My Latest Deal Proves the 70% Rule Doesn't Always Work

This is a case study from an area of Fort Worth known as Como. What makes this area incredibly unique is the parts of the city that are dilapidated and filled with older homes (1950s+ builds) and stray dogs walking the street. There are nicer parts of these neighborhoods that have been much better taken care of and not neglected, so I don’t want to paint a gloomy picture of this area. It’s an interesting community, to say the least — they even have their own parade annually, I hear. The neighborhood has lots of character, even for the parts of the community that are clearly in pain.

However, one thing that makes it unique is that it is surrounded by an affluent community with very high end homes. It’s a very interesting juxtaposition, seeing million dollar homes next to homes that you might be able to pick up for $70k+ retail. This is another case study that will drive home the importance of never following the 70% rule blindly. It always depends on the exit strategy for the property. In this case, the offer I made would have never worked (it would have been too high under normal circumstances), but since the buyer wanted the lot for luxury homes, it worked!

As a result, many land developers and home builders are trying to buy up as many lots as they can and hold them. The plan, it seems, is to control as much real estate as possible in the area, and when they reach critical mass, start flipping the lots and turning them into high end homes. And that’s where I came in for this case study.

Securing the Lead

Como is not one of the main areas that I market to; actually, I don’t market to that specific area at all. I tend to target houses that are a little bit newer construction and not quite so old and needing heavy repairs within certain neighborhoods that I like. But that’s the great thing about my lead generating website — it is ranked for many top search terms related to my field, and for most of them, my site ranks in the top three positions. As a result, I get tons of leads from all over DFW. This is one of those leads.

When I initially got the call for this lead, I was en route to another appointment and fumbled my phone as I tried to reach it while driving. I answered the phone, and it was what appeared to be an older male talking to me.

Interrogated by the Seller

He began to ask me pretty bold questions right off the bat, and that’s pretty unusual even for me. One of the first things he said to me is, “How much will you give me for my house?” Now, you have to remember, this is an internet lead. I had no idea who this person was or even the house location at that point. Taken aback, I started to try and calm him down a bit and back up several steps. I explained to him how the process worked and what he could expect from me. After a lengthy discussion, he decided to schedule a meeting with me, and we loosely booked the appointment.

When I got back to the office, I began researching the house. Just from the crossroads, I could tell this was probably going to be more of a “war zone” type of property — something that I don’t normally consider, even for wholesaling. But sometimes I do make exceptions, as I did for this hoarder house or this former drug house in Fort Worth. But this was in the middle of January (last month), and usually things are a bit slow for me right now, so with only handful of other appointments for that week, I decided to go ahead and book it officially.

On Site

Upon arriving at the property, it looked pretty rough. The house had a composite roof, but it looked very worn, with granules missing all over it and signs of weathering throughout. The front door had been boarded up, and the front window had a huge piece missing, as if someone threw a rock through it.

The interesting part on the inside was the partial rehab. The kitchen was actually done quite well and over-rehabbed for the area and price point, with new cabinets and granite countertops. The rest of the house needed quite a bit more work, but it was mostly cosmetic. After shooting the breeze with the seller and talking about our favorite sports teams, he decided he would like to go ahead and sell to me.

Normally, I go ahead and try to make offers or write up contracts on the spot, but for this lead, I was more hesitant. I always look out for the seller’s best interest. The reason I didn’t immediately jump in to write up the contact was confidence — I wasn’t confident that I would be able to find a buyer for this type of product. I try never to exercise an option in a contract unless absolutely necessary, and I have only have had to do so once so far in my career.

Finding a Buyer

When it comes to war zones, in general, it can be both good and bad if you are trying to wholesale. Unfortunately for me, I wasn’t confident that I had even a handful of buyers who would consider purchasing in this particular area. But I did remember a land developer mentioning from a previous REI meet up who indicated he might have interest. So I scrolled through my phone contacts and business cards and finally found the guy.

I gave him a call and told him about the property, and immediately I could sense he was interested. Feeling a little bit more confident in the transaction, I decided to go ahead and put the house under contract at this point since it seemed like I would have at least one solid buyer lined up. Long story short, that one phone call did land me a buyer, and he is looking for more in this area after this transaction.

Right now the guy has a tenant in the house basically to cover the holding costs after he did some cosmetic repairs. He is probably charging a little bit under the market rent. Remember, the plan here is not to buy and hold or keep tenants in their long term. Instead, they are looking to amass as many of these houses as possible to reach a critical mass and start flipping whole areas of the city all at once to turn these into prospects for luxury homes. In other words, they want the lots, not the houses themselves, and having tenants pay the holding costs is just icing on the cake in the meantime.

The house’s ARV was only worth about $65k after we comped it out, but the land itself was worth several times that for the developer. The moral of the story is keep that Rolodex of REI contacts handy — you never know when you might need it.

Have you been involved in any interesting deals lately?

Let me know with a comment!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.