Now this house could be sold TOMORROW for $190,000. Can someone please pound into my brain that the 70% rule DOES work. Or does it only apply in under $100,000 neighborhoods? Please provide an example of a property you put under contract that fit this criteria.
However … ARV - repairs * 70% … DOES WORK for me… but according to my investor list thats not there formula.
My area is similar to yours in price. The average home is around $250k. The market is slow up here in NH and my buyers expect 65% of ARV - repairs. So these offers are getting pretty low.
I think it all depends on what your experienced buyers are willing to pay.
What im saying is … ARV * 70% - repairs is a HUGE discount. Basically $70,000 under what you can get TODAY with one day on the market.
Now (ARV - repairs) * 70% is more realistic, but I dont think thats what an investor is looking for.
So what im saying is … can someone give me a real life example of an offer they got on contract with ARV * 70% - repairs. B/C in my market I dont see anything close to that. Even the ‘big time’ investors send me deals WAY off. Even if it fits ‘70% - repairs’ … once you go check out the ‘real’ comps, they’re like $30-40,000 off the ARV price. Using 3 family units from 7-8 months ago with an additional 1000sqft as comparable to a 2-family.
IMHO - The ARV * 70% - repairs is a “safe” formula that is meant to protect the investor’s profits. I know people who do not use the formula for properties over $250k. I know others who use it up to $500k because they are taking on more risk and want to be paid for that risk. The 70% formula does work but it may not work for the specific property that you mention below AND it may take A LOT of offers to get one accepted.
Often times for houses in the price range that you list below your offer will come out to 50% of the ARV. "Generally " if you can pick up a property at 50 cents on the dollar you will come out profitable. If you work your numbers backwards you are already over $195k (purchase for $125k + $70k) when you add closing and other soft costs…
What’s important for you to keep in mind, based on your post below, is that if your primary exit strategy is wholesaling to other investors then you “have” to use their purchase criteria/formula in order to ensure that you will have a purchaser for your deals. Unless you are willing to purchase & rehab it yourself, it doesn’t really matter what you think is a deal or not, it really only matters what your investor/buyers will pay.
Remember, the only way to know is to make offers! Investors who make offers get deals! Sounds like you are succeeding in this! Keep it up!
F-props, the people you will be buying from are people who can’t get it together to get their property sold for what it is worth.
There are people out there who literally won’t lift a finger to wipe off the kitchen counters. They will say right out loud" let the buyer fix it" when there are repairs to be done. In this market, with lots to choose from, no one wants to buy their mess. They still refuse to clean or paint, so eventually, they will sell it to you for pennies. They’d rather lose half the value of their property than to clean and prepare it for sale.
Why do people do such a dumb thing? Beats me.
Or your buyer will be desperate, foreclosure, divorce, job loss, illness, trouble with the IRS. They simply do not have the time or the money to prepare and market.
$70,000 is a major renovation. Nobody will buy that and take on that much work except for a real estate investor. The investor, is not going to pay generous amounts.
If the seller knows how to market a fixer, or he has an agent who knows how to market a fixer, maybe he can get the $190,000 that you know you could get. In that case, you won’t be able to buy it.
But if he doesn’t know how to market it, he won’t be able to sell it. At some point, he will just want out, and then you buy it.
You are not going to be able to buy every house you look at for 70%. You will only be able to buy from really motivated sellers. People who want out and don’t care what they get as long as the house goes away.
I’ve used the formula successfully on a property whose ARV was $100K. Have you considered taking less for your assignment fee? A few thousand dollars might mean the difference between your offer getting accepted or not. If the profit is there, you’ll still be able to get it sold. Also, remember that the formula will work with owners who need to sell, not just want to sell. Good luck!
Your current worth assumption of $230k is highly incorrect. Performing $70k of repairs will take few months to complete. Where is the holding costs? loan payments, tax, insurance, and risk factors?
Second, why would anyone pay $230k, spend $70k to rehab to get market value? I understand thats not what we are offering, but this means $230k is not the correct value.
Now, the 30% discount associated with the 70% formula sometimes is not even enough…
How much is the investor being charged in points on their hard money? (3-5%)
Marketing costs to sell this house? (1-3%)
Holding costs? (1% * 6 motnhs = 6%)
Closing costs to resell (4%)
If sold through a realtor (6%)
Best case, investor makes 10% profit
Worse case: 5% profit
It is extremely important to understand the cost of buying and selling not just a formula. The 70% formula comes from the hard money lender requirements, but it does not always makes sense depending on the amount of rehab.
Finally, to earn 15k in assignment fee, you need to get the investor better than 70%-rehab costs.
First and foremost, YOU need to know WHAT formula your buyers are using AND use that to determine how to structure the deal to meet THEIR requirements.
Second, the 70% “rule” doesn’t always work. It depends greatly on the market and the market conditions. An extremely hot area, if you try to hold out for 70%, you’ll be left in the dust. In a soft market, using 70% may make you go broke.
Third, dollar amount can make a difference, BUT, using the 70% as a guide will always steer you in the right direction. A $10K profit on a $100K house is NOT the same as a $10K profit on a $500K deal. More risk should equal more reward.
Fourth, I agree that your assignment fee is pie in the sky thinking. The guru “nonense” is probably more in that figure than anything else. $2-5K for that type of deal is more in line with real world numbers.
I agree w Raj 100%. You need to find out what investors are paying in each area, and go from there. It takes some work and studying, but once you get a feel for what investors are paying, it makes things a lot easier. There’s really no cutting corners- you need to get out there and start studying your market. Otherwise, it’s pretty much a guessing game.
I think it varies from market to market, but here in Tampa, if I were to follow the 70% rule, I would be screwed. I’m trying to get in around 60% max in most areas.
From my experiece the formula changes quite a bit depending on price if your buying homes under 50K then you need to do better than 30% below to make a decent profit up to about 150k the 30% seems to work decent. Once your past that mark 30% gets a bit tougher because you are dealing with alot larger numbers. That has been my experience at least.