The Science of Flipping - Should You Wholesale, Wholetail, or Rehab, and Why?

Episode Date: December 3, 2020

The choice is tough sometimes! But what are the things you need to be looking at in order to make the right call on a deal to either wholesale it, wholetail it, or rehab it?

What is up, everybody? Welcome back to another episode of the Science of Flipping podcast. I am your host, Justin Colby. And if you have not yet jumped over to my YouTube channel, please make sure you jump over to the YouTube channel. I knock out a video a day about all things real estate business and entrepreneurship. Just go to YouTube and check out justincolby.com. This podcast is all about real estate, all the strategies, tools, tips, tricks, processes, you name it. It's all real estate on this show, baby. So I hope you guys like it. This show is going to be about when to use a separate exit strategy. I have a lot of people asking me if they should buy a home for rehab versus a wholesale. And then as I look at that, a lot of people are missing an exit strategy called

wholetailing. And so let me just kind of talk you through my process of the four exit strategies we will use. We will wholesale, we will wholetail. I'll define that here in a second. We will also rehab and put a property in our rental portfolio. Now here is the criteria. I'm going to use a wholesale deal on national average to be 10,000 K profit. Now for those doing deals, I do understand you can make much more than that, but you also at times can make less. So let's just use the argument that you are going to make $10,000 on average for a wholesale deal. So that is great. So you go into a property looking to make your $10,000. Now, let's say a property is a little bit newer. Let's say it was built in the 90s, not really beaten up, everything looks

pretty good, doesn't need a full-blown rehab per se to be livable. Well, that might now make you think about a wholetail. Now, it doesn't have to be in the 90s, but I'm just using the example. Let me take a step back here, guys. Let me define wholetailing. Wholetailing is like a cousin of wholesaling and a cousin of rehabbing because you are actually going to buy it. Okay. So unlike wholesaling, you're actually going to buy it. However, unlike rehabbing, you're not really going to put any money into it. You're not going to remodel the home. Now, if you are doing paint and let's say just carpet, okay, I would still consider that a wholetail. That's not a remodel or rehab. But most of the properties that I wholetail, I literally don't spend any money.

I might clean the home out if the seller was a hoarder or whatnot, but I will literally buy the home and relist it. It's usually in that type of condition that makes and fits a good wholetail property. Now, why would I wholetail something and actually have to go either find money, raise money, use my money, get hard money, et cetera? Well, I would want to wholetail something if I believe there's a market that doesn't have much activity. There's not a lot of active listings and there's a lot of solds. Okay. So there's not a lot of people listings and there's a lot of solds. Okay. So there's not a lot of people able to buy much because there's nothing out there to buy. And obviously people like buying in that area because there's a lot of sold comps. So now what would make the threshold

for me to pass up a $10,000 wholesale fee to actually go find money, take the property down, close on the property, list it on the MLS, and then deal with taking in offers and buyers that may come. Why would I do that? So for me, my numbers are this. This is where you might want to take some notes. If you're listening to this in the car, you might want to rewind this part. I will wholesale a property and make 10K. If I can 2.5X my wholesale fee, if I buy it, put it on the market and sell it, if I can 2.5X net in my pocket that wholesale fee, then I will really, really, really look at doing a whole tail. Okay. So for example, you might be able to make $20,000 as a wholesale. That's a great deal for sure. I will wholesale most things at $20,000. But if I take a look at the surrounding area, the neighborhood, what's on the market, how many sales, and it doesn't really need a big

rehab. I don't have to go in there. It's not a dumpster fire, so to speak. I might start considering, hey, could I make 45 grand if I whole tailed the property by listing it on the MLS? If I could, I will immediately start really diving in very quickly to make sure that the numbers work out. Obviously, you need to account for holding costs. I always account for four months holding costs, always. Debt servicing, which is depending upon who you ask, you might even lump into holding costs.

Obviously, taxes, any power and water that comes about, and if there are HOAs. So you do have to account for those costs. So once I subtract that cost for four months, if I see a number at $45,000, and let's just say the home was built in 1993, and yes, the cabinets might be dated, they're not the new look or the new color, but really the home is in perfect condition, I'm likely going to that. I need to, again, underwrite it as such. I have spreadsheets to do so. If you want any and all my resources, just go to thescienceofflipping.com. A lot of ton of free resources there. As a matter of fact, if you are interested in speaking with me further about your own business

and challenges you're having, I'm happy to do that as well. Just go to the science flipping.com, fill out a quick business strategy call, and we'll get straight to it and see if I can help. So then you have wholesale, wholetail rehab. Now, why would I pass up on a wholesale or even a wholetail to actually have to go through the entire process of rehabbing? Now, why would I pass up on a wholesale or even a whole tail to actually have to go through the entire process of rehabbing? Now, for those of you know me, I've done well over 400 actual remodel rehabs. The bane of my existence are the contractors. I'm sorry if you're out there and you're a contractor. I have yet to find a contractor who is put together enough not to go over budget and not to go over time. And so I finally have found a great company that I do have to pay a little bit more.

