Importance of the 70% ARV concept?

Question

For a novice investor/wholesaler, I am curious to fully understand the concept of the 70% ARV rule. I think I know the jist of it which is being able to buy a property at a discount, or cents on a dollar. But..how do you relate this to a seller who is trying to sell their property and not feel like they're being "low balled" by a lower than expected offer? How do you create a Win Win for you and the seller?

I have spent countless amount of hours reading on the topic wholesaling and can easily say that I've read almost everything there is to know at least 5 times but have yet to read about how someone would relate the %ARV concept to a seller and still create a win win situation for all parties involved in the deal.

Also, I've been on Biggerpockets for two days now and practically read every post on the topic of wholesaling and I have to say that there is a great deal of very talented investors who are willing to share invaluable information with novice investors like myself. (A broke novice at that). It makes hiring a coach the worst financial decision a man can make. I now have hundreds of mentors available at my fingertips, as opposed to one or two and I don't have to be an experienced investor to know that without the knowledge, I will not have any deals coming my way any time soon.

I've decided to cool off the reading and take action first thing on Monday. I've already done some grunt work to find some sellers and I am also building a list of potential buyers in my market area. I must say I have full confidence as well as the knowledge to get this boat on the water.

Thanks,

Keep up the good work guys, knowledge is power.

Jeff S. · Answer

It has absolutely nothing to do with any percent of ARV used by a lender.  Some lenders don’t lend on a percent of of ARV.

Spending 70% of ARV minus repairs, will enable you to make approximately 10 to 15% of the ARV in profit.  Paying much more increases the risk you won’t make anything.

Sellers don’t care about any of this.

You have to make it known to the seller that you are an investor and have to make a profit.  The benefit you bring is a fast all cash sale, with no contingencies and no questions asked.  You’re providing a service.

This is the same reason people trade their cars in to an auto dealer instead of selling them on their own using say, Craigslist.  They know they will take a hit on the price but also know it will be a fast as-is sale with no hassles.  Yes, the car dealer will make money.

If your seller instead wants to hire an agent or go FSBO, that’s certainly their prerogative.  They also have the option of spending their money and fixing the property to market standards, so they can maximize the sale price.  If not, and they can accept that it’s Ok for an investor to make a profit, then they can be assured of getting out quickly and conveniently.

You might change your mindset from that of someone trying to steal a house at low-ball prices, which you're not, to that of someone providing a service.  Then explain the benefits of your service and let the homeowner decide.

Dawn Anastasi · Answer

I was just going to post the same thing!

Tim G. · Answer

Look at sold comps, THAT ARE REHABS.

Look for the slimmest deals out there, what % of ARV are they buying at. That tells you without a doubt what people are buying at in YOUR MARKET.

There, you have the answer on what % of ARV buyers are buying in your market.

Don't guess, this is all guessing based on someone else's regional information. I wouldn't run a business on that.

Know your market, study it and understand it well. You'll know what to offer then.

Luke W. · Answer

Agreed. I do just use it as a starting mark, and twist the "rules" to fit what I feel is working in my area. Thanks for the clarification.

Jeff S. · Answer

The 70% rule, Luke, is for estimating the purchase price of a flip, not rentals.  It’s really a rule of thumb to be used for screening. I'll add that it used to be called the 65% rule.

Rentals have their own rules of thumb, discussed all over the place here for both SFR’s and MFH, but of course you could add any other “rules” that suit your investment criteria.

What a lender would give you on a refi has nothing to do with what you should pay for a flip. The sources of income are completely different.

Luke W. · Answer

I agree with most of what you said Jeff S , however not the having nothing to do with ARV and lending. If I am buying the property for a rental, I absolutely don't want to be above 70% ARV. The lenders I have around here won't go above that in a refi. Your statement does make sense from a rehab perspective, though. Which is why sometimes a wholesaler may be able to sell one to a rehabber at a bit higher than 70% if there isn't much work to be done. Hope I understood you correctly. If not, my apologies.

Justin P. · Answer

I agree with Jeff S. Just be up front and honest. It will go a long way...and not just in RE. Being honest builds credibility.

I think the TV show Pawn Stars is a good example of how to do it. They tell the customers what their top dollar is for the item in question because they as a business HAVE to make a profit on it.

Ceasar Blackman · Answer

very well said Jeff S

Jerome Klah · Answer

You guys are a lot of help. It certainly makes plenty of sense now that I'm able to think of it as providing a service to someone in need. I am going to incorporate this mindset into every deal that I come across and hopefully make a smooth transaction.

Thanks guys,

Jerome

Mary B. · Answer

Totally in agreement with Bryan H. Disclosure in a general form only. Too much details will have you talking yourself out of the deal altogether.

There may be a how to negotiate with the seller post on BP...

Kudos,
Mary

Importance of the 70% ARV concept?

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