Episode #29 – Wholesalers Making Offers in the Current Real Estate Market
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Welcome to another episode of EarlToms podcast.
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Today we’re going to learn or talk about how to do something that’s opposite of what everyone is used to doing. Before we get into it, let me explain where we’re, where we’re headed. Typically, when everyone goes and looks at the ARV, you know, they’re thinking, Okay, the markets gonna go up, it’s stable, those, it’s easy to predict. But right now what we’re about to experience, and I’ve seen it multiple times in my real estate career, and it has every one of the signs, so I have 100% confidence, it’s on its way. The good thing about it, is that wholesalers and investors alike will be able to make a lot of money. In this time, it’s kind of one of those that that you wish didn’t happen. But, you know, at the same time, there’s a benefit to it. And there’s a con to it. The con to it is is that a lot of people that own houses, investors, homeowners, they’re gonna, they’re gonna wind up losing money, because of the direction that our economy is headed.
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So what we’re going to talk about today is how to protect yourself when you’re making offers, and protect your investors the same way so that you can be profitable in it. Because one thing that you don’t want to risk right now is letting your investors your buyers that are, you know, typically there to help you out, you’re gonna wind up running them out of the market, because if they’re paying too much for something in a declining market, then when they look up their overleveraged, they paid too much for a house, they can’t keep buying. So you wind up losing your ability to make make money. If if you’re not preparing yourself for what’s to come. You know, I’ve said it multiple times on different episodes. When I was appraising during the foreclosure crisis, we lost 10 million jobs. 10 million jobs calls the foreclosure crisis. To date, we’ve lost 50 million jobs now have good, you know, some of them a good bit of them, whatever number, you know, percentage you want to put on them have come back. But they’re still lost. And still more than 10 million jobs are lost. So what the government’s been doing is, you know, putting a bandaid on things they can 1200 1400 16 $100 is going to help people pay their bills, when in all honesty, you know, most people that’s that’s rent, or that’s a mortgage, and maybe a car payment for one month. And then it’s it’s exhausted, there’s nothing left, maybe groceries, if you have a family, you know, it probably doesn’t go that far. So what they’re trying to do is basically, what we would refer to is just putting lipstick on the pig, instead of actually just, you know, letting the people solve the problem. Now the vaccine that’s out is is going to help get things somewhat back to normal. But it’s not an overnight fix. damage has been done, it has to work itself out. And the only way that it can work itself out is for a correction. So what you need to be doing now, instead of what you’ve always done in this business, is look at a trend. And instead of a trend going up or staying stable. Now you need to look at the trend going down. And that means your ARV are going to start going down. And if you’re if you’re in this business, and you’ve been in this business for, you know any amount of time, you also see the signs showing up.
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I’ll give you just some concrete examples. And my market and the last week, I’ve had three different people tell me they will bring a chick to the closing table to be able to sell their house. Some of them were owner occupied, some of them had a tenant in them. I had one guy called me it was not one of the that said that they would bring a check. But I had one guy call me and say his tenant was $3,000 behind. And I just thought that I can’t do anything with that. I mean, you’re trying to You’re willing to pass that over to me the headache over to me, I don’t want anything to do with it, you get the tenant out, you know, we’ll talk. But now is the time to have uncomfortable conversations with homeowners and investors alike that are selling. Because whatever they’re asking is too much. They know it, they see the signs, they’re trying to get out right now, while they still have the opportunity to get out. But whatever they’re asking, don’t even consider paying for it. If they’re asking $50,000 for a $75,000 house, three months from now, that’s, that’s gonna probably wind up being a $50,000 or $60,000. House, it’s going to come and it’s going to come fast. So your deals that you’re that you’re putting under contract, now, you need to take into consideration. Some, if not all of your buyers will get a property, they’re either going to buy it and finance it. Very few people always pay cash for it, unless you’re dealing with an institutional investor. They’re not paying cash for it, and nine times out of 10 if they do pay cash for it, because a lot of these institutional investors are the same way. They’ll pay cash for it up front, and then they’re gonna turn around and refinance it in three, six months a year. So how are they going to recycle that money that they’re spending in cash today. And once they get to that point, then they can’t borrow anymore because they can’t free that cash back up. So when you’re making these offers, now, you need to go in and look at the trend. And when I say the trend, you can go on different websites, it doesn’t matter if it’s Redfin, Zillow, MLS, it doesn’t matter. You can go on these different websites, and put in a timeframe of when something sold. And you can go in and say, you know, what, what did things sell for from September to November 1. And you can look at those and then you can go over and you can say, Okay, what, what did things sell for in this area from November, you know, to the beginning of February. And if you’re doing that, you’re gonna see a downward trend.
