Modifying the 70% ARV formula to capture more contracts? Yes or no?
Real Estate Entrepreneur · Owasso, OK · Member since 2015 · 220 posts · 154 votes
Modifying the 70% ARV formula to capture more contracts? Yes or no?
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Investor · Dallas, TX · Member since 2014 · 2k+ posts · 1k+ votes
11ySeveral things to consider here.
1. The 70% Rule and the 2% Rule and every other "rule" are just rules of thumb. They aren't gospel. Each deal is different. Each investor is different. An investor needing to execute a 1031 Exchange may be more than willing to take a neutral or even slightly negative cash flow and bank on appreciation and rent escalation, because it's cheaper than paying capital gains. Or, a flipper who uses their own cash and doesn't have the same holding cost burden may easily be able to pay more for a propery and still make the same profit I would.
2. The market is so tight in Dallas right now that full-time investors (particularly smaller players) are paying more for deals, because less profit is better than no profit, particularly if you are dependent on that income.
3. 2% is a mirage in most reasonably desirable areas of DFW. The market rebounded so quickly from the sub-prime crisis that rents haven't caught up with property values. We're in an inverted rent:value situation that is compounded by the ridiculous lack of inventory.
Now...what you're actually describing, in terms of having specific investors with specific criteria, is reverse wholesaling. You have a buyer, before you have a deal to sell. In this case, you have a lot more leeway and flexibility than when you are straight wholesaling. You know precisely what your buyer is looking for, what their profit/cash flow thresholds are, and you can go find that deal. If you have a buyer in place, then by all means go find a property that meets their needs, regardless of the numbers. But, if you don't have a buyer in place, then it is always safer to stay with the fundamentals.
Also, remember, this is particularly true in DFW right now, even a good deal may not make a good buy & hold property. Rental rates and property taxes take a toll on buy & hold deals. I analyze every property to see what the available exit strategies are and what the best exit strategy is. That way I know who to pitch it to and how to position my pitch.
Good luck!
16 Replies
- Investor · Nashville, TN · Member since 2015 · 688 posts · 607 votes11yMichael Slockers just know your investors in your market. I personally would never buy anything that's a buy and hold that doesn't meet the 2% rule. I also would never buy a flip that isn't ARV x .7 - repairs. But I have investors that are cool with 1.5% of rent. If you know you're investors that you wholesale to you might be able to grab more contracts. Always ask the question what return are you looking for that will solve your problems
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
the metric of 70% - costs etc.. is pretty tough one in most markets these days.. unles your in low value areas or rental dominated areas.
if you have investor that want cash flow then 85% under market value is pretty good really
- Wholesaler · Anaheim, CA · Member since 2014 · 64 posts · 16 votes11y
FWIW,
I recently sold a wholesale deal in the DFW area in which I had little expectation to sell at all.
These were two 8 year-old houses in good condition with new roofs.
The seller owed $106k on each and needed to net a minimum profit of $25k on both properties.
We sold one at $115k and the other at $120k.
These had existing long-term tenants as well, which must have apealed to the buyers.
As an investor I wouldn't have looked twice at these deals, but they sold on the 1st day of inspection!
I learned that perhaps in some rare cases such as this, One should always look for the 70-80% discounts first, but for those stubborn owners who won't budge on their price, perhaps you can get them under contract and offer the property up at their price during a short option period. If it doesn't sell, have them reconsider their price and try again at a more realistic number or walk away.
- Investor · Dallas, TX · Member since 2014 · 2k+ posts · 1k+ votes11y
Several things to consider here.
1. The 70% Rule and the 2% Rule and every other "rule" are just rules of thumb. They aren't gospel. Each deal is different. Each investor is different. An investor needing to execute a 1031 Exchange may be more than willing to take a neutral or even slightly negative cash flow and bank on appreciation and rent escalation, because it's cheaper than paying capital gains. Or, a flipper who uses their own cash and doesn't have the same holding cost burden may easily be able to pay more for a propery and still make the same profit I would.
2. The market is so tight in Dallas right now that full-time investors (particularly smaller players) are paying more for deals, because less profit is better than no profit, particularly if you are dependent on that income.
