Breaking the 70% Rule on High Value, Low Repair Properties?

Question

So I'm new to wholesaling and am trying to figure out the basics of pricing.

Everything that I've come across so far tells me to make an offer of no more than 70% of the ARV.

But what if the house is worth a lot and needs minimum repairs?

What if my ARV is 390,000 and the house only needs 5k worth of rehab.

If I can pick it up at 337, and the investor buying it from me stands to make roughly 30k profit....

Is this not a wholesale deal?  is it not reasonable to serve this up as a wholesale deal and charge 3k for the assignment?

would you buy this deal?

or is it written in stone that unless it's 70% of the ARV then it's not worth pursuing.

in this case here we are actually at 86% of the ARV, but it only needs 5k worth of work.

Shouldn't that be a factor?

Matt Geerts · Answer

I'm a bit confused... if the house just needs a little paint and polish, why would you wholesale this? Why even use a realtor? Just buy it and sell it FSBO and walk away with 20k+. I am suspecting that the numbers are just a little too optimistic here.

Brent Coombs · Answer

@Chris Piper, you just missed the entire point of the OP's question! He already knew YOUR formula! But @Matt Geerts got the point! Cheers...

Chris Piper · Answer

@Brian Rudderow The easiest way to figure out how much to pay and sell for is as follows:

MAX ALLOWABLE OFFER

ARV-30%-Repair costs-Your Profit= MAO

I usually offer 15% less than my MAO to leave some room to counter if needed.

SELL PRICE

ARV-30%-Repair costs= SELL PRICE TO CASH BUYER

Make sure your comps are accurate and current, and make sure your repair costs are accurate.

Brian Gibbons · Answer

@Brian Rudderow

THIS IS CALLED A COOPERATIVE REHAB.

I would get a realtor that has retail buyers to walk through.  Get a fast sale price.

I would get private lender rehab money.  Pay 10% interest in 3 months.

I would buy it and give the seller a a note for equity payable in full when the home re sells.

Sellers' Net = Comps - Private lender loan plus interest - 10% sales costs w commissions and closing and other costs - $10K for you

Private lender gets all money when home resells.

You make $10K.

Michael Le · Answer

@Brian Rudderow, the formula is not just 70% ARV but 70% ARV minus repairs. So if the repair numbers are low then that would reflect in the formula. I think that answers your question.

However, as someone else mentioned, your repair numbers are really low. I don't know what size house $390k is in your area but in my area it's pretty big. And just new paint would eat up a good portion of those repair dollars. New people always tend to underestimate repairs so be careful with that.

Also, for some investors $30k would not be enticing enough for a house that price. That's a lot of money to put down for that. That's risk. Unless the market is really hot then why wouldn't the seller just go through a Realtor.

$390k ARV minus 6% Realtor commissions leaves you with $374,400. Minus repairs of $5k would be $369,400. Then there are holding costs relating to insurance, tax, utilities etc while you repair and market the house. And then there is the cost of the money to buy the house - either your own, private money, or hard money loan. Let's say that's another $8k and leaves you with $361,400. Assuming they buy it from you for $340k, that's only $21k profit.

Steve Vaughan · Answer

If in at 337 sub2, lease option or owner-financed, easy entry without having to put new financing on it, you will increase your buyer pool significantly.   Don't forget to ask sellers - if I can get you more for your property or speed up your exit, would you consider keeping your existing financing in place for a period of time?

Low equity pretty houses are great for sub2's and lease options.  There are more ways to engineer transactions than the 70% model @Brian Rudderow.

Brian Rudderow · Answer

Good info, thanks.  Will definitely keep that in mind.

Sam Dangremond · Answer

I would offer one humble suggestion: most wholesalers don't break out a "wholesale fee" separate from the sale price.  Opinions differ on this, but personally I don't think there's any reason to tell your investor-buyers how much you're making on the deal.... just tell them the total purchase cost including whatever markup you want to get.

Bobbi Jones · Answer

Brian, I buy from wholesalers in Co Spgs and Pueblo, so please add me to your list.  It is the rare house that only needs $5000 worth of rehab.  If it's in that good of shape the seller will likely use a realtor.  Of course it depends if it's going to be a flip or rental, but that's a super low rehab.  Make sure you understand rehab #s and play it straight on what needs to be done; don't lowball it.  And make sure you give an accurate ARV.  Good luck getting houses and I hope to buy some from you soon!

Anore' Allen · Answer

every market is different, every buyer is different. 70-75% ARV minus repairs is the norm. It can fluctuate due to the fact that the 70% "rule" adds a buffer for repair cost mistakes (I think it's 10% of the 30% discount ). We can typically wholesale to a contractor who'll be doing some of the work for 75% of ARV minus repairs, remember you're saving them marketing dollars and most importantly the time and hassles that come along with negotiating with sellers.

Breaking the 70% Rule on High Value, Low Repair Properties?

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