Can someone help me understand how to find the 70% rule?

Question

Here's my problem:I've been working with Realtors, Wholesalers, and just looking at my own deals online. I've been looking over a lot of deals, and their numbers show their ARV estimates, Rehab estimates, etc.Not one single deal has shown anywhere near the 70% rule of expenses, and that's only considering purchase price and rehab estimates. These numbers haven't taken into account the wholesale or realtor fees, holding costs, closing costs, etc. Every single deal has been between 75% and upwards of 90% of ARV. Could someone please let me know if I'm missing something? Are these list prices from wholesalers including their fees? Maybe I'm getting concerned before looking long enough, or maybe I'm confusing my numbers. I refuse to let my first deal be a loss due to settling for something above the 70% rule. I just need some help understanding how it all gets pieced together in a legitimate deal. Thanks, guys!

Kenneth Garrett · Answer

@Ben ValentinThe market has improved so finding deals are a little more challenging especially if you are using the MLS. There is a lot of competition. That doesn't mean you can't find deals on the MLS. Some markets, the 70% rule doesn't work and they are using a 75-80% rule. Make sure your rehab numbers are not to conservative. Analyze properties you are interested in. Watch them and see what they sell for and what rehab was done to them and what they sold for. Study your market. I spent the first year tracking the industry before I bought my first one. Just like you I didn't want to make a mistake. Find a mentor to help you. Attend REIA meetings and see what people in your market are doing. I'm sure you will do great in your investing career. It does take time otherwise everyone would do it.Good Luck.

Bob Okenwa · Answer

@Lynne HaSellers do off-market deals because they're looking to get cash quickly without doing repairs and often sell the home as-is to investors. Doing it off-market with cash usually means you can bypass using and paying for real estate agents. So you save 6% and get to close within a few days. Much more appealing than listing the home on the MLS, doing an open house, having showings, going into escrow, signing tons of paperwork, paying agents, etc.

Cornelius Garland · Answer

@Ben Valentin I definitely think you should still try to find deals the way you have been, but also start your own marketing campaign. You want to be generating leads from multiple sources so you'll always have a surplus of deals coming your way.I didn't want to sound like I was being too critical of wholesalers. There are probably a handful of serious ones in your area. You need to find them and get on their buyers' list. Whenever I have a wholesale deal, it won't be made public because I market it directly to my cash buyers that are in my CRM. This is likely why you aren't seeing the best deals because these transactions are happening privately.

Cornelius Garland · Answer

@Ben Valentin I understand your issue. Essentially, most of the "deals" that you'll come across aren't really deals at all. You can pretty much guarantee anything that's on the MLS is retail value. If an agent has a hot deal and he works with other investors, then they've already called their cash buyers and sold it before it can reach the MLS. If you're going to work with agents, then I would reach out to the ones who work with foreclosures. They work with a lot of discounted properties; however, you'll still encounter some competition and may find yourself in a bidding war.Wholesalers can be very shady. A lot of them may be trying to market deals for other wholesalers, or they may be new and not know how to evaluate a deal properly. Oftentimes, they think that just because a homeowner wants to sell their home that they have a deal. They'll get the home under contract and market to cash buyers hoping to find someone with little experience to purchase the property.I suggest you start generating off-market deals yourself. This is really how you'll be able to find the deals that fit your buying criteria because you'll be negotiating with the seller directly. Have you tried generating a mailing list, SEO, or cold calling?

Chris Purcell · Answer

Look harder....

Frank Chin · Answer

You just got to be patient and persistent. Beside the 70% rule, my wife had a 100 property rule. According to this, if you looked at 100 properties, there'll be a fluke. Even for properties represented by agent, and in a hot market. I got the first two properties that way.For the first property, FMV is about $210K, I got it at $150K after about seven months of looking, about 5 - 6 properties a week. How did it happen? The arrogant owner tried 1-1/2 years selling at FSBO when prices were going up $50K/year. A realtor came along, told him it's worth more. He signed a contract with the agent still insisting he's right. I was the 2nd one to call the realtor to see the place, but when we got there, a customer whom she just showed to house hours earlier, was there talking to the seller trying to cut her out of the deal. She's so mad that she told him he either sell the house to me, and if he tries anything funny, she'll sue him. He agreed to the deal that night.The second case was a $180K advertised for a house that I know was worth $225K. How did that happen? Finally, the agent admitted to me they made a mistake, they told the seller they'll get him $180K net, but the girl in the office got it wrong, and advertised it for $180K. Then the house was advertised for $225K for several months after, and every week, I called about the same house, saying I'll pay $175K. Then, one week the agent called me, would I do it for $185K. I was perplexed, said "what happened"? Told me these two guys, the owners, go partying every weekend, every night, and they can't show the house. Her exclusive contract will end in one week, and she did all this work for nothing. I was the only one calling every week. Every one else gave up.The funny part of it is, I managed to get an inspector in, found a leaky roof. When I went to contract signing, the seller was screaming the roof it's not leaking. What happened? The agent said "All right, I'll reduce my commission and pay for your roof. Then she said to me afterwards "I'm sick of these guys, so if I made $2,000 commission, not $30,000, that's OK.My wife was right about one thing, you have to go to 100 houses. The 1st time around, I got tired after about 70 houses, and she said you promised to see 100. To keep her happy, I went to see a few more, when I ran into the arrogant jerk on my first deal. Talking about jerks, he took me to small claims court several months after closing. Made such a scene in court, the judge told him "if you think you didn't make enough money on the sale of the house, next time ask for more, but don't waste the court's time".Who says REI can't be interesting.

Charlie John · Answer

hi @Vee Vu I guess I calculate it different. Holding costs to me are things like water, electric, property taxes, insurance, etc while owning the property. If my Arv is 200k and the flip will take 6 months, that formula gives me 4K to cover those costs which is very accurate for that kind of deal. I take interest costs for my loan out of the deal profit.

Ben Valentin · Answer

@Lynne Ha Are you referring to purchasing off market or selling off market? As far as I know, purchasing a property off market is so you can get it as cheap as possible. Then selling it publicly like you're saying is to get the highest sale price possible. But I'm a newbie as well, so I wouldn't know for sure!

Ben Valentin · Answer

Jeffrey Hotz That would be great! I'm in the Orlando market. Shoot me a PM with the info, I'd love to connect up!

Jason Richey · Answer

Functionally speaking the 70% rule in my understanding is to what you should max offer, not necessarily what they are going to ask or accept.You have a house with ARV 100,000 and are asking 90,000. I offer 70,000 or less and since you're desperate you accept.Incredibly simplified and unlikely to ever happen that straightforward, but that's the general gist as far as I understand it