Forgoing the 70% rule

9 Replies

Hello BP community!

I am wondering if some of you make exceptions to the 70% rule in some cases. I have one in my sights and am in communication with the very motivated owner. Time is short for him and he has agreed to sell for the ank payoff, which in this case is 303K.

The place is upscale and immaculate, and repairs are under $8,000 and house could list in less than 2 weeks.

Comps in the immediate neighborhood dictate listing at $360-370.

The market is Northborough, MA and the absorption rate here is positive.

The 70% rule says I can't pay more than $252K for everything. 

Do you make an exception here?

Thank you all in advance for sharing your experience.

Originally posted by @Tim Wilkinson :

Hello BP community!

I am wondering if some of you make exceptions to the 70% rule in some cases. I have one in my sights and am in communication with the very motivated owner. Time is short for him and he has agreed to sell for the ank payoff, which in this case is 303K.

The place is upscale and immaculate, and repairs are under $8,000 and house could list in less than 2 weeks.

Comps in the immediate neighborhood dictate listing at $360-370.

The market is Northborough, MA and the absorption rate here is positive.

The 70% rule says I can't pay more than $252K for everything. 

Do you make an exception here?

Thank you all in advance for sharing your experience.

 Hey Tim! 

It's important to understand that the 70% rule is a rule of thumb. Don't make buying decisions solely based off of it. I think this is important to remember both when something is offered at less than or more than the 70% rule. There might be instances when 70% less rehab costs is a bad deal. Then there are times when the market is screaming higher (or for other reasons) you can afford to pay over 70%. Don't let a rule of thumb dictate every purchase. Due your due diligence. Be really confident with your numbers and if helping this man can offset a slightly thinner bottom line it might be worth it. Just remember that if you're violating this really valuable rule of thumb you need to be really certain of your numbers and your reserves. 

I agree with everything Joe said...and I will add that you need to take into account what your exit strategy is going to be too.  I pay over 70% for houses that I am going to lease option or just rent....or that I'm just going to put on the market and sell as is to a retail buyer.

Are you going to be rehabbing it?  If so, would you be willing to cut your profit margin?  Or are you going to be wholesaling it to another investor?

Again, exit strategy is important as well as being confident with your numbers like @Joe Kling said.

Well your not just not hitting the 70% rule you aren't even hitting 85%.

For a deal of that size I would generally want to target a 10-15% minimum profit, so you are barely hitting that with NO costs other than you pretty optimistically low rehab budget.

Do you have like $320K cash to buy and fix it or are you getting a loan?

Would you plan on selling it FSBO and not even pay a buyers agent commission?

Do you have a "Record your Deed for free" coupon that you will bring to the registry when they have "No Transfer Tax Day"?  (Anyone who BS detector is on the fritz these things to not exist:) )

If you need to borrow most of the money (unless you have very good terms) and plan to sell with an agent you would be lucky to break even on this deal.

Shaun Reilly, Real Estate Agent in MA (#9517670)
1-800-774-0737

Thanks @Shaun Reilly,

I appreciate your honesty. The thing that was attractive was that I felt it could probably sell for 330K as-is. I think he was counting on a bailout that didn't happen. It has not been listed at all. 

I agree with you, though. It is very lean and maybe only attractive to a cash buyer. Financing makes it too narrow.

@Tim Wilkinson

Goodie!!  Numbers :)

303k purchase

365 sale leaves you with 62k

- realtor at 6% of sale = $40,100

- closing costs at ~5k = $35,100

- renovation at 8k (suspect) = $27,100

- taxes @ 500/month for 4 months = $25,100

- insurance @$150/month = $24,500

- mortgage payment @$1200/month (20% down, 4.25%) = $19,700

- utilities @ $250/month = $18,700

Skinny deal.  You'll be out $65k at closing.  Your 8k renovation budget could triple as soon as the simple floor replacement reveals mold in one of the bathrooms, etc.  $18k is a good number on 80k flips in Florida.  Way too skinny up here in MA.

Hey @Tim Wilkinson ,

It looks like you've received some good feedback on this one from @Aaron Montague , @Shaun Reilly , @Brian Gibbons , @Joe Kling and @Priscilla Z. .

The 70% rule ensures you have some margin if you're doing a traditional flip in an average price range. I.e.  a house that would sell for $100k retail that needs $15k in repairs, you'd pay $55k max.

When you're in a higher price point, things change a bit.

For example, I looked at property yesterday that would sell for $850-$900k all fixed up.  It needs $150 -$200k in rehab.  With the 70% rule our offer would be somewhere in the low 400's to high 300's.  But, because 10% of $900k is significantly more than 10% of $100k, we can pay a bit more up front.

As Joe said, it's just a starting point, just like the 2% rule.

If he can sell for the bank payoff, but not need it to be paid off at closing, I would definitely do it.  See if he needs to re-qual for a new loan right away.  Often their credit needs time to heal anyway.  Add 24 months to the payoff time and you've got some options @Tim Wilkinson !

@Tim Wilkinson ,

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