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Updated over 8 years ago on . Most recent reply

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Kai G.
  • Lee, NH
2
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7
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​Why/how is it possible to buy at 70% ARV?

Kai G.
  • Lee, NH
Posted

I'm admittedly brand new at this, but I'm trying to wrap my head around how you're supposed to buy rental property at 70% ARV (or maybe 80%) after repairs costs. I do understand how that's rather desirable, giving you better cashflow, an exit strategy, etc. But I wonder how it's possible, because what's a good deal for the buyer is a 30% left on the table for the seller, and I wouldn't think too many sellers are up for that.

Here's what I can come up with as to how deals like that could happen:

  • The seller goes FSBO and doesn't have much clue, so underprices the property. (but I gather that most people do FSBO because they're trying to get top dollar, so they're more likely to actually overprice).
  • The seller uses a realtor/MLS. In that case, I'd expect that at least the realtor will have a clue, and not price the property way low. I suppose there is the occasional distressed/desperate seller who's willing to accept 30% below list, but I suppose it's hard to tell from the listing. So how would you find those? Make a hundred lowball offers until one sticks?
  • Properties that get sold outside of the public (MLS/zillow/craigslist) market. But again I don't quite see why people would sell for substantially less if they could get more in the open market?
  • I guess the exception I can see are properties that need substantial repair before being sellable in the regular market, because regular buyers would shy away from them, not get financing, etc. I can see getting a substantial discount there, though even that may be limited somewhat now, since rehabbing/flipping properties seems to have become rather popular since the last bubble / HGTV, so I suppose there's competition there, too. Anyway, personally those feel like too much of a risk for me at this point, as I don't have any experience with hiring/supervising contractors etc, and I suppose doing this the regular remodeling / general contractor way, any potential profit would go to the GC rather than me.

So maybe I'm missing something, but it seems that for a newbie it's rather hard to get those kind of deals on properties? (And of course that makes some sense, too, because otherwise everybody would be doing it...)

Most Popular Reply

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Russell Brazil
  • Real Estate Agent
  • Washington, D.C.
30,165
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17,478
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Russell Brazil
  • Real Estate Agent
  • Washington, D.C.
ModeratorReplied

The 70% rule is one we typically apply to flips, not to rentals.

Also a seller isnt leaving 30% on the table. Work needs to be done to a property to achieve the higher price.  There are areas where there are large price spreads between rehabbed and non-rehabbed properties, and this is where you will find a lot of flips taking place.  There are other areas where the numbers can not be achieved and thus may not be an area good for flipping.

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