What is formula for coming up with percentage of ARV

[Deborah Hill]

What is the formula for percentage rate of ARV. I've heard the standard is 70%. But then I hear that rate may have to be adjusted. And please give example. Thanks

[Phil B.]

Hello,

Generally, the formula to determine the maximum price you'll pay as a wholesaler is:

ARV x .7 - cost of repairs - expected profit = max offer price.

Example:

You know the neighborhood and pull comps to determine a house, in perfect move-in condition, is worth $100,000 but after walking through the property you determine it needs $15,000 worth of repairs to bring it to that move-in ready condition. For your effort, you expect to be paid $5,000.

$100,000 x .7 = $70,000 - $15,000 in required repairs = $55,000 - $5,000 profit = $50,000 maximum offer price.

From there you adjust as you see fit.  If you can add some profit you offer $44,000 initially then sell it to a rehabber or landlord or whoever for $55,000.

He in turn uses cash or a hard money loan to fix and flip the house. Hard money lenders will only lend at 65 or 70% of ARV as I understand so in order for your end buyer to fund the deal, he needs to acquire it at 70% of ARV or better or he won't be able to get the financing he needs. This applies to a typical wholesale deal.