Why I Pay More for Fix and Flips than the 70% Rule States I Should

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Right now the markets are very tight for buyers in most parts of the country.

Most areas have very few REOs and short sales compared to a few years ago.  Good deals to fix and flip are much harder to find for investors.  With the tight market I see people ask all the time on the BiggerPockets forum if it’s okay to pay more than 70% of the after repaired value (ARV) minus repairs on fix and flips.  My answer is yes; under certain circumstances.

What is the 70% rule?

The 70% rule states you should not pay more than 70% of the after repaired value minus the repairs needed.  If a house is $150,000 and needed $20,000 in repairs the 70% rule states you should not pay more than $85,000.  $150,000 x .70 = $105,000 – $20,000 = $85,000.  This is a guideline commonly used by many investors to decide how much to pay on a fix and flip.

I pay more than 70% of ARV all the time

I don’t always follow the rules and I pay more than 70% of ARV on a lot of our fix and flips.  We have six in the pipeline right now and here are my calculated ARVs on each one.

1.  71%

2.  71%

3.  73%

4.  62%

5.  75%

6.  71%

You can see we have one great fix and flip at 62% of ARV and the rest are slightly over the 70% rule.

History of my experience with the 70% rule

Before I found BiggerPockets I had never heard of the 70% rule.  To calculate how much we paid for flips we would write out the estimated costs and projected ARV (new term to me as well) and hope to have at least a $20,000 profit on houses that would sell for $150,000 or less.  We would want more profit for more expensive houses, because of the higher risk and we would have more money tied up.

I didn’t realize it at the time, but we were basically using the 70% rule on our typical flip.

Is the 70% rule a good guideline?

Yes, I think it is an excellent tool for investors to judge fix and flip deals.  I still think investors should always list all the estimated costs and calculate their profit as well.  The 70% rule can be a good indicator, but not the only tool used to make a decision on a fix and flip.

Costs to consider on fix and flips

1.  Repairs (always be conservative)

2.  Carrying costs (interest, points)

3.  Monthly costs (utilities, hoa, insurance, taxes)

4.  Buying costs (back taxes, cash for keys, liens, code violations)

5.  Selling costs (commissions, closing costs, transfer fees, title insurance)

6.  Unexpected costs (I always add $5,000 to be safe).

I am sure I missed a few, but these are the basic costs we always consider.  I take the ARV, subtract these costs, subtract my minimum profit ($20,000) and I get my purchase price.  For the example I just used here would be the rough numbers.  This is a house bought off the MLS so there will be no buying costs.

$150,000 ARV

-$20,000 repairs

-$5,000 carrying costs

-$2,500 monthly costs

-$0,000 buying costs

-$6,000 selling costs

-$5,000 cushion for the unexpected

$111,500 breakeven point

-$20,000 profit

$91,500

You may notice this method produces a buy price that is higher than the 70% rule even with a $5,000 cushion.  If you look at the numbers closely you should be able to figure out why.

How Can I Buy Properties for More Than the 70% Rule?

The number one reason I can buy for more than the 70% rule is I am a Real Estate agent.  We bought all of the homes in our pipeline off the MLS, except for 1 which was a public trustee sale.  When I bought the houses I got a commission check back for 2.5 to 3 % of the purchase price.  When we sell The houses I will save another 3% in commissions, because I can list it myself.  Not all of the 5.5 to 6 % is profit as it is taxable income, but that lets me pay more than the 70% rule.  You will notice in the figures above I only calculated 3% for the selling commission, when most investors will l have to calculate at least 5.5%.  I didn’t even calculate the money I got back for my commissions when we bought the house.  I will chalk that up to income taxes for the total commissions I made.

I also have been flipping for over ten years and know the market better than anyone.  I can nail down my ARV pretty well and be confident I am not 10% off on prices.  Because of that confidence I can go one or two percent higher than the 70% rule even if I wasn’t saving money on the commissions.

