To Wholesale or to Flip: Case Study of an Investment Property

I freakin’ love Real Estate. Days like today make me love it even more. Earlier this week I got a lead for a house. Today the property went under contract. I’m now faced with a very difficult question.

Should I wholesale the contract and make $10,000 next week or complete the project myself and make $30,000 in six months? These are the types of problems I don’t mind having.

Many of my students ask me about how I determine whether an investment is a winner or a loser (yeah, I’ve had experience with both). So I’ve gone through the process of evaluating a property using this house as a template. At the end of this post I’ve included a short poll to get your feedback. Should I wholesale this deal or flip it myself?

Interviewing the Owner

On Monday I received a contact from a homeowner requesting an offer on their property in South Philadelphia. I spoke to Frank, the owner, on Tuesday and we discussed the property. During my initial contact with any owner, I try to do three things. First I collect the basic details on the house: address, number of bedrooms and bathrooms, condition, etc. Second, I try to evaluate whether the seller has any emotional attachment to the property. Finally, I want to determine the seller’s level of motivation. Why do they want to sell? Do they want to sell or do they need to sell? When do they need their money? During the course of my phone call with Frank I began my evaluation.

The property is a 3 bedroom row house with one bathroom and a partially finished basement. The house has been occupied by a long term tenant for the last 7 years. Recently the tenant was evicted and left behind a mess. The owner considered fixing up the property, but he’s now retired and just wanted to unload the house. Frank was fed up. I asked him how soon he wanted to close on the house. He said, “How’s tomorrow at 10?” While this wasn’t a “need to sell situation,” the owner was motivated enough to sell the house at a significant discount. Before getting off the call, I gave him a price range on where my offer would fall. We then scheduled an appointment for Friday morning so I could check out the property and firm up my offer.

Doing my Homework

Before viewing a property I find it helpful to do my homework. This includes determining the estimated resale value of the property, contacting some of the investors on my wholesale list to determine their interest in the area and get an idea of how much they’d pay for a property. I also search the public record to find out what the property last sold for and when.

Philadelphia is an urban market. That means that home prices can change drastically within a few blocks. So when I search for comparable sales inside the city limits, I stay within 3/10th or even 2/10th of a mile from the subject property. The results for the South Philly house were all over the place. I saw sales for $70,000 and I saw sales for $240,000. Even after I refined my search to include similar square footage, the range was huge. When I reached out to my investor list, they helped me narrow down the range.

According to two “flippers” in the South Philadelphia market, the after repair value of the property ranged from $169,000 to $189,000. Both investors said they’d offer around $75,000 for the place based on the information I’d provided.

The public record revealed that the house had last changed hands in 1991 for $45,000. There were no mortgages recorded on the property. Based on my conversation with Frank, it didn’t sound like there’d be any utility liens on the house.

Friday morning I was armed with the knowledge I needed to make an offer. The house was owned free and clear, or nearly so. It would likely sell for around $175,000 once I completed approximately $40,000 in work. I had two investors willing to buy a $75,000 contract on the property. If everything checked out, I was ready to make my offer.

Inspect the Property and the Neighborhood

The onsite inspection has two purposes. First I need to determine whether there are any significant environmental factors or structural conditions which would affect the value of the property or impact the rehab expenses. Second, a face-to-face offer with a written contract has much more impact than a verbal offer over the phone. I also like to establish some common ground with the seller. That common ground can go a long way in getting your offer accepted.

When I arrived at the house on Friday, I drove around the area. I was looking for the environmental factors. How did the area look? What kinds of cars were parked in front of the houses? Was there any evidence of drug trafficking? You get the idea. I was looking for the good, the bad and the ugly. What I found was a nice, working class neighborhood.  There were no abandoned buildings or shady looking kids lurking on street corners. The vehicles ranged from late 90’s model fords to newer BMW’s. I also saw two other rehabs in the immediate vicinity and new construction being built a block away. So far, so good.

