65% rule in CA?

[Andrew Bassuk]

Hi. I'm new on the forum and have a ?? The flipping rule of thumb of 65% ARV minus repair costs makes sense in markets where houses are affordable. I'm wondering if it needs to be modified in southern CA. If I could buy a house with and ARV of $500k for $400k that had $10k of repairs that leaves $90k to cover holding and sales costs and leaves room for a reasonable profit. Do most investors in high $$ markets modify the 65% rule and will hard money lenders go along with deals that might be 75% but have a good profit potential? Thanks Andrew

[Jeff S.]

Lightening does strike every once in a while, @Andrew Bassuk, but it's almost impossible to find a 65% deal in southern California and use that as a long-term business strategy. Nor will you find a property requiring only $10k in repairs. These sell to end homeowners.

You can make a fair profit at 75% of ARV minus repairs and that's the number we use in our criteria. Beyond that, you will either be working for very little profit and taking a huge risk or, more likely, you will lose money.

Even if your numbers held up, you would be lucky to net around $20k on the 82% deal you presented. This assumes you borrowed the purchase money from a private lender. $20k on a $500k house is well within a reasonable counter-offer or appraisal spread. There goes your profit.

For reference, our average LA basin borrower spends about $40k in repairs. Thus, you would have to buy your $500k ARV property for $335k and I estimate you'd net a much more realistic $60k, or 12% of ARV. You must be sensible.

Don't push the numbers, don't assume the home will sell fast, and you don't buy a flip assuming appreciation potential. No matter how well you believe you qualified your end buyer, deals fall through all the time and often take longer than you'd like.

Good luck, Andrew.