The final reason I can pay a little more than the 70% rule is I have great financing lined up with my bank.  We can finance 75% of the purchase price at 5.25% right now with 1.5% points.  I can’t finance the entire purchase amount like you may be able to with hard or private money, but I have been doing this long enough to build up a bankroll that can pay for down payments and repairs. (I also have a little private money as well at 6%)  If you have to pay 15% interest plus 3 points to a hard money lender, your carrying costs are going to double or more.

Huge advantage over other investors

I talk about why being a real estate agent is such a huge advantage in this article here.  You can see in this example how much money it saves me.  Not only does it save me money, but I can pay more for houses than other investors can, because I save all that money.  I believe that is a big reason why I have 6 fix and flips in the pipeline right now.

Thoughts? Share below!

Photo: Ricardo N. Cabral

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About Author

Mark is Real Estate Broker and investor in Greeley, Colorado. Mark invests in long-term SFR rental homes and also does 8-15 fix and flips a year. Mark started a blog this year that focuses on investing in long term single family rentals.

32 Comments

  1. Michael Gammage on

    Mark thanks for this post you answered several of the questions I had about potentially paying slightly higher than the 70% rule.. I’m a newbie, so I plan on sticking to the rule for a bit. However I have the advantage of being a RE sales agent as well so hoping that will be huge in my business. Question: Are you Broker or a Sale agent? Thanks again.

  2. Another really interesting article, thank you!

    I’m curious about your 5k in unexpected costs. I’ve usually heard contingency broken out as a percentage of the rehab budget (i.e. 10%, maybe 15% or more if you’re new or depending on the looks of the house and complexities of the rehab). So I’m wondering if you’ve always found it more effective to use a flat rate for your unexpected costs rather than using a percentage. And does this number rise as the cost of the rehab rises? 5k seems a high number on a 20k rehab, so what would your figure be on a 60k rehab project?

    Thanks!

    • Hi Karen, I don’t do $60k rehabs, at least not yet. I try to stay under $20k and at most $35k. This is how I have always done it, but I base it more off of a purchase price then off of the rehab cost. If I was buying a 200k house then I would probably raise that up. That covers more than repairs, but also things I may have missed initially like HOA dues, buyers asking for closing costs or inspection repairs. I would say it is probably more accurate to use a percentage than a flat number, but for whatever reason that is how I started doing it and have never really changed.

  3. We also paid over 70% of the ARV for the same reason you stated in the Phoenix/Scottsdale market mid-year as there was still strong demand and short supply. Unfortunately, that demand and supply started inverting by the day by the time we had the finished property on the market – but it didn’t sink in until weeks later. It was so insidious that we didn’t make out first price drop for two weeks, the standard protocol. We were perpetually behind the curve, never dropping enough to hook an offer. In that time, active listings rose about 25% per month while demand diminished. 30 DOM became 45 which became 60 and now over 90. Holding this long when you are paying dearly on your hard money is the death knell for flippers. As a result, our original listing price went from $300K to the just-relisted price of $239K! Never mind our projected profit, we are in the red after all rehab & holding costs. We purchased for $175K; our rehab $45K. We are not newbies and have never lost a deal ever, so this is a true embarrassment.

    We knew damn well that when one goes beyond the usual 14 DOM without a solid offer (and in our case, not even a showing), your likelihood of market risk increase many fold. We’ve just never encountered this before

    So, is there any formula for when the market turns on you before you know it?

    Also, besides slashing pricing, any further suggestions at moving our property quick before our debt service eat us down to our down payment money? We need an offer. Even a lousy one.

    • Tim, I am sorry to hear that and wish you the best of luck in getting it sold. Price is what drives the market here, but I assume you are using an agent to market it or you are an agent?

      This points out how important it is to be on top of your market and if you see any shifts lower price quickly. That is a huge price drop and I’m not sure what else you can do besides lower the price more.

  4. Mark –

    There is no one formula that is a fit for every property. I think the 70% rule is just a starting point in most cases. My offer may be lower depending on the area and other factors. Nice post.

