70% rule for wholesaling to determine value?

Question

I've been doing some reading and would like to clarify some things before I move ahead. I understand that you need to  check out comps in order to get your ARV.  But what do you do when determining the value  for an as-is condition? As far as wholesalers go, do you guys use the 70% rule to determine if a property is a good deal? Or do you again look for comps and then somehow use a formula to subtract the estimated repair cost to factor in the as-is condition?

Shvonne C. · Answer

Your question about "determining the value for an as-is condition" is a little confusing.  As a wholesaler you usually would always be buying in as-is condition. I can't think of a scenario when you'd be negotiating contingencies, seller fixing things and such (maybe a more experienced wholesaler can think of instances).  The ARV (after repair value) is just that - figuring out the value of the property after it is repaired or fixed up.  As wholesalers we are usually drawn to the properties with motivated sellers and more than likely issues with the property.  That's what allows us to get it under contract for a good deal.

I don't use the 70% rule - I use 65% of ARV but that's just me.  MAO= 65% of ARV-repairs-my fee.  I will say that you have to be cognizant of your area and what are true comps.  Some of the areas I work in have a decent amount of investor activity going on so recent sales are all pretty low - those wouldn't be decent comps since those properties are being purchased "pre-ARV". That's why it's good to have your feet on the ground locally as a wholesaler.

Sharad M. · Answer

@Pedro Oliva

There are some critical numbers that you need to arrive at:

1) ARV - After Repair Value. Just to be safe, whatever number you come up with, use 90% of it.

2) Repair cost - How much is it going to fix the house? Get bids from 3 licensed, insured contractor. Just to be safe, add 10% contingency to it.

3) Profit - How much you would like to make?

The biggest issue that investors have with wholesalers is that wholesalers over estimate ARV and under estimate repair and want to make too much on a deal.

Let's say you come across a property where you determine ARV will be $120,000 and it will cost $25,000 to fix it and you want to make $5,000 on the deal. This is how you calculate your offer:

ARV = $120,000 x 90% = $108,000

Repair cost = $25,000 + 10% contingency = $27,500

Profit = $5,000

Maximum Purchase Price = ARV x 70% - Repair cost - Profit

MPP = $108,000 x 70% - $27,500 - $5,000

MPP = $43,100

Start lower than that number so after back and forth you don't pay any more than $43,100. Anything lower, you can pass a great deal to your buyer and make him happy or split with him or keep all the excess.

Account Closed · Answer

its value is different for you compared to an investor and compared to an owner occupant.

if your wholesaling than your value is as follows: ARV minus repairs, holding buying/selling costs & contingency, that total minus what you want to make as a wholeseller  = purchase price/value of the home

an investor may see the property in the same fashion just without the wholeseller portion so an investor is able to put a higher purchase price/value on it.

an owner occupant doesnt see holding, buying/selling costs as an expense. they only see repairs costs as an expense normally so they would put a purchase price/value of the home even higher than a whole seller and an investor would.

so the traditional mindset of a set value doesn't apply to real estate investing. that is more for the end buyer/user.

Account Closed · Answer

each estimate I put together typically ends up closer to the 64% ARV- repairs when actually detailing out the cost and a reasonable profit margin.

seems like the 70% doesnt even get you $10k net profit after short term capital gains on any property less than $200k ARV. And by the time from the house being under initial contract all the way to finally selling the thing.... months of time and hassle, although costs should be accounted for its still allot of unnecessary risk and time spent with a house on your mind for not much reward.

instead of using a 70% rule, do a detailed estimate on the big array of holding costs associated with inquiring and holding and selling a property, that will give you an idea of what would be reasonable for a cash buyer to need as motivation to pull the trigger. I will tell you 10 or 15k will never be it for me... rather get a part time job then risk years of cash building for a reward i could get just by working those few months and not risk $$$$$$.

Pedro Oliva · Answer

So I shouldn't worry about the value of the home in its current condition, but mainly it's arv, and if I can be able to purchase under the Max purchase price to where I can score a profit?  Am I correct in this assumption?

Luis Lopez · Answer

Well as the rule of thumb goes, the idea is to sell the property to your buyer at 70% ARV less repairs estimate.  So your purchase/offer price would have to be that price less your profit (wholesale fee).

So let's assume the ARV = 100,000, it needs $10,000 in repairs, and you want to make $10,000. The price to your buyer would be 100,000 x .70 = 70,000 - 10,000 = $60,000.  Your offer to the seller would have to be (60K - 10K) = $50,000.

To the more experienced, please correct me if i'm wrong and if I'm missing anything.  Hope this helps.

70% rule for wholesaling to determine value?

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