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One other thing that you need to do is go and look at the active listings. Because six months ago, you didn’t see very many houses that were having to reduce their list price. I spoke to an agent the other day, 20 days on the market, and they had already dropped to $10,000. On a street, we’re actually own a house that I’m getting ready to renovate and flip. So I was doing my reconnaissance trying to figure out why she dropped the price. The reason she dropped the price was not smart. She basically said I don’t like inventory sitting there. So I got the owners to drop the price. That’s not good after 20 days. I mean, if you’re trying to actually sell a house, you’re basically losing every bit of your negotiating power by dropping a house $10,000 after 20 days, if you drop it 10,000 at least wait 30 days to drop it.
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So that you can get full market exposure before you can get enough feedback to understand Okay, I may be asking too much, something’s wrong with the house, whatever it is, because it always does come down to price if when something sells so to see all of the houses now that are reducing their sales prices versus what happened six months ago, because you’ll be able to go on all these websites as well. And if you’ll scroll down, you’ll see the the the history of the listings. So it may say this house was listed on the first day for $200,000. And it sold for 175. Well, that’s what’s called as a list to sale ratio. So when you’re looking at something that trend for a $200,000 house that sold for $175,000 that’s basically a 12 and a half percent difference from a list price to a sales price. So and to be easier on it. It would basically be $100,000 on a list price that sold for $87,500 if you want to sit there and just divided in half to get a an even number and something easier to work with. So when you’re sitting there now, and you see these list prices, versus the sales prices, you’re going to see all of these agents that go out there and go. Okay, well. We’ve either got to a market that’s declining, or I’m going to be stubborn and not recognize it, because I need to make a large commission. So I’m going to list it for more, and then they wind up selling it for, you know, 10 20% less than what they originally listed it for. It sits on the market for a while, those kinds of things. So you need to pay attention right now to the train, that’s this headed in a downward direction. One thing that’s going to show you that is that list price to sales price ratio. So when you’re looking for your comps, you’re still looking for something in similar condition. And an in the same area, if you’ve got something in the neighborhood, stick with it don’t go out and distance if you don’t have to go to another neighborhood if you don’t have to. But you need to start paying attention to these list prices versus the sales price ratio, and then go back and do a historical analysis, so to speak, so that you can see what what sold four to six months ago, and even look at that list price to sales ratio for those properties that sold four to six months ago. And then come in and look at what so from today to three months ago, and look at the list price to sales price ratio from today to three months ago. And you’re going to see that trend line headed in the wrong direction.
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So when you’re going through with these offers, right now, one thing that I always tell these people that are selling their houses, this is what I can give you, it’s gonna be the best that I’m gonna be able to give you, you know, forever, how long. So sometimes it’s better to get out while you can, even though it may not be exactly what you want, or what you had in mind, the longer you wait to sell your house, the less I’m going to be able to give you and I get people all the time now that are that are calling me saying, Hey, I’m thinking about selling my house in six months. And I just tell them, honestly, call me in six months, because I can promise you what I could give you is going to change whatever I tell you today is not what I can give you in six months, you have too many people out there right now that are that are getting nervous in some way starting to panic. And it’s going to cause that correction, because common sense is starting to take over. So what you’ve seen since November, you’ve already got gas prices going up, jobs being lost that didn’t necessarily need to be lost, you can have your own political and ideological views on that. But one thing that that you should never penalize somebody for is an honest day’s work. If it’s an honest day’s work, that should be praised. I don’t care what it is, when you wake up in the morning. And you say I’m going to go wholesale houses, you tell white lies, you tell real lies, you do those kind of things. So at the end of the day, is wholesaling. Really an honest day’s work. So when you take your politics or ideology towards, okay, well, we’re gonna set a pipeline down and it should have been done. That was an honest day’s work, that was something that you are most of you were not even able to do, and sleep at night with a clear conscience knowing you did an honest day’s work. Because when you go out and you say I’m gonna pay cash for this house, nine out of 10 of you can actually do that. So when you judge somebody else for an honest day’s work, it’s not necessarily a good thing for you to view it that way. I don’t try to get into politics or ideology, I try to do me and let everything else fall as it may.