    Sharon

    • Thank you for the comment Sharon, You are right about the rule. The house that we have at much lower than the 70% rule needs more rehab than we have done in a long time and that is why we got it so cheap. I am not sure I would have bought it at the 70% rule.

  5. I haven’t done a lot of flips, but I got my real estate license just to support my long term purchases and a few sales. It helps a lot to have my own license. Whenever I do a transaction for myself, I credit the commission to the buyer/seller (who happens to be me). That way I never get a check for the commission. Either the seller is helping with my down payment or I get the money in the form of a higher sale price for the property (long term capital gain). Either way, it’s not regular income. If I was flipping homes, it wouldn’t really matter as it would translate into regular income either way, but the commissions would still help. On the other hand, it’s not for everyone. Including a real estate agent you can trust on your team can be a great advantage. Personally, I like the contracts and the negotiating so it works for me.

    • Hi Alan thank you for the comment! I will sometimes take the commission on rentals just to have the cash on hand or if it is an REO where it may be difficult to convey that I don’t want a commission or the seller has a policy against the agent taking a commission and buying the home. For those reasons I have someone from my team as the agent so I am not the agent and the buyer.

  6. Hi Mark,
    I really enjoy the article and the blog. I’m seriously considering getting into real estate and rehabbing/flipping houses and find your blog and BiggerPockets to be a wealth of info. and very helpful. For instance, I didn’t know about the 70% and 2% rules until reading here.

    Maybe this question is too specific, but I’m hoping you can help. The house next door was foreclosed in Oct. The bank bought it at auction for $261 and based on sales in the neighborhood I figure the ARV at $440. I’ve been in the house and it’s sound except it needs a thorough cleaning and the floors need replacing probably ~35k. Assuming carrying costs, taxes, sales costs … I figure I need to get it from the bank at ~230. This seems really low and a lot lower than I would have thought before reading here.

    I guess the real questions are is my math in the ball park and is it reasonable to think I can get the bank to sell so low? If not, at what price does it get too risky to pursue? Also, fwiw homes are selling reasonably well here and have appreciated 8-10% in the past year. I can get the financing from friends and family and split the profit 50/50.

    Ideally I’d get my feet wet with a smaller purchase, but since this is next door and I know the area pretty well, it seems like something to look into.

    Thanks
    Mike

  7. Hi Mike using the 70% rule I came up with $273k as the buy price. I didn’t figure all the costs out like I did in my article since I don’t know costs in your market or what all your costs would be.

    I prefer smaller purchases because it is so much easier to lose money on the big ones. There has to be a huge margin for profit to make it worth it. Everything is more expensive and repairs cost much more. Plus they are usually harder to sell and take longer to sell. If the profit is there and you don’t have any other opportunities it may be worth a shot.

  8. I am pretty conservative so I really don’t like it when a deal doesn’t fall within the 70% rule.
    Of course depending on things like being your own Realtor or having low cost of money can soften that a lot. Those I do think are very good reasons to be able to set your bar a little higher (and getting things at 71% like 3 of the 5 over 70% ones you mentioned is well within that cushion).

    What a lot of people seem to be doing is paying more than they should because of the “hot” market and the feeding frenzy of people just wanted to get into a property. If the market goes up 10% just by owning it a few months then great it worked out. If things are stagnant you lose a lot of margin for error, and if the market goes down you might get your head handed to you.
    The unfortunate situation that Tim had above shows that it is great to be in a roaring market until it stops roaring. The smaller the margin is to start the bigger the risk.

  9. Mark:

    I am curious: are you finding properties listed on the MLS at those prices (~70% ARV), or are you having to offer far less than asking to get the price there?

    • Hi Mike, a little of both. I will find some problem properties listed at 70%. My last three were listed at 70% and I a few I offer low on, but not more than 20% less usually.

