70% x AVR rule? Common?

Question

Houston investor or any others, do you all use the 70% AVR rule? I find it hard to get deal accepted at 70% that's why I'm asking. Are most rehabber happy with other higher percentage?

Cody L. · Answer

Something to remember when you think about the "70% rule" is your 70% might not be someone elses 70%.

You're making assumptions about comps and ARV that may or may not be accurate.  Someone else might think the ARV is higher or lower, thus changing what someone else needs to pay to buy at "70%"

Also what you think it might cost to fix might not be what someone else thinks it might cost.  And all parties could be wrong.  Thus a 70% deal is really a 80% deal, or 60% deal.  Or 50% deal, or 100+% deal (that's bad kids)

So it's good to focus on trying to get to 70%, but make sure the calculations you use to see if you're at that % are accurate.  You might be losing your 70% deals to other 70% buyers because they're just being less conservative with their estimates.

Jay Hinrichs · Answer

70% rule is so 2009   not relevant in todays market place in any market that has intense competition.

there simply is not enough houses to feed all those that are taking class's on how to wholesale  read BP and want to wholesale and or how ever they decide they want to wholesale.. its dog eat dog out there.

I find also if your competing against those that do a lot of their own work.. some of my best borrowers were contractors themselves.. if they could buy a property get their normal profit for all the work they did to the house plus a bonus.. great deal for them.. virtually impossible for investor to compete.. only thing that keeps investors in the game is so many contractors simply cant do deals for a number of reasons.. but the ones that are sharp they are killing it.

Van Blackman · Answer

@Alejandro Flores,

How you doing, sir?! Nice to see another fellow Houstonian doing his thing!

My organization is currently purchasing on average 25-30 distressed SFR's every month in Houston, all over the city. Ranging anywhere from Woodlands all the way down to Galveston. Let me tell you, I totally believe you when you say that it's hard to get a deal accepted at 70%, because those deals are VERY challenging to find in our market.

The reason that it is difficult is because there is SOOO much competition in Houston!! Everyone wants to be an investor, and if they're not, then they want to be a wholesaler! How many bandit signs do you see at every street light you stop at? I literally have to offer on 20 houses just to purchase 1 for my organization. That's a 5% conversion rate! Don't get discouraged if you lose out on A LOT of deals. Trust me, I get rejected all day long, that's the game.

The 70% Rule is a rule of thumb that many investors use in other markets. It could be considered the worldwide standard that is preached in every RE investing book you've read, and it even may have been true in Houston many years ago, but is not the case today. If you want to have a shot at the wholesale game, I would run my numbers closer to 75%-78% just to even be considered as an option by most sellers. But, you're going to have to build your buyers list with investors that can actually buy those from you. At the end of the day, a wholesaler is only as good as his list of buyers.

The best of the best deals will not be found on the local MLS. You really need to dig. Speak with every neighbor, put a sticker or door-hanger on every distressed house, talk to everyone at the gas station when you're filling up your tank, send letters, throw signs.... the list is endless! But it's doable, I know.

And if you ever do come across the mythical 70% deal in or around Houston, please be sure to give ME a call! LOL. You would have people lining up at the door for that over here.

Hope this helps my friend!

Good luck to you.

-Van

Jay Hinrichs · Answer

@Sandy Sawyer  I fully understand all of that.. my comments are based on why is it so tough to find deals right now.

well in my market  your competition does not have to pay a contractor.. has some cash and does their own deals.. wife is a realtor etc etc. this knocks the investor right out of the equation when they have none of that.. I can't for the life of me see how anyone who wants to flip houses also is not their own realtor... that's a huge part of the profit.

Jay Hinrichs · Answer

@Sandy Sawyer  nope I mean strap on a tool belt and dig in !!!  here in Portlandia its almost mandatory if your going ot make any kind of real margin.

Manolo D. · Answer

@Alejandro Flores Then there you go, in SoCal, a lot of people bite 80%, but basically, if a wholesaler makes 5k for Houston that ARV is 200k, vs a wholesaler here making 5k on an 800k ARV, it's way easier to pay. On investor side at 80%, if they make 10% profit there is 20k and 80k profit respectively. Let's say you take out your fee on the 10% investor profit, then that will make it 15k and 75k profit respectively. Play with your math, but ask your buyers  for their opinions. Maybe your competition takes his fees under the 30%.

Andrew Johnson · Answer

@Alejandro Flores Well this is a guess, but if Wholesaler B has a huge list of cash-buyers that close then he/she can afford to operate with less of a spread.  In this case, it appears you aren't competing with "Houston" or "the market" but one other person.  In your niche the commonality of the 70% rule is irrelevant because you're competing against someone that doesn't follow the rule.  That said, are you sure you're losing on price?  Will he/she close on a property if they can't assign the deal?  Does their wholesale agreement look different than yours?  Different terms?

Sandy Sawyer · Answer

@Jay Hinrichs Account Closed

If DIY means "delegate it yourself" then I'm one of those contractors! (ha ha)

Please add me to your buyers list if you have anything in SW Houston.

Sandy Sawyer · Answer

@Jay Hinrichs I know, but when you consider that you are either paying Uncle Sam from your profit, or paying a hard money lender to do the deal in the first place, or the opportunity lost because you are spending all your time and sweat burning the daylight on your own jobs, it's like whack-a-mole! You can bypass Uncle Sam by doing deals within your IRA, but prohibited from swinging your own hammer. :-/

Sandy Sawyer · Answer

I agree with @Manolo D. In a region where you're working with much larger numbers, you can afford to fudge on the margins a little. But even then you have to be careful because being off on your calculations by 2% can cost you a lot more money. Keep in mind too that investors looking to rehab and hold have the luxury of time to let the value catch up with overpaying for the property. So you'll want to collect contacts with these kind of investors. They are buying with their own money so not as worried about hard money. Hope this helps.

70% x AVR rule? Common?

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