3. 2% is a mirage in most reasonably desirable areas of DFW. The market rebounded so quickly from the sub-prime crisis that rents haven't caught up with property values. We're in an inverted rent:value situation that is compounded by the ridiculous lack of inventory.
Now...what you're actually describing, in terms of having specific investors with specific criteria, is reverse wholesaling. You have a buyer, before you have a deal to sell. In this case, you have a lot more leeway and flexibility than when you are straight wholesaling. You know precisely what your buyer is looking for, what their profit/cash flow thresholds are, and you can go find that deal. If you have a buyer in place, then by all means go find a property that meets their needs, regardless of the numbers. But, if you don't have a buyer in place, then it is always safer to stay with the fundamentals.
Also, remember, this is particularly true in DFW right now, even a good deal may not make a good buy & hold property. Rental rates and property taxes take a toll on buy & hold deals. I analyze every property to see what the available exit strategies are and what the best exit strategy is. That way I know who to pitch it to and how to position my pitch.
Good luck!
- Rental Property Investor · Los Angeles, CA · Member since 2013 · 119 posts · 51 votes11y
As a flipper in north New Jersey finding deals that fit the 70% rule is pretty tough. For my most recent deals I've been generally coming up with a max purchase price using ARV x .77 minus rehab costs but that's because I've been able to borrow cheaply using a couple conventional mortgages and another deal I'm doing with my own cash. If I were to borrow more expensive money I would have to tailor my % of ARV downwards. 77% of ARV is on the thin side but as @Hattie Dizmond said less profit is better than no profit.
Originally posted by @David Tankersley:
FWIW,
I recently sold a wholesale deal in the DFW area in which I had little expectation to sell at all.
These were two 8 year-old houses in good condition with new roofs.
The seller owed $106k on each and needed to net a minimum profit of $25k on both properties.
We sold one at $115k and the other at $120k.
These had existing long-term tenants as well, which must have apealed to the buyers.
As an investor I wouldn't have looked twice at these deals, but they sold on the 1st day of inspection!
I learned that perhaps in some rare cases such as this, One should always look for the 70-80% discounts first, but for those stubborn owners who won't budge on their price, perhaps you can get them under contract and offer the property up at their price during a short option period. If it doesn't sell, have them reconsider their price and try again at a more realistic number or walk away.
David, I don't know you or your business, so judging just from this post. Statements like this is what give wholesalers a bad reputation.
Taking a deal with "little expectation of selling", that you "wouldn't have looked twice at" as an investor, and making a quick buck by offloading it to someone else, is not wholesaling - it's fishing for suckers.
Just because you can "walk away" from an overpriced deal under contract, does not make this the right thing to do. If it sells, some (likely newbie) investor just walked into a potentially losing deal. If it doesn't, you've left the seller in a worse position than where they started.
And finally, I would strongly caution any newbie wholesalers regarding this statement:
for those stubborn owners who won't budge on their price, perhaps you can get them under contract and offer the property up at their price during a short option period. If it doesn't sell, have them reconsider their price and try again at a more realistic number
This is starting to border on representing the seller as an (unlicensed) agent. Great way to get in hot water with TREC for practicing real estate without a license. Please be careful how you talk to sellers - it's "sell me your house", not "let me help you sell your house".
[Off my soap box, thank you]
On the original topic - the 70% "rule" is no such thing. It's a quick filter to see if a deal is worth looking into further.
The podcast with @J Scott had some great discussion about how to pull apart that 70% number. It boils down to hitting a specific profit goal for yourself and/or the end buyer, after factoring in all the costs of the project.
Can a house that doesn't meet the "70% ARV minus repair costs" filter be a great deal for the right buyer? Absolutely! Especially if your market is tight, and investors are willing to take smaller profits on their flips. But you should be well aware of what these numbers look like for the buyers in your market.
- Wholesaler · Anaheim, CA · Member since 2014 · 64 posts · 16 votes11y
Dmitri L.,
You make some very strong and rude accusations for one who doesn't know me.
