I’ve been doing my research and I feel a lot more confident about investing than I did last week. Thank you to everyone who posts and replies as well. But I was doing some calculating and I keep hearing about this .7 or 70% that you multiply the ARV by, but I’m not clear as to how investors come up with this 70%. If someone could reply to this question, it would be greatly appreciated.
Here’s how you do it. Let’s say you find a property with an ARV of $200,000 and the property needs $30,000 worth of work and you want to make a $10,000 wholesale fee.
$200,000 X 70% is $140,000, then subtract $30,000 for repair costs and another $10,000 for your fee. After that your offer should be around $100,000 if you are using the 70% formula. However,in this market I would go down to 60%.
The percentage is based on market conditions in your area. If the market is steady or good the traditional 70% would suffice but if the market is bad you would lower the percentage down the worse the market the lower the percentage.
Thank you for the quick response, I’m understanding it a little better. Thanks again! :smile
The 70% can be confusing.
Brian explained the formula great.
But lets look at the 70% from a different viewpoint. The 70% actually represents the rehabbers potential profit, in a backwards way mathmatically.
Most rehabbers want a 30% profit margin for all of their deals. This 30% will cover their holding costs, financing costs, closing costs, and hopefully some profit after it is all said and done.
So to do the calculation the long way using the 30%, the formula would look like this:
ARV - (ARV x 30%) - repairs - wholesale profit = offer to seller.
Kind of confusing isn’t it, and it takes a few more calculations. So to shorten the calculation and make things simple when you use ARV x 70% you are automatically building in the 30% profit margin. If you took the ARV x 60% you would be building in a 40% profit margin.
Run some sample numbers to see that they are the same: ARV = $100,000
ARV - (ARV x 30%) = $100,000 - ($100,000 x .3) = $100,000 - $30,000 = $70,000
ARV x 70% = $100,000 x .7 = $70,000
See how much quicker it is. Of course then you would take the $70,000 and subtract the repairs and wholesale profit, just like Brian explained.