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But I’m also to the point to where I know what’s coming, because of my experience in this business. So what I want everyone to do is take the blinders off, whether it just be your own beliefs, a political view, whatever it is, what is going on right now in our country, as far as the economy is concerned, and the country in general, is not productive for entrepreneurs, and wholesalers or entrepreneurs. There’s discussion about raising the the corporate tax. So when we all go File our taxes, we’re gonna have to pay more raising the minimum wage, we’re gonna have to pay more every month to have a staff. It there is the the business aspect of the country is getting squeezed and it’s going to continue to get squeezed and what that translates into, what a lot of people don’t realize is you’ve got someone out there that’s worked for a company, they’re stable. All of a sudden, now, this company has to raise their salaries of their employees, or they have to pay more in taxes. So what winds up happening is, is their bottom line gets squeezed, they have less cash flow coming in. So what winds up happening is, is you have layoffs, furloughs, people just losing their jobs, it’s not necessarily a good thing, or a bad thing, because it is still gonna fall on your ideology of what’s fair, what’s equitable, things like that. But you have to get that out of your mind, if you’re going to be a business owner, or be an entrepreneur, you have to get that out of your mind. Because when you open those doors, and you hire an employee, or you run a business, the goal is to keep the doors open. So if you have that one thing that says, that old saying, take one for the team, you might have five employees in there, but now you can only afford four, to be able to keep the door open. So when you look at things, and people say, Well, everybody deserves a living wage, and this and that, if you’re willing to work, I’m not in any way is gonna argue with that.
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But as a business owner and an entrepreneur, your job is to protect the business, keep the doors open, and it makes you have make difficult decisions. And sometimes there are people that have to be let go, in order to save jobs for the for the business to keep the doors open, things like that. It when you look at things in a singular way, is when you start to crumble Own your business. It’s not fun, I’ve fired people before I’ve had to let people go, it is one of the worst things in the world, because you’re looking across the desk at somebody that’s got kids, and needs to put food on the table. And you feel less worth less than dirt to be honest with you, because it’s something that you shouldn’t have to do. But to keep the doors open to keep the other people employed to benefit the majority, you have to be able to do that.
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So right now, you have to look at things as a holistic view, the collective what’s best for everyone in here, if there is a scenario where you have to lay someone off or let somebody go. Sometimes that’s necessary, even though that’s hard. And that’s about to start happening. So what you wind up seeing is that translates over to real estate. So when the person in your company lost their job, they can’t pay the rent anymore, or they can’t pay their mortgage anymore. So now they have to sell they have to downsize to get something more affordable. And it causes almost like a domino effect to go across the industry. So what you wind up seeing is, is the housing prices start to go down. So you you add fuel to that fire. So what you look at is okay, gas has started to go up, groceries have gone up now the pandemic calls the good bit of that. But it’s being it’s still going up to the point where society is kind of getting back to interacting with people even though we’re all wearing a mask and being socially distinct from everyone. But we’re still we’re still struggling for it to be able to get back to some sense of normalcy, instead of what we’ve been through the last year. It has to work itself out. And the only way to work itself out is to correct the the real estate market. So let’s let’s take for example, you’re looking at the house that you think an ARV would be $100,000 in a normal time, pandemic, current economic conditions, state of politics, state of ideology, whatever you want to throw in there. If you were in normal times where these things maybe you had one of the one of them involved instead of all four or all five ever how many you want to put in there. You can survive that because you still have a majority that is stable. Right now you have a majority that is unstable, and that causes people to feel unstable as well. And when people start feeling unstable, they panic. And you can’t blame them, because they’re in protective mode that fight or flight instinct that we all have. So you look at the $100,000 house that it should be in normal times, or with, you know, majority stable factors. And you go through and you say, Okay, I’ll give you 95 for it. Now, you look at it and go, this, this was $100,000 house six months ago. Today, this houses, I don’t know, $75,000, whatever your market trend is going to tell you is where you need to be. Because it’s not just a it’s only worth $75,000 today, but it was worth $60,000 or it was worth $100,000, six months ago. What today is telling you is, is it hasn’t stopped. So when you look for your buyers, to be able to stay in and keep you paid from buying your deals, you have to look at it of Okay, well, if it was $100,000, six months ago on a $75,000 today, then does that mean it’s 5-6 months from now, this is where you’re having to go and predict a downturn. And how hard it’s going to be every market is going to be different. Not no one, no two markets are going to be the same. You can have different cities within your area, different suburbs within your area that are going to be different. Some will weather the storm better and better than others. But you need to be able to predict the trend that’s coming. Or you’re going to wind up putting houses under contract that you can’t get sold. And then you’re going to wonder why they won’t be sold. All you need to do is go and look at the trend line, what things sold for four to six months ago, look at the list price to the sales price, how many days it stayed on the market is also an important factor. And then go look at what things were selling for today to three months ago. Look at the list price to the sales ratio there as well see how many days it stayed on the market in the past three months as well, because what’s the what the days on the market is going to tell you is how much activity is really in the market? Does the list price to sales price ratio change? Is that caused by no activity in the market less activity more at what what’s causing the list price to sales price ratio. Sometimes it’s going to be as easy as you just had an agent that wasn’t any good. So you need to factor that in as well. But when you start seeing an average, a cluster that says okay, well, the list price to sales price ratio, for three of five houses was 10%. The average days on market, let’s say it was 65 days, four to six months ago, average days on market was 45. Then you had the list to sales price ratio, excuse me, oh, maybe 5% you’re gonna be able to see what’s happening. And it’s going to help you with your with your contracts with the deals that you put under contract. Because let’s say that you see three months ago that something was a 5% list of sales price ratio. Today, it’s 10%. So you can either use 10% 12% or 15%. To know what it’s going to be worth three months from now, if it looks like six months ago was 5%. Today, it’s 10%. Same applies in six months from now, it’ll be 10% 15%. It may even be 20 25%. But you have to analyze your market in a historical context because it’ll tell you what’s happening and what is coming. So if you start seeing a lot of really reduced prices that are staying on the market longer than you think they should, that that should signal to you that there’s there’s trouble.
