Does the 70% rule really work?

Question

Reading about the 70% rule, but am interested if this really works for some on here.  For an easy example I'm looking at a smaller home for a quick turn around that is asking $74,500.00  The after repair value is going to be around $85,000 so they are already too high with an asking price.  However, with the 70% rule that would put me at a $42,150 which includes the estimated $10,000 fix up cost.  Thats over $30,000 off of the asking price......  Does this approach really work??

J Scott · Answer

I prefer to use actual numbers as opposed to relying on the 70% rule (which has issues for very high and very low priced houses).  Here is how I do it:

http://www.biggerpockets.com/renewsblog/2010/03/10...

To use the formula, you need to be able to accurately estimate ARV:

http://beta.biggerpockets.com/forums/311/topics/73...

You need to be able to estimate Fixed Costs:

http://www.biggerpockets.com/renewsblog/2010/03/17...

You need to be able to estimate rehab costs:

http://www.biggerpockets.com/flippingbook

And  you need to determine your desired profits...I strive for 15% of resale  value with a minimum of $15K (for lower priced projects).

Andrew Kerr · Answer

Hi @Blaine Cox, yes it does work, but it is tougher to do these days. A lot of the super easy deals are gone, more folks are renovating homes, there is less inventory, and people are willing to take tighter margins. Also, to get those killer deals you tend to buy off market properties, or properties that need a lot of work.

I also see a lot of folks today to does around 80-85% of ARV.

Keep in mind the 70% rule, is a rule of thumb, it builds in a heft margin, selling costs and room for error.

Will Barnard · Answer

Good point but keep in mind that you may have gone too aggressive to get your deal and under your circumstances outlined in your other thread, may have overpaid. Point is, the 70% rule is a guideline, not a rule and it requires many adjustments for each investor in each area, and in each circumstance. These guidelines are meant as quick analysis tools and not the end all be all decision to move forward or pass.

Also, with properties with resale values under $100k, I would argue that you need better than the 70% rule and same goes with multi million dollar deals with huge rehab budgets. On deals priced from $300k-$1M, you can be very successful in the 80% range (but not too much over that) assuming you have the right teams and systems in place.

Jonathan Yip · Answer

Definitely agree with what many have said here. Just started out flipping myself. 70% is a good benchmark, but depending on the market your bids will get written off until the cows come home. I threw out hundreds of offers and wouldn't even get the time of day until I got more aggressive with the numbers. Just do all your math and make sure the margins still make sense.

JD Martin · Answer

If you're going by rules, 70% should be your all-in based on ARV. If the ARV is 85k then your all in is almost 60k ($59500). So if you have $10k of repairs you are looking at a maximum purchase price of $50k. You're not basing 70% on their asking price. If that was the case you could be way out of the ballpark from the get-go if the asking price is too high.

In any case, always look at the individual deal. "Rules" only mean if you should bother taking a deeper look at the property - it's a quick way of skimming to not waste a lot of time on things that can't work.

Vaughn Smith · Answer

@Blaine Cox It CAN work, but its largely based on geography and how shrewd of a negotiator you are, it sounds like in the example above you needed a lower purchase price or a way to decrease the rehab cost

Brad Shepherd · Answer

Blaine, remember that you're looking to solve problems for home owners. You need sellers who are motivated to sell. If you're looking at a house with those numbers, there's not enough motivation on the seller's part and you're not solving anything for them. They're better off listing the house with an agent. You're not going to get them to come down $30k on their price. If you're looking for a rental, then sure, maybe it could work, based on the rent rates. But for a flip, move on and keep looking.

Garrett Hogan · Answer

J Scott nailed it above. Nothing to add there. 70% rule does not work in many markets. I too strive for the 15% of ARV as a minimum return.

Does the 70% rule really work?

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