Brand new and seeking AVR help!

[Kyle Brown]

I'm brand new to the game and a potential buyer I had been in contact with told me that he likes investing in and flipping houses with "70% AVR or less minus restoration costs". What exactly does he mean by that in easy to understand terms?

Thanks!

[J Scott]

Originally posted by @Kyle Brown:

I believe so, Joseph! Just to make sure though:

So if Zillow estimates that the house is worth $100k (given that there's nothing wrong with the house), he's saying that he wouldn't want to pay more than $70k? (Which would include purchase price and all restoration costs)

First, don't trust Zillow when it comes to value -- learn to estimate ARV yourself or work with a good, local real estate agent.

Second, the 70% rule says that if you purchase at 70% of ARV minus rehab costs, you should generally make a reasonable profit. This is because the assumption is that the 30% remaining will cover your "fixed costs" (purchase costs, holding costs, selling costs) and your profit.

There are some caveats though:

- This typically works best for houses in the $100-300K range.  Lower-end houses you may see too thin margins or elevated risk and higher-end houses your profit margins will end up considerably higher than your competitors and you'll likely close fewer deals.

- This assumes that your financing costs aren't tremendously high, as they sometimes are with hard money lenders.

- This assumes your happy with about 12-18% ROI on your invested capital (for an all-cash deal).

In my opinion, there are better ways to evaluate a deal.  Do a search for "The Flip Formula" to see what I recommend...