My comments were regarding the numbers in a deal that I believe you and I would agree would not fit the standard for what would be an acceptable deal, but I was only keeping to the topic of numbers and how it is that sometimes deals don't have to fit the 70% rule. Perhaps my comments were strong, but this in no way represents how I conduct my business or my ethics. What I left out was the following:
The seller was motivated to sell for reasons I did not meddle into, but needed a price much higher than my initial offer. I gave a presentation explaining my sales process and how Icame to the price offered and which also explained the benefits of selling through a whol;esaler as opposed to the retail process. He was intrigued by this angle and the cost savings found in the wholesale process. It was the seller who did the math and realised that selling retail would get him more money, but it was he who proposed the questions that we sell at the prices settled-on if we could find a cash buyer in this range.
I in fact did discourage him from this idea at first as the DOM in this market would have been pretty short ( 60 days or less). He did askme again to look into this and so we found another wholesaler who is known for selling low-margin deals. This wholesaler looked atthe numbers and believed he could make it work. So, what I then did was explain this to the seller, who agreed to an option contract for two weeks and at the end of this period we could either lower the asking price or he could then decide to sell via the retail route.
Fortunately for all parties, we found cash buyers and all parties were happy.
So that being said, I apologize if some of my choice of words were offensive to you, but I find your accusations even more offensive. Perhaps instead of throwing me under the bus in a public forum you can ask questions to clarify my statements in a less hostile manner.
As a Christian I would never conduct myself in any manner that you are implying.
You can chose to believe me or not, but if you do I will be expecting an apology.
- Real Estate Entrepreneur · Owasso, OK · Member since 2015 · 220 posts · 154 votes11y
Thank you all for your thoughtful responses!
In summary:
1. Know the market
2. Know your buyers' needs/desires/terms
3. Be honest, of course
4. ROT are only ROT
@Hattie Dizmond, I'd like to talk to you more. I have family in Southlake and it sounds like you are doing a lot in that area. I may DM you with some additional questions! Thanks!
- Investor · Dallas, TX · Member since 2014 · 2k+ posts · 1k+ votes11y
Michael...would live to talk. Feel free to PM me or reach out directly via the email address and phone number in my signature line.
- Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes11y
I look at rentals all day long. The 70% ARV doesn't factor into my calculations. I'm looking at cash flow. Getting there sometimes requires a massive discount vs market values but in some markets the 2% places are popping up all over.
I roll known repairs into the mortgage if possible. So the price is important, but the relative price isn't.
You mentioned "know your buyers." If you were talking with me and started on ARV I'd assume you were trying to sell me a flip. If you opened with "the tenants are paying $xxxx/month" you'd have my undivided attention... until you got the price :) As @Hattie mentioned, not much worth buying in the rental market down that way.
- Real Estate Entrepreneur · Owasso, OK · Member since 2015 · 220 posts · 154 votes11y
That's fantastic @Aaron Montague
I appreciate the insight and definitely see how catering to the monthly cash flow is of great interest to the buyer in this case. But just curious, how much does a strong equity position play into your decision? If it is a 1.5% cash flow but you're buying at market value, is that okay with you?
- Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes11y
Market value is fine as long as I'm hitting my numbers. Honestly 2-4 unit properties don't really have a consistent market in my areas. They probably make up less than 15% of the buildings available at any given time. More in urban areas (25% of sold 1-4 in the last 12 months in Boston, MA) less in suburban (12% in Woburn, MA).
So the "market rate" is more or less made up. There aren't a lot of times I can point to a 12 month trend where 7 3-family properties "just like" this one went to market and sold. The current pricing model for newly listed triple deckers in East Boston seems to be "find the last sold one and add $20k."
I'm putting 25% down on most of these purchases. The equity pretty much comes built into the purchase. I'd love to do zero down, 100% owner financed deals all day, but they are few and far between :)
The 1.5% isn't something I look at for more than a few seconds. Once I delve into the actual numbers the spreadsheet takes shape and I can formulate a price fairly quickly. If the price looks like I can get it, I'll go after it. The worst that happens is they say "no." But if it started as a 1.5% place and then the numbers got me to $125/door cash flow and 15% Cash on Cash return, then yes, I'd be good with the deal.
