The 70% Rule...Does it really hold true in Today's market?

[Jamie Wooley]

Hello All,

I am a new investor in the DFW market.  I am looking for a house to purchase wholesale as we speak to rehab and having trouble doing so.  One because I am new to the industry so my contacts are slim and two because the homes that are being sent to me do not come close to meeting the 70% rule.  The dallas market is by far a sellers market right now and I just don't know if it is even possible for this rule to be followed right now.

Please any investors (Rehabbers, Flippers) let me know if this will still work in my market or if I am going to need to adjust this a little bit to be competitive right now. If so, how do I need to adjust it, and what are your suggestions? Just to give you an idea of where I am at... I am looking at properties around $250,000 ARV or below and anywhere in Plano, Garland, Wylie, Sachse, Murphy and parts of Dallas.

[Bill Gulley]

  @Jamie Wooley those that go by purchase rules can miss the jewels  :)

The 70% "rule" is a quick guideline to judge a potential rehab-flip and the tendency seems to be for those new to RE to treat these percentage guidelines as something that can't be violated. Not true, really.

While I understand investor lingo, let me point out that saying you want to buy "wholesale" is not really correct phraseology in real estate, where you really want to buy is at a "distressed price". Yes, it's two words instead of one, more difficult to say and use, LOL. Investors don't really buy "wholesale" they purchase distressed properties at distressed values or the buy in distressed circumstances where the seller is highly motivated to move the property for less money than they should be getting.

That explanation, took more than two words to state, which is why most use incorrect terms, but in that explanation, definition, is also what you need to be looking for, distressed properties or sellers or both. In any seller's market, expecting to pick up a market ready home off the MLS to improve is usually very hard to do. In a seller's market the degree of stress (as in stress testing) is less, meaning that a marketable property will move on the market quicker without distress.

You won't be buying "wholesale" off the MLS unless there are some extreme issues, an example might be a rehab that isn't finished and the owner is walking away, an estate sale, a foreclosure or possibly one that was initially so over priced initially that Realtors no longer show it (these will have been on the market too long, you'll see a DOM or days on the market being 120/180 days or more). There can be distressed properties listed, but when they are listed they are in the public domain and competition will exist. Obviously, the more competition, the less likely even a fixer upper will sell at a truly distressed price.

So, what to do? Need to do what listing agents do, locate owners willing to sell, but your goal isn't just to find a seller, you need to find a distressed seller. Here are some areas where you might find them:

Bankruptcy

Divorce

Estate situations, obituary notices

Fire Sales, fire department calls

Foreclosure, pre-foreclosure*

Home Owner's Association liens

Hospital matters, health issues (an agent here picked up deals in waiting rooms!)

Incarcerations, folks don't get to stay at home.

Insurance losses, storm damage

Job loss, or Job transfers, business news announcements give you these leads.

Just Married, some will dump one place to move in with another

Nursing Home admittances and transfers

Renovations by owners, building permits, they get over their heads

Tax liens

*NOTE! Pre-foreclosures are an area that is highly regulated by federal law with serious teeth, you may not advise or assist in this area unless you are a certified credit counselor by HUD or an attorney, this is not an areas for new investors without having professional assistance.

In a seller's market you need to identify the social and economic underlying issues of a distressed property owner or property.

Now, as to the 70% rule (guideline). This is basically covering two settlements, holding costs and a profit margin. The first assumption is that you take title for a rehab, which you don't always have to do. You can use business entities or construction contracts to partner with an owner, that can also save the cash needed to get in and work out a profit split after your costs and reasonable profit is paid. It also assumes that many of the settlement costs will be paid twice, not necessarily, as an example, a seller can pay for the title search and n a flip you can hold open title having the end buyer pay costs. So, there can be some fine tuning in the costs assumed under these purchase rules,

You really need to take a pencil to the acquisition, holding period expenses and costs of sale as applied to a specific property. These rules of thumb are fine for a drive-by, but the higher price range will skew the percentage approach taken.

Need to sharpen you pencil, identify the market, look for the social and economic aspects that drive distressed situations and go from there. :)