The block itself is very tight. I had a difficult time driving my car comfortably down the block with parking on one side of the street. Though that’s not a plus, it’s not atypical for the neighborhood. The tight blocks tend to keep out non-local traffic and can actually be attractive to buyers.

When I met Frank for the first time, he started telling me about his tenant. As we walked through the house I was able to find that common ground by relating some of my tenant horror stories. By the end of my inspection we were old friends.

The condition of the house was precisely as he’d told me. The prior tenant left trash and abandoned furniture in every room. The walls were dated with wood paneling and stained carpets. But the structure was sound. From what I could tell, the electric and plumbing needed to be updated. The bathroom and kitchen had to go. I saw evidence of a roof leak, so we’d have to replace the roof. The heating system was 2 years old, but I’d need to install an AC unit. The scope of work fell right into my $40,000 budget. It was time to make my offer.

Calculating and Making the Offer

Before I make an offer to any property owner I want to make sure I’ve accounted for everything. So I excused myself and took a minute to run my numbers before discussing them with Frank. To calculate all of my costs on any project I use a simple piece of software that I developed called the BirdDog Investor Profit Maximizer . It’s a lot easier to run the numbers and make a solid initial offer than it is to change your price after realizing you’ve offered too much.

For this South Philly property I calculated a profit of about $37,000 with a purchase price at $60,000. I’ve broken down the numbers below.

Estimated ARV $175,000
Selling Costs (Agent Fees, Transfer Tax, Seller Concession) $19,250
Purchase Price $60,000
Purchasing Costs (Transfer Tax, Title Insurance, Hazard Insurance) $5,480
Finance Costs (Hard Money – Points & Interest for 6 months) $13,125
Construction Costs $40,000
Estimated Profit $37,145


After running the numbers  I went back into the house to discuss them with Frank and make the offer. In the past I’ve found the best way to make an offer to a seller is to be honest. I mean overly honest. Show them the numbers. Give them the facts. Then if they come back and say, “Hey you’re making all this money. I want more,” I just tell them, “Fine. You take the risk. Your house is a mess. Spend $40,000 to fix it up. Deal with the construction. Then find a Realtor. He or she will charge you 6%. Pray that you get an offer. If you do, pray that their financing goes through.” Usually that conversation puts things in a little better perspective.

I didn’t have to have that discussion with Frank. I told him what I thought the house could sell for and how much I was going to spend on the rehab. I showed him my expected profit and how long it would probably take to sell. I told him I could close and he’d have his money when the title work came back. I gave him a copy of my bank statement as proof of funds (obviously the account numbers and pertinent information is blacked out). That’s when I made the offer: $60,000. Then I shut up.

We sat at the kitchen table for about three minutes without a peep. It got a little bit uncomfortable. He asked for $90,000 over the phone. I told him at the time my offer would be between $50-80,000. Though it was a lot less than his asking price, I thought I had a shot. Finally he said, “Let me talk to my wife.” We agreed to speak Saturday morning.

This morning when he called he said I could have the house for $65,000. I agreed and emailed him the contract. An hour ago I got the signed agreement in my fax machine.

This business is full of up’s and down’s. Sometimes I feel like there will never be another deal. That’s when I end up talking to a guy like Frank. So that brings me to my question, should I wholesale this deal or flip it myself? Give me your feedback. Click on the poll at the bottom of this post to voice your opinion. I’ll update you on my decision in a future post.

Tell me What You Think By Completing the Following Poll

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  • ron

    this one seems like an ideal wholesale too much rehab for my taste. i like to keep it no more than 20k for flips at least in this market right now. either way seems like a great deal to have under contract. much success

    • Josh Weidman

      Ron, thanks for the feedback. I don’t disagree with your analysis. It’s always a balancing act between risk and reward. Is the additional exposure an acceptable risk for and additional $20,000?