So I have to adjust for that. But they are dialed in. But even them, even they can make mistakes. For example, a rehab I'm doing right now, a condo I'm doing right now. For one reason or another, it was supposed to be done. I'm recording right now, a condo I'm doing right now. For one reason or another, it was supposed to be done. I'm recording this training on Thursday. I'm actually recording it on Thanksgiving. So happy Thanksgiving to each and every one of you. Be very, very thankful you're alive, you are breathing, you have your health and you have your family. So back to it. Happy Thanksgiving. Even my construction company that I love and has done a lot, I mean, thousands and thousands of homes, their flooring guy forgot to put or didn't put or whatever the carpet in. And it's a condo. So I tiled the kitchen area and bathrooms. Everything else has carpet. I don't know how that happens. They're dialed in,

they have itemized bids, they're on point with timing and scheduling. All of a sudden, the carpet guy of all people doesn't finish the job. Everything can happen. Rehabbing to me, the bane of my existence is the construction part. I love you guys. And, and, and, you know, most everyone does a great job, but it is a challenge for me. So why would I take that on? Well, if it is, you know, something that if I do a certain amount of upgrades, I want to effectively double my wholetail cost. So, or I'm sorry, profit. So if I could wholetail it, and in the example, I said, I could wholesale something for 10 grand. I could wholetail it for And in the example, I said, I could wholesale something for 10 grand. I could wholetail it for 25. I would make that decision.

Well, if I could flip it and make 50, I would also make that decision. Now, again, let's be very clear. I'm making some assumptions right now. I'm in a certain price point. My price point is under $300,000, right? I am in a certain price point of rehab. I do not do projects that are going to be north of $60,000 rehabs. I just don't do it. That's why I stay in

a price point under $300,000. So again, I'm all in usually where I can net out at minimum 10% of the exit price. I'll say that again. I can net out 10%. So if I sell it for $300,000, I can make $30,000 minimum. So again, I could wholesale it for 10. I could hotel it for 25. If I can remodel it and walk away with 50 net after all my closing costs, after all my holding costs, after the debt servicing and the loans, then I'm going to really, really now look into the remodel because the profit margin is there. Another reason why I still don't super love the remodel is depending upon the size of the job, how long is the remodel going to take? Because you buy it in roughly, let's just say the remodel is 45

days. Then you put it on the market. And if you get an offer in the first week, you accept it, the loan approval, all the loan contingencies, that's another 45 days. No matter how you slice this, you're going to close in around 120 days, almost inevitably. So with that said, I would still probably look at the wholetail model, but, you know, with those numbers, rehabbing makes sense for me. And so that's really the system. That's how I look at it. Now, obviously the last is the buy and hold for a portfolio play. And, you know, gone are the days of the 1% rent, right? 1% of what you bought it for. You know, people now are happy for 6% to 8% cap rates.

Essentially, that's like, you know, for someone who doesn't know what that is, it's called a capitalization rate. Essentially, it's like a return on your investment, an ROI. It is a very easy way to try to explain that, right? And so that's, you know, you know, hard to find these days, the six to 8% cap rates. So it can be challenging. And quite honestly, most of the properties that do give me a good eight to six to 8% cap rates are also really good wholesale hotels and rehabs. So as a moment in time, I have

not been over egregious on buying rentals. I'm not in a huge rush in my life to accumulate this because I do believe there are good times to do this and be a little more bullish. If a good deal does come by my radar, then I will definitely be taking a look at it as a buy and hold. If you are in a great buy and hold market, this is also another reason why I opened up Oklahoma City because the price point there is even lower than Phoenix, much lower, and it lends and tends to lend itself to be a better rental market. And so that is a little of my hope there is to wholesale and buy and hold there in Oklahoma of all places. So, Hey, if you guys like this, I'd love a review on iTunes. Obviously make sure

you're over to YouTube. Just look up Justin Colby. Uh, I have a video a day, all things, business, real estate, and entrepreneurship. And Hey, if you want to talk to me, just go to the science flipping.com. Let's chat. See you guys on the next episode. Peace.