65-70% of ARV

8 Replies

Hello, 

Why 65% or 70% of ARV?

What is factored in that %, because repairs are factored in after you take 70% from the ARV?

So if i offer a seller 70% of ARV and they ask why 70% what do I tell them? "Because its rule of thumb" I don't think that explanation will go over well.

Thanks for the help on this.

You need to listen to the podcast from the Yellowletters guy (forget his name suddenly, Michael ____)--he is an expert at explaining stuff like this.  You could probably find it in the archives.

I wouldn't mention ARV to the seller. Simply convince them what you believe their house is worth in its current condition and make your offer. If you can't make the deal happen for a price that makes sense to you then walk. It does not have to fit a rule of thumb, it just has to be worth it to you based on how much work you believe it will be and how much you stand to make in the end.

Thank you Vincent I appreciate the feedback. That's good advice. I'd like to know for my own understand as well. I'll look for that yellowletter guys podcast. Thanks again.

I believe that Will Barnard also discussed the 70% rule in podcast #132. There have been some other podcasts that have covered this subject. One answer that I liked - much like what Vincent said, was that we have to purchase the property at a price that allows us to support our family - make it personal; not a business matter.

If you haven't already read it, there is an excellent article concerning the 70% rule at http://www.biggerpockets.com/renewsblog/2014/02/14...

Additionally, you probably know that the 70% rule depends upon the situation - your desired profit, the ARV of the property, etc. I watched HGTV's Flip or Flop today and calculated their offer - the two that I watched were 80% and 85%.

@jerry powers- Thank you that article was great.

The 70% rule seems more like a guide then a rule something not to go over. I mean what you're really looking at is to get the price down to where the property and rehab cost make since for what you expect to sell at. 

First why are you even thinking about investing in real estate? The key word is investing, meaning you want something that will earn more for you than you are going to spend. 

Eventually if you do something enough you come to a point of wanting to make it an efficient process as well as a profitable one. The 1%, 2%, 50% and 70% rules simply are a manner of determining that you can take on debt, pay for cost and still earn a profit either more immediately or over the long term given what we know and rely on which is based on like anything else historical data. 

The stock market has historically returned from 8% to 20% over the years so people use that to calculate risks and returns. Maybe bond have historically returned from 3% to 9% and when the stock market is doing poorly historically bonds are the better investment so during those times more people will move their investment dollars over to bonds etc. 

Historically real estate investing has proven to yield good and consistent returns and they offer security as a fixed asset class.

It is not that you are offering a selling 70% of what their house  is worth, it is 70% of what the market would pay for your product once you make it equal to market value. That is generally the most you can expect to get for your property. If everyone around you is paying $120K for a 3 bed/2 bath 1500 square foot home and you also have a 1500 square foot home that is a 3/2 you would not expect to be able to sell it for $300K, no one would buy it because all around they can find such a home for $120K. 

A fixer upper may not be worth the same $120K if it needs $30K in repairs but you can calculate based on the $30K in repairs that your purchase price must be somewhere around 50% of market value, that would be your Maximum Allowable Offer to account for the risks you are going to take in spending $90K in purchase and repairs plus all related transaction and carrying costs. Somehow you have to determine that you will be able to make a profit. Generally you can expect that you can buy at most 70% of market value leaving you room for added expenses and still sell at market value and profit. It is just a guide but it just so happens it is also a proven guide. 

You can say ARV = market value

If your market value or ARV is $120K and you also pay overall the same $120K then there is no sane reason for you to do that deal.

You are looking for your greatest source of supply as well. You need a product to sell or a house to rent. You may be able to pick up turn key properties that you can buy under market such as a foreclosure that has been discounted by the mortgage holder or even a house you can buy that is in good shape for a seller that for whatever reason has gotten themselves in a tight financial situation and need to sell with a sense of urgency but that supply is low. 

You want to have an investment strategy that will keep you supplied with product and you also want a source of product you can buy at under market value. This is to assure yourself of operating at a profit, or increase your chances of a profit. You can also buy properties at full market value and depend on appreciation over time. It does happen but you are lessening your chances of profiting. 

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