  10. I have a hard time finding them for that price in my market. Properties needing work seem to be listed at only slightly less than everything else…

    I know you are a fan of being an agent and I am thinking about getting my license. I am curious: is it harder to make low offers as an agent (do the seller and/or listing agent not want to work with you thinking you should ‘know better’ than to low ball)? Is it easier or harder to find deals that are not on the MLS and convince them to sell to you at (admittedly) a significant discount knowing you are an agent? And are you able to be the buyer on a short sale, or does the bank not want to work with you as an investor/buyer knowing you are an agent?

  11. Jorge Caicedo on

    Mark, good post…I’m doing something similar here…4/2 SFH that comps for $340k (Realtor verified)…the owner is asking $225k….Repairs are $50k(rehabber verified), closing costs are $600 and I’m going for a $15k assignment fee… …One of my end buyers is adamant about the 70% rule but I won’t make any money that way so I’m gonna go w/ someone else….

    I guess my point is is that you don’t always have to do ARV x.7-Repairs…..By marketing this property for $240k (225k + my 15k fee), even w/ repairs factored in, makes it $290k, the end buyer makes a nice $50k minus $600 for closing costs, so the buyer has a profit of $49,400

    I don’t know too many buyers, besides this guy who would turn down almost $50k…In fact, if you multiply $340k x. 7=$238k which is just slightly less than my contract price….Comments are welcomed

    • Jorge, I personally would not buy that deal. The problem is you are not factoring all the costs for the flipper. He does not only have to make repairs. He has to pay to sell the home (8%) $27,000, taxes, insurance, hoa? Another $3-5k. Interest and money cost $6-10k minimum. That leaves 40-45k more in costs that leave no profit after repairs. That is why the 70 percent rule is ARV x’s .7-repairs. The 70% rule states the investors should pay 188k. I might go a little above the 70% rule but not by much.

  12. Jorge Caicedo on

    I should clarify a bit, my end buyer is doing $340k x.7-Repairs but I’m not…. and while it’s probably profitable, I figure it’s easier to give the owner her asking price instead of having to negotiate..My buyer of course will easily profit by doing it his way but I figure my way will also work and he’ll still profit regardless

  13. Jorge Caicedo on

    Hmmmm…I was told that any expenses on the flipper’s end would be his responsibility and not have to be factored into the wholesaler’s asking price…and this is from people who do deals….maybe they’re wrong?

    • Your a wholesaler trying to sell to a flipper. If you were a flipper would you buy the house for $240? This is how you have to think of it. You need to figure all of his costs as if you are the flipper to see if there is enough profit. I wouldn’t buy for anything more than $200k.

  14. Jorge Caicedo on

    Well, you’re assuming he’ll put it w/ a Realtor as opposed to doing a FSBO and that he’s gonna borrow the money from a lender when it’s possible he has access to such an amount..
    I know some buyers do this

    In addition, couple of buyers I know don’t make the wholesaler factor in taxes and insurance…

  15. Jorge Caicedo on

    Well, if anyone out there has a suggestion to make this deal work to where I can profit at least $10k and still offer enough to not insult the seller and that my buyer will profit also, I’m open to suggestions..Thank you

    • So basically you didn’t want to put in any effort to try to negotiate a marketable deal with a seller.
      Then you want to have the buyer pay with their own cash, sell the property FSBO to save on commissions, not carry any insurance since it was a cash purchase and they aren’t required to and somehow become exempt from paying property taxes so they can make your BS profit number work.

      This so you can “earn” a $10-15K fee.
      No offense but if you want to earn 5 figures on a wholesale deal you usually have to do SOMETHING to bring value.
      If you are worried about insulting the seller and don’t want to negotiate you are probably in the wrong business. To get a $15K fee you probably need to get it under contract no more than $185K and probably need to be more like $175K, or less.

  16. Jorge Caicedo on

    Well, I could always lower my assignment fee if need be or try to justify to the seller why we’re asking her to pay less than her asking price, I guess…I’m still a bit new at this

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