This is a question I hear frequently when I tell people to look at their exit strategy in the pre-auction stage. Knowing what you plan to do with a property directly affects your maximum bid. Each of the 3 strategies I listed will have a different effect. Let’s have a look at each one individually.
– Pro – The great thing about wholesaling is that you won’t need to be worried about rehab costs. They will be passed along to the wholesale buyer.
– Con – A big downside is that your max bid needs to stay low enough for you to make the deal attractive to wholesale buyers that won’t pay anywhere near full market value. On average, they want to buy properties at 70% of the ARV and then lower the price by the cost of the rehab.
– Pro – Flipping properties is where you’re going to get the most bang for your buck. This is where you do whatever it takes to realize the full market value of the property.
– Con – Completing rehab on a property can be an expensive and lengthy process. This is the highest risk avenue and more often than not, the lengthiest process. You need to be prepared to
add significantly higher holding costs, the cost of the rehab and your profit margin to your bidding formula while all understanding that your money will be tied up longer.
– Pro – Unlike flipping, holding will start giving you a return much faster. You also retain ownership of the property so you can leverage it out to get your money moving onto its next cycle as fast as you can.
– Con – You will need to add the cost of taxes, rehab & property management to your bidding formula. It won’t typically be as much as flipping but it could still end up being a significant amount.
As you can see, each strategy will affect your max bid formula in a different way. That’s why it is so important to think of your exit strategy from the start. The biggest purpose of your property evaluation stage is to create the most accurate maximum bid number humanly possible. As you get better and more efficient with your evaluations, you’ll find yourself winning more and more profitable properties.
I hope this information helps and next I’ll be discussing how to calculate your maximum bid… thank you again for reading and for being a part of the TAI Community!