,000 * 0.70 = $182,000
- Subtract Repair Costs: $182,000 - $60,000 = $122,000
- Subtract Wholesaler's Fee: $122,000 - $15,000 = $107,000*
MAO = $107,000
This means the wholesaler should not offer more than $107,000 for the property to ensure the deal is profitable for both them and their end buyer.