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So when you see trouble, you have to address the trouble with the way that you put it under contract. If you’re not, you’re going to get left behind. One thing that you can do right now is looking analyze your market because if you do it the right way, and you start getting these houses under contract, because there is a panic in the market. You’ll make a lot of money during a downturn in an economy. Be fair when you do it, because these are people in even more desperate situations than you’re used to. But whenever whenever you have a downturn in the economy, the vultures tend to start circling, and start waiting to pounce. Because, like what I did, I mean, I don’t, I don’t consider myself a vulture on it. But, you know, in 2017, I sold my house, when I was getting multiple offers the same day, next day, bidding wars and soon, and I said, Hey, I’m just going to rent until the market goes down again, so I can buy at the bottom and make money again, on the house that I live in. Unfortunately, four years later, I’m still reading, I’m never expected to rent for four years. But it’s something that I put my own discipline in, to be able to make money instead of going and buying a house, at the top of the market, and in wait for a decline in the market. And now I will be in the same boat as a lot of these homeowners and investors that we’re running across. So you practice in your own life, what’s happening. But what you what you’re doing right now, is if you if you take into account that whatever you’re paying right now is going to be more than it’s going to be worth in six months. And you relay that over to the seller where the homeowner investor, they already have a sense of something’s coming. So you’re not necessarily praying off of it. But you’re being honest, the only way you can be honest, is if you do the analysis on the market to know where your trend lines are, where your values are headed. And you can make an actual educated estimate, instead of licking your finger, sticking it up and seeing which way the winds gonna blow and making an offer that way. That’s not good business, it’s never good been good business. So those out there that do that, more power to you. But you’re probably not very successful at this, when you put the work in, in this business, you’re rewarded, it may take six months, a year, five years. But when you put the work in this business, you will be rewarded. So what I want everyone to do right now is go and educate yourself on market conditions, check your trends four to six months ago, today to three months ago, and see where your individual market is headed. Because that’s going to help you in your approach to getting houses under contracts with the sellers and be able to actually make money. Because when you get these houses under contract right now, I see it all the time people are sending me deals. Hey, this house, somebody sent me a four pack the other day, and I told him I would be in it for $240,000. And they come back to me and say, Well, this one house alone is worth $230,000. Yet it’s only rented for $1,000 a month. It’s not actual, factual, but that’s what they’re trying to portray. And all that tells me is they have absolutely no idea what’s going on in the market. So they’re fixing to get left behind. They’re gonna ask themselves, Why can I not get anything sold, instead of looking and seeing what’s going on and getting the houses under contract for what it can be sold for in a declining market, where when I say a declining market, it has already started, this is not coming, this has already started. So you need to look at things in a way of what was $100,000 today is not worth $100,000 it has not been worth $100,000 for the last three months. I need to understand what it is going to be worse than three months. And that is what I need to get it under contract for anything less, I will not be able to get that deal. So Well, I hope you’ve learned something from this episode. We’re gonna leave you with that plan on the market going down, do not get caught with your pants down. Because you will suffer all of the marketing dollars that you’re spending right now will be worthless if you do not get these houses under contract for the correct amount in a declining market. The declining market is when wholesalers and real estate investors can make the most money. But you have to put the work in both that we’re going to draw to a close.
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If you need more information you know about how to grow your business. Head over to Earltoms.com. We have plenty of stuff on there to help you out to grow your grow your business and get it. Get a good solid foundation on it so it can be successful. We’ll be back in two weeks with a with another episode to see where the market is then and maybe have something new to talk about.
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Thanks for listening
