Need Help Knowing a Good Deal

[Kenneth Goldman]

I am looking at a house in Skokie, Illinois where the asking price is $205k. It needs roughly $35-$40k in rehab work. The comps seem to indicate the house may get an ARV of $300k tops (conservatively $290k). I would be using private investor money for purchase and rehab. Using the 70% rule, I should be making an offer of $210k minus rehab costs equaling $175k-$180k. If I buy the house at $205k, I am already $30k over the 70% rule purchase price. Furthermore, do I assume that hard costs are roughly 9% of the ARV? What is the best way to analyze this?

[Ellis San Jose]

@Kenneth Goldman

The 70% is a guide for flipping, not a rule carved in stone in my book. It helps, as you just saw, when doing a quick & dirty analysis.

I think, at least in the beginning, it is a good discipline.

What complicates things in your example, is that this is a heavy rehab. That adds risk, plus lots of capital requirements.

What if the house was in a hot market & neighborhood where there was low inventory & homes were selling fast in under 45 days.

If you didn't need very much cash to control the property, & if it were an easy property to sell as-is, then you could make a case to bend the rules.

Let's say for example you could control this same house at a contract price of $220k. It was in clean condition & could be sold at a quick sale retail price of $275k because everything else comparable was selling at $290k-$300k, but all you needed to "tie it up" was $2,500 earnest money & then close in 60 days."

Now you sell it for an all cash quick sale for $275k in 30 days, paid a flat fee agent to list it (because the market is so hot no need to market the property very hard) plus closing costs & the buyers broker 2.5%. Assume your total transaction fees are say 8%. No carrying cost because your contract was 60 days to close. So your gross profit is $17,500 & all you needed was the $2,500 check in escrow.

$275,000 sales price

-22,000 transaction cost

-220,000 contract price (80% of sales price )

-------------------------------

$33,000 gross profit (no fix up, no carrying costs)

you were out of pocket $2,500 up front.

If you were wrong you would lose your $2,500 earnest money worst case, if you are right you make $33k .

Would you break the 70% rule in this case?