70% Rule?

Question

I have read that the 70% rule should be applied as follows before making an offer.

Example:

$100,000 ARV

minus 20% profit

minus 10% holding and closing cost, including title insurance,
          four to six months interest on loan, and realtor fees

equals $70,000           (70%)

minus repair costs       $15,000

minus loan points         $1,500
___________________________

Purchase price       $ 53,500

Is this correct and is this still applicable in today's market?

Andrew Massaro · Answer

I didn't read your response, Jon.  So I apologize if I say somethg that appears redundant.

Randy, you need to know what the buyers in your area are buying at.  You can find this out by talking to them, interviewing them.  Ask them at what percentage of ARV they buy at.  You can also get on the email lists of other wholesalers.  Check out there deals.

Once you have an idea of what they are buying at, you can create an offer forumula.  Here is mine, assuming buyers in my area are buying at 55% of ARV.

(ARV x .55) - (5% potential hard money points assessed to your buyer) - (3% closing costs) - (repairs) - (your fee) = offer.

I typically end up between $.30 - $.40 on the dollar, depending on the repairs.  If your market is 70%, you'll end up higher.

Jon Holdman · Answer

If the purchase price plus the rehab costs for a fix and flip is 70% of the ARV, your profits will be in the 10-15% of ARV range.

Yes, that works in any market.  Its just math.  What changes is the LTV a hard money lender will do, and the ARV you can really get.  If the market is declining, as most are, you have to discount the ARV from what it is now to what it will be when you sell.  Reports just today say home prices have fallen 18.2% in the last year (Nov 07 to Nov 08).  So, you would want to discount an ARV computed from recent, nearby, similar comps by about 10%, at a minimum, if you think you can sell six months from now.

That assumes you have hard money, and hold for about six months.

If you can borrow 70% of ARV, you would still need cash to do the deal.  Maybe 10-15% of ARV.  If you can get purchase and rehab down to 55-60% of ARV, you might not need so much cash.

Some HMLs are using lower LTVs.  Some are requiring you to have money in the deal.

If you're wholesaling, you would need to subtract your fee out of the price, too.

Andrew Massaro · Answer

Another good way to determine what buyers are buying at, is to know at what percentage of ARV hard money lenders are lending at.  Most buyers these days use cash, but hard money is the same as cash.  This will give you a good idea...

70% Rule?

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