Am I being to conservative? 70% rule

Am I being to conservative? 70% rule

Wylie, TX · Member since 2018 · 23 posts · 9 votes

Hi Everyone!

Complete newbie here working on closing my first deal. I'm looking to fix and flip. As I've been evaluating deals I'm trying to follow the 70% rule. My question is how strictly I should be doing this in the DFW market. Specifically in the areas I am farming the average DOM is 10 days or less. As I'm analyzing deals from whole sellers even using their ARV which I do not really trust it's not possible using the 70% rule so my main question is should I be less conservative considering the market I'm in?

To use just one of the properties I’m looking at as an example it’s AVR is around $165k and $25k in repairs putting my max offer around $90,500. Now if I just work off my desired profit of $20k and factor all cost in I can go up to $95k which is what I’ve offered after my low ball initial offer was rejected. I’m finding out seller wants $110k which just doesn’t leave enough meat on it from my perspective as a newbie investor. That’s fine if the numbers don’t work they don’t work but I’m wondering if a more experienced investor would go for this and settle for a lower profit.

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Russell BrazilBusiness Member

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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

8y

Instead of trying to force the numbers on a particular location....find the locations that fit the numbers. Find out where the majority of flips in your metro area are happening, see what the flippers are paying for them and selling them for...then copy them.

[email protected]301-893-4635 Podcast Guest on Show #192

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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
8y
Instead of trying to force the numbers on a particular location....find the locations that fit the numbers. Find out where the majority of flips in your metro area are happening, see what the flippers are paying for them and selling them for...then copy them.
[email protected]301-893-4635 Podcast Guest on Show #192
District Invest Group546 Reviews
Website View Page
4 Reply
Matt C.
OP
Wylie, TX · Member since 2018 · 23 posts · 9 votes
8y
@Russell Brazil thank you sir that’s a very valid point and something I need to consider. My immediate area may not be the most conducive to what I am trying to do. Although I know investors are flipping properties the subject house I mentioned above has a flip on the same street which is where I’m getting a lot of my numbers from as the houses are near identical. I may have to spread out my search though if I want to reduce competition.
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Ryan Dossey
Real Estate Broker · Indianapolis, IN · Member since 2014 · 3k+ posts · 2k+ votes
8y
From working with clients and having friends in Dallas you're not going to get a deal. In metros like Dallas wholesalers are able to sell for upwards of 80-85% of ARV.
If you're wanting $0.70 on the dollar you're going to have to go direct to seller and have a large budget for it.
2 Reply
Matt C.
OP
Wylie, TX · Member since 2018 · 23 posts · 9 votes
8y
@Ryan Dossey thanks for your comment that is exactly what I’m seeing 80-85% maybe even a little higher. That was really the point of my question if 70% is unrealistic in my area because that’s what it’s looking like. Im ok with adjusting my expectations just wanted to make sure I’m seeing it the right way.
I’m conceding to the fact I’m going to have to work on buying directly from sellers if I want to follow the 70% rule.
1 Reply
Mike Burkett
Lender · Colorado Springs, CO · Member since 2018 · 241 posts · 97 votes
8y
@Matt C. Matt, last year we were regularly wholesaling houses to investors at 80%-82% ARV less construction cost all over the DFW area. There are a lot of investors buying houses from wholesalers and the wholesalers know it. You will need to go direct to the seller to get something below that. The problem there is all those sellers are being approached by a lot of buyers so the sellers are pretty savvy to the price they can get for their homes. Also, if you go that route, don't forget you will need to add your marketing costs to each house you put under contract. And that is probably not a small amount.
1 Reply
Bart H.
Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
8y
Originally posted by @Matt C.:

@Ryan Dossey thanks for your comment that is exactly what I’m seeing 80-85% maybe even a little higher. That was really the point of my question if 70% is unrealistic in my area because that’s what it’s looking like. Im ok with adjusting my expectations just wanted to make sure I’m seeing it the right way.
I’m conceding to the fact I’m going to have to work on buying directly from sellers if I want to follow the 70% rule.
I think the Dallas market is really tough to find properties that work. Unless you have substantial experience in construction. I would be very reluctant to pay much above the 70% number for a deal.
on your first flip, you almost certainly will pay twice as much and it will take you twice as long to complete as expected.
IMO the market is really tight, maybe those who are paying 80-85% have cheaper capital, or are licensed real estate agents, or are doing enough deals that they are getting discounts from contractors on labor, or are able to get discounted materials. Heck maybe other bidders aren't making any money on the properties they are buying.
Regardless, be careful about chasing deals, stick to your numbers. Don't change your numbers to make the deal look good.
1 Reply
Jeff Erickson
Erie, CO · Member since 2018 · 2 posts · 0 votes
8y
I'm testing out www.getprivynow.com in my home market, but I have access to Dallas as well and it's showing 150 active properties in the Dallas area, with investor comps that fetched 70% ARV or better. Has anyone every tried this software out?
This house is asking $117k and has several comps in 50-60% ARV range, what do you think?
http://bit.ly/2HrZtl1
0 Reply
Matt C.
OP
Wylie, TX · Member since 2018 · 23 posts · 9 votes
8y
Thank you everyone for your replies it looks like my assumptions are pretty much confirmed. I am going to stick to my numbers and assume I will probably not find my deals through whole sellers. I do have some construction knowledge but starting out I do not want to be behind the eight ball. Looks like I will get to use my marketing and selling skills to find deals.
@Jeff Erickson Privy looks interesting I will have to check that out more.
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Bart H.
Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
8y
Originally posted by @Jeff Erickson:

I'm testing out www.getprivynow.com in my home market, but I have access to Dallas as well and it's showing 150 active properties in the Dallas area, with investor comps that fetched 70% ARV or better. Has anyone every tried this software out?
This house is asking $117k and has several comps in 50-60% ARV range, what do you think?
http://bit.ly/2HrZtl1
Its under contract.
From the pictures, to me as though it has major foundation issues and likely significant termite/or water damage issues. Not sure if the back unit is permitted.
Not sure its a good first flip for a beginner.
0 Reply
Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
8y
@Jeff Erickson, you wrote: "This house is asking $117k and has several comps in 50-60% ARV range, what do you think?"
If those "comps" are also "asking" price, then none of those figures are really helpful!
You need to compare asking price with sold comps! (Anyone can "ask" anything!) Cheers...
0 Reply
Account Closed
Denver, CO · Member since 2018 · 1 post · 1 vote
8y
@Brent Coombs there are 20 comps listed, 4 of them are active or under-contract but the other 16 are all sold data - take another look.
@Bart H., the property still appears Active for me. The rear structure does look like it needs some attention, but the main house looks promising. It looks like it receives power from the main house, so it would have to be permitted, no? What makes you think it isn't permitted?
1 Reply
Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
8y
@Jeff Erickson, aah, from what James pointed out above, it seems that what you meant when you wrote "This house is asking $117k and has several comps in 50-60% ARV range", is that $117k is 50-60% of the value of (some) recently sold (ARV) comps? Yeah, that looks encouraging on paper/screen, but you'd still need to check in person, by also asking other real persons (eg. Agents), to see just how comparable those sales really were!
@Account Closed, thanks for that post. Welcome to BP...
0 Reply
Account Closed
Rental Property Investor · Austin, TX · Member since 2015 · 280 posts · 176 votes
8y
@Matt C. If you are seeing 80-85% ARV, you should consider switching to a buy and hold model. Think about it, you could potentially buy low, renovate, and cash-out refinance at 75% LTV. Depending on the rent to cost ration on the property, you could have a cash flowing property with 25% equity already baked in for ~$10k.
2 Reply
Ryan Harris
Cybersecurity Engineer · Dallas, TX · Member since 2015 · 11 posts · 9 votes
8y
Larry might be on to something there with the BRRR idea. When I was a newbie fix n flipper in Arizona, I didn't once find a deal from a wholesaler that had enough meat on the bone to make it a profitable venture. Always wondered who wa taking those lean deals!? I ended up doing heavy marketing to find motivated sellers myself. rom what I am seeing, Dallas is much the same way. If that's the case, you'll have to drive for dollars, do your research on abandoned properties, make friends with mailmen, and all kinds of other ways to generate leads. So with that in mind, perhaps the BRRR strategy is a better way to go. I used to chase the easy fast profits, and in the long run have little to show for it. Buy and hold, with refinancing to get your cash out, may be the better long term play.
0 Reply
Tanner Micheli
Investor · Plano, TX · Member since 2016 · 13 posts · 4 votes
8y
Matt C. Great topic here and thanks to everyone for responding! The wealth of information has been really great as I’m also a newbie in the DFW area. Does someone mind walking me through the numbers in Larry’s response on how the BRRRR strategy might make more sense in DFW?
0 Reply
Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
8y
@Tanner Micheli, wherever you try to BRRRR, the numbers would still require you to (all-in) bring it up to ARV standard for no more than the percentage of ARV that your Lender (using their appraisal) will lend you. [Lenders commonly use 70% LTV for investment loans].
eg. ARV $100k means: don't pay more than $70k all-in. [Then, Refi/cash out to: Repeat!]
The other criteria is: Ensure that it doesn't negatively cash flow even when 100% leveraged!
ie. You have none of your own money left in the deal, but, you're still getting a return!
[100% leverage means you owe 100% of what you paid originally, not what it's worth!]
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Bart H.
Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
8y
Originally posted by @Account Closed:

@Brent Coombs there are 20 comps listed, 4 of them are active or under-contract but the other 16 are all sold data - take another look.
@Bart H., the property still appears Active for me. The rear structure does look like it needs some attention, but the main house looks promising. It looks like it receives power from the main house, so it would have to be permitted, no? What makes you think it isn't permitted?
THe back of the main house has a pretty nasty crack along the brick. Without walking it, and based in large part on the price, I would bet pretty good money that there is major foundation issues.
Not saying this particular house isn't the unicorn, but sub 200K houses are in incredibly short supply. There are a shocking number of people chasing even marginal deals.
You asked about how I would know it wasn't permitted. I don't. But Dallas has a reputation for being hands off with permits. If I had to guess, I would bet that the back house isn't permitted, we have looked at a bunch of them in a similar situation and I bet 80-90% aren't permitted.
Here is the thing, over the last 18-24 months, if a house is a good deal, it has multiple offers, especially if it has multiple units. A year ago we were involved in one that had 35 offers. Many of the agents aren't even asking for a best and final, Even on all cash offers at full asking price.
0 Reply
Bart H.
Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
8y
Originally posted by @Account Closed:

@Matt C. If you are seeing 80-85% ARV, you should consider switching to a buy and hold model. Think about it, you could potentially buy low, renovate, and cash-out refinance at 75% LTV. Depending on the rent to cost ration on the property, you could have a cash flowing property with 25% equity already baked in for ~$10k.
I think Larry hits the ball out of the park with this suggestion. BRRR gives you the opportunity to step into the market with a lot less risk because you have more time to pick your exit. And in the mean time you pay down the loan AND get the benefit of time for price appreciation.
0 Reply
Andrew SyriosPro Member
Moderator
Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
8y
The 70% rule is a guide, but where you should aim differs based on the location and price point. You can usually go higher on a higher priced property. Also, we're in a very hot market overall, and Dallas is particularly hot. That doesn't mean you should be lazy with your criteria, but it does, at the very least, mean you should be patient and not expect a lot of great deals right now.
Podcast Guest on Show #121
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Account Closed
Rental Property Investor · Austin, TX · Member since 2015 · 280 posts · 176 votes
8y
@Brent Coombs Thanks for breaking that down. To be honest, I find it rare that an investor will BRRRR without having any 'skin in the game' at the end. The mindset I take is that, when all is done, I am buying cash at a discount - it's just that the cash is held in the property in the form of equity. And regarding the rent/cash flow - you are ABSOLUTELY right. This only would be beneficial if the property cash flows (as to how much, that is a different topic of discussion since everyone has varying requirements).
@Matt C. Let's say that a wholesaler brings you a deal with an ARV of $100,000 and he is asking $80k. Let's assume that rehab is cosmetic and around $5k total. Basically, the wholesaler would be selling you a $100k property for $85k when all is said and done. As a flip, this may not make sense because you will need to budget up to 10% in seller's cost (i.e. agent commissions and seller paid closing costs) which would amount to $10k on this scenario. Your net profit as a flip - assuming you paid cash and there are no holding costs involved or hiccups, would be a paltry $5k for all your time spent.
However, looking at this from the eyes of a Buy and Hold'r, you can buy and rehab the property for $85k and then cash out refinance it at about 75% LTV against an ARV of $100k. For simplicity sake, you are out of pocket -$85k up front but receive +$75k on the cash out refinance which brings your net cost on the property to $10k BUT you still have $25k equity 'banked' in the property! You basically just CREATED $15k.
Bear in mind this example disregards the cost of capital (i.e. hard money / short term loans). It also disregards the cost of obtaining a mortgage as well as any monthly holding costs involved. Even so, assuming an additional $5k in expenses, you would still be creating $10k AND have a cash flowing money making machine.
Best of luck!
1 Reply
Matt C.
OP
Wylie, TX · Member since 2018 · 23 posts · 9 votes
8y
Thanks for the replies guys! I am familiar with the the BRRR strategy and that is for sure an option. I will keep an open mind on BRRR opportunities going forward. I'm working on marketing as well to try and buy direct from owners but I know there is a ton of competition for that as well. Luckily I use to sell direct mail and know some pretty good strategies that I will get to dust off and put to use for myself.
0 Reply
Tanner Micheli
Investor · Plano, TX · Member since 2016 · 13 posts · 4 votes
8y
@Brent Coombs Thanks for the answer! Makes sense. I guess that’s the benefit of the BRRRR strategy is that you can use other people’s money to procure the distressed property, but have little exposure on the high interest rates because of your ability refi with more traditional financing in the short term.
0 Reply
Sam Shueh
Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
8y
In SFBA people pay $1 on the dollar hoping the stellar demand will push up the home prices even more. This is doable if you are 30 min away from Goog ,FB or TSLA headquarter. As properties still sell 125% of asked. With 30 year interest rate at 4.53% and disappointing earnings or miss expectation coming the likelihood is it is getting harder to buy and put it on the market making a tidy profit. Frankly, I do not pay any attention to the rules here. It worked once upon a time. If the margin is thin it is a red flag. People work for months to get a property and find they made $10-20K. The hourly wage is not worth the trouble. You need to find a niche. If you can not find it then don't force the issue.
1 Reply
Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
8y
Originally posted by @Tanner Micheli:

@Brent Coombs Thanks for the answer! Makes sense. I guess that's the benefit of the BRRRR strategy is that you can use other people's money to procure the distressed property, but have little exposure on the high interest rates because of your ability refi with more traditional financing in the short term.
The trick is: Finding the right deal/s, and the right Lender/s! It's always easier if you have your own 25%+ deposit for that first deal, rather than relying on Refinancing later out of HML!...
0 Reply
Stu Basham
Jersey City, NJ · Member since 2012 · 93 posts · 32 votes
8y
@Account Closed when you're talking about