70% rule, obsolete?

Question

We have all heard about the 70% rule. You want your total estimated cost with purchase price, rehab, and holding/closing costs to add up to 70% of the ARV. Around where I am, Ocean County NJ, I am not seeing it. Case in point, a solid deal came on the market, knowing I would not land the deal at my estimated 70% ARV I bid much closer to 80%. Guess what? I was outbid. I met a couple of seasoned investors afterwards who told me they had also placed bids on the property and their bids were even lower than mine. The only deals I see happening at 70% are assuming either a significant risk i.e. underground oil tank, occupied properties [which can really slow down your turnover] or close to the shore where the properties need to be raised etc..

Am I missing something?

Amir Weinmann · Answer

I don't know about this rule

i am investing in the greater Boston area where usually deal with properties around the 300-400K price range. The flip expected to end up with 700-750 ARV..

Based on these numbers I should have bought my properties for 80-100K less than what I actually buy them. I just can't see it happens in the Boston market. Even Foreclosures and short-sale deals here don't sell so low. It is a sellers market for long time now.

Just some numbers from my last deal

Bought 370K

invested 250K (including everything + holdings for 6 months)

Sold for 725K

deduct the 5% fee and I still made (698 -620) ~78K..  Not bad at all..

if I had followed the 70% (in my example it is ~86%) rule then I should have bought this property for 254K.. Well not in a life time.  Yes, i can wait for the "right deal" for 2-3 years but don't you think that it is better to let you money work, make 4 times 78K then one time let say 178K (assuming you will find the right 70% ARV property).

conclusion, I think that this rule applies better on low price markets and low grade properties (Indeed, the roof for a 725K property will cost you the same as for a 135K property, however when it comes to flooring or counter-tops.. the investment is much higher on the up scale properties)

My two cents contribution for this discussion

Account Closed · Answer

@SOLOMON F

Maybe it was not such a great deal. IMHO The best deals this far long after Sandy are found by seeking them out and using your own boots on the ground finding deals before they hit the open market. Of course best to have cash in hand.... The deals in Ocean Monmouth Middlesex NJ are out there but again they will not fall from the sky onto the laps that wait.

Russell Brazil · Answer

There are a number of problems...the 70% rule might apply perfectly in some places, and not in others.  Would you buy a property at 90% if you could still make a $50,000 profit on it? That is possible in some locations. There are other locations where you could get the property at 50% and still not have enough profit in the deal to make it worth the time to rehab it.

Instead of focusing on the percentages if they do not work, focus on the profit in the deal regardless of the percentage.  Also identify the areas in your local market where there are big price spreads between rehabbed and non-rehabbed loans to identify areas that are good for flipping.

Jeff S. · Answer

"You want your total estimated cost with purchase price, rehab, and holding/closing costs to add up to 70% of the ARV."

Not quite, @Solomon F. . You want your purchase price and estimated rehab costs to total less than 70% of the ARV.  All other expenses, including holding costs, are included in the remaining 30%.  If you use your formula above, your offers will be so conservative; you'll never get an offer accepted.

This formula, which is not a rule but a rule-of-thumb, works and is not obsolete.  It assumes a hard money loan, realistic rehab costs, and that you will be paying an agent for at least one side of the flip.  These three costs will normally account for the lion's share of any flip and are easily estimated.  Run the numbers.

If you are in are in a relatively high dollar state (like NJ?), with ARV's in excess of $250k, you can generally push the percent a bit.  I use 75% here in CA and estimate a 10% to 12% of the ARV as profit. From comparison to many real deals, I know this is accurate. To maintain this profit on lower value properties, you should really stick to a purchase price plus rehab cost less than 70% to make about the same return, since fixed costs have a greater impact against the profit on lower dollar properties.

"… knowing I would not land the deal at my estimated 70% ARV I bid much closer to 80%..."

I assume you mean 80% minus repairs?  Why would you do that?  The idea is not to buy a property at any cost.  It's to earn a profit.  Anyone can overpay.

"I met a couple of seasoned investors afterwards who told me they had also placed bids on the property and their bids were even lower than mine."

Makes sense.  Experienced investors would naturally bid lower.  To make your point, didn't you mean they bid higher? Don't forget, some investors have lower construction costs, perhaps self-fund and don’t have high holding costs, and are maybe brokers who can absorb sales commissions. Alternately, just because they are experienced doesn't mean they know what they are doing.

If you can't write one, most of the larger hard money lenders in your area are normally happy to provide you with a state specific spreadsheet that can estimate all expenses for a flip.  If you approach a few and try them, you'll likely see that this rule-of-thumb works.

Solomon F. · Answer

Thanks for the great reply. In a strong sellers market where it is reasonable to expect the property to sell quickly, an estimated 13-15% ROI makes sense to me. Obviously, I am assuming some risk with that because things can and do go wrong with a project, but overall I think the numbers are still with me.

Solomon F. · Answer

I need to build my contacts to find a solid wholesaler. So far the ones of spoken to either claim the property is worth ARV much more than it is or don't actually follow thru on bringing the deals.

Chris Grenier · Answer

There are numerous 'rules' you will read about but the reality of it is in todays market (in Central Florida at least) all those rules are obsolete and if you make anywhere from a 13-15% ROI on a Flip then you are ahead of the game. Unfortunately it is very easy to filter out and distinguish between the newbies and seasoned investors when looking at their offers and their unobtainable profit desires & assumptions

Brad B. · Answer

@Solomon F.

Try buying off-market so you don't have to directly compete with people who overpay. There's probably only a handful of people in every market who actually pay what they should for property.