How close are you to being able to close a deal on a buy and hold property directly?
If the numbers would work for you with financing, they may look even better to a buyer putting in more cash. Also cash buyers could be potential private lenders.
- Real Estate Entrepreneur · Owasso, OK · Member since 2015 · 220 posts · 154 votes11y
Thanks again for another good response. I'm learning a lot on this forum.
I can close a deal today if I give the appropriate number to the seller. So I'm avoiding the 70% stuff because this is going to be a long-term hold in relatively decent condition.
Market value based on comps is around $125,000; the property needs about $18k in estimated repairs; the owner has no mortgage, and I'd like to offer 81k, then turn it to a cash buyer for 86k.
So for 86k + 18k repairs, that cash buyer would be in for 104k. Rent is 1250/month. Are these numbers any good from a buy-and-hold strategy? I was up late last night trying to understand MORE about some of the rental metrics. My rental buyers have simply told me, "if the numbers look good, we'll buy".
To me a $21,000 equity position + good cash flow (I THINK?) seem like the numbers work. Still doesn't meet the 2% rule... 1250/104000 = 1.2%
Again, thanks for the input. Any input relative to these specific numbers would be hugely helpful. I struggled last night to find the RIGHT spreadsheet for seeing the big picture.
Originally posted by @David Tankersley:
Dmitri L.,
You make some very strong and rude accusations for one who doesn't know me.
My comments were regarding the numbers in a deal that I believe you and I would agree would not fit the standard for what would be an acceptable deal, but I was only keeping to the topic of numbers and how it is that sometimes deals don't have to fit the 70% rule. Perhaps my comments were strong, but this in no way represents how I conduct my business or my ethics. What I left out was the following:
The seller was motivated to sell for reasons I did not meddle into, but needed a price much higher than my initial offer. I gave a presentation explaining my sales process and how Icame to the price offered and which also explained the benefits of selling through a whol;esaler as opposed to the retail process. He was intrigued by this angle and the cost savings found in the wholesale process. It was the seller who did the math and realised that selling retail would get him more money, but it was he who proposed the questions that we sell at the prices settled-on if we could find a cash buyer in this range.
I in fact did discourage him from this idea at first as the DOM in this market would have been pretty short ( 60 days or less). He did askme again to look into this and so we found another wholesaler who is known for selling low-margin deals. This wholesaler looked atthe numbers and believed he could make it work. So, what I then did was explain this to the seller, who agreed to an option contract for two weeks and at the end of this period we could either lower the asking price or he could then decide to sell via the retail route.
Fortunately for all parties, we found cash buyers and all parties were happy.
So that being said, I apologize if some of my choice of words were offensive to you, but I find your accusations even more offensive. Perhaps instead of throwing me under the bus in a public forum you can ask questions to clarify my statements in a less hostile manner.
As a Christian I would never conduct myself in any manner that you are implying.
You can chose to believe me or not, but if you do I will be expecting an apology.
David,
Thank you for the clarification. I certainly apologize if my comments were offensive. It was not my intent to offend, but to discuss the issues at hand. Admittedly the tone may have been more confrontational than necessary, although I did try to preface with the fact that I don't have any direct knowledge of the matter to avoid giving others the wrong impression.
Back to the meat of the subject - the flow of your deal certainly makes more sense as you lay it out more fully, namely that you were fully transparent with the seller throughout the process - which is a great best practice and example for others to follow.
I would still caution newbies against language such as "selling through a wholesaler". This sounds awfully close to acting as a broker. As always, I'm just a voice on the Internet, and this is not legal advice, only my opinion. Legal advice should be obtained from a lawyer. Lawyers have malpractice insurance that gives you recourse if you get bad advice.
I stand by my opinion that the original post as written was somewhat misleading, but appreciate your clarification, which helps move the discussion forward and provides more info to others who may be reading. As an educational forum, this kind of discussion is valuable to have in the open, in my opinion. Again, apologies if my comments caused offense.
Regards,
-Dmitri
- Wholesaler · Anaheim, CA · Member since 2014 · 64 posts · 16 votes11y
Thank you Dmitri.
We're cool now! ;-)
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