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Updated over 6 years ago on . Most recent reply
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Flipping Homes & 70% Rule Questions!
So I have been a Realtor in the Myrtle Beach SC area for about 5 years now. I have been wanting to start doing some flips as well as acquiring rental properties and I have been doing a lot of research first. I don't really have any questions about rentals but for flips, I'm coming across some problems.
I use the 70% rule to evaluate max offer price. When I go to the foreclosure auctions or bid on any properties, I'm usually outbid and it's usually by over 10k or more making me feel like the 70% rule doesn't apply to my market. I don't know if I'm just over estimating repair costs or if I'm just missing something.
As a realtor, I know my ARV is spot on that's the easy part for me. But I feel like I'm missing something. I did hear of another rule that said take the ARV x 90% to take out holding costs, then subtract repair costs and the profit you want and use that as max offer price. Has anyone used this rule?
I just don't want to lose money on my first flip. I have found a condo in my area that is a perfect flip but my math says I need to get it for $65,000 max and the property is listed at $115,000 and the ARV is $128,880. I just know if I could get this for $65,000, it would be gone already so I know I can't get it for that price. I'm assuming 25k in repairs.
I doubt I'd get this under 90k so I'm struggling to make the numbers work to actually obtain the property. Any ideas would be greatly appreciated!!!
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@Jonathan Edmund It's not you, it's the market. As a realtor I'm sure you're aware of current market conditions, especially in Myrtle Beach. Margins are very thin because there's a lot of money from more expensive markets looking for a home in Myrtle Beach. Many of those investors are paying cash and, to them, the numbers look fine since they're not factoring in the lost opportunity cost on their money. I'm sure you've sold plenty of condos to these folks.
What's left over, such as the courthouse auctions, usually goes to folks with established businesses - professional contractors and long-time investors with rehab crews in place that can turn your $25k flip into a $15k flip.
All of those rule-of-thumb equations you read everywhere are regional. As @Teri Feeney Styers said, run your hard numbers and decide what you're willing to selling for. For instance, I follow the 1% rule with my investments, and that's getting harder and harder to meet in Myrtle Beach. I've never heard anyone talk about meeting the 2% rule in our market, but people in the Midwest do it all the time. Folks in California would probably be darn happy to meet a 0.5% rule.
As a Realtor you have an advantage you may not have thought about already. You're already advertising for listings. Keep your eyes open for properties that need a lot of work and offer to list it, or to give them a quick cash offer yourself to save them time and commissions.
Bottom-line: Invest when it makes sense for you, not based on rules. Those rules change.