  • Cameron

    I’m a newbie to this so I won’t weigh in on whether to wholesale it or not, but what kind of rehab work takes $40K to perform? If you could provide as much detail as possible, it would be GREATLY appreciated.

  • Chris Wosnitzer Albatross Property Solutions LLC

    Its hard to answer this question completely based on info provided. It depends on if you need to have money on hand for other deals.

    If you have unlimited funds or enough funds to do the rehab and hold the property for the 6-12 months it takes to sell it I would say Rehab it. As you probably are well aware as soon as you take down walls/paneling do kitchen/bath remodeling you never know what your gonna find.

    If funds are tight and you have other deals that you need money for then I would wholesale it- $10k for about a half a days work is fine with me.

    On a personal Note:

    I have 2 properties that went on the market back in March that I rehabbed, one has been under contract twice- (buyer financing fell through) the other in an over 55 community at the Jersey Shore has had no offers. Based on my research the over 55 had a better chance of selling quicker then the other in Mt Pocono PA that has been under contract almost as long as it has been listed!!

    You never know with this market “a bird in hand beats two in the bush!!
    Albatross Property Solutions LLC
    Your Short Sale Specialist at the Jersey Shore!

  • joe

    Take the 10 and move on to sweeter pastures.

  • Riskco Cartel

    The basement could be an issue with unforeseen repairs that may kill your budget, wholesale it. Experienced Rehab Investor

    • Bill

      I agree, been there & done that. There always are hidden problems & $40K seems too low for repairs. I’d take the Quick 10K.

  • Woody

    Seems to me that 10k now is the best move based on limited information and my assumption that this property is not in close proximity to your home or localized investment “comfort” zone, even though you may sometimes buy/sell property sight unseen (by your own eyes) in far distant locations.

    The 30k sounds good, however, I would want it closer to 3 months – ALOT closer, preferably even sooner…….GOOD LUCK whichever way you roll with it.

    I am in a similar position currently, as far as the rehab issues, but my numbers are quite different. Paid 110k (all in) on assignment, needs 20k rehab, comps 165-185k ARV.

    I am planning to retail it because the prior owners RE agent had over 20 interested parties but none could afford the DP on conventional financing at 155k (original asking price) because of repairs needed. I am sure that I will be able to market this home at nearly full retail when it meets FHA guidelines and the “down” drops to 5% with no additional fix-up needed.

    Also, FYI, rather than using my business entity …… this is the 1st property I chose to invest in using my new “Self Controlled IRA LLC” after losing money in 2010-11 and earning less than 3% through March when the IRA consisted of mutual funds and account was controlled by Schwab.

  • Mike G

    So far it looks like a 6 to 0 vote to wholesale.
    Let’s make it 7 to 0.

  • malendaz

    I would prefer to stick and move. Flipping is one of the best ways of making money in real estate. It’s all about doing what you love. I love selling real estate and solving problems.

  • Mary B

    Better things come to those who wait. Yet if you really need to fast cash for othr business than wholesale is the obvious answer. Course nothing is final just yet because the contract can still b renegotiated. Get a contractor / home inspector out there asap and tighten those figures of yours. I know S.Philly area that fluxuate $70K one house then two house over across the street same block $225K. Rowhouses at that! Bananas. Anywho sounds like a win/win sich either way. GODspeed.

    • Josh Weidman

      Mary B, Thanks for the comment. I am very familiar with the area, construction costs and possible pitfalls. I complete several of these projects each month. I just thought I’d share some of my experiences. It sounds like you’re in Philadelphia (or close by). Please let me know if you have any wholesale deals you’re looking to sellor would like to joint venture on.

  • dan

    you may have problems trying to do 40k worth of rehab to a house in SOUTH PHILLY!!!! Take the 10k and move on to the next rehab.ALWAYS REMEBER A BIRD IN THE HAND IS WORTH MORE THAN THE BIRD IN THE BUSH!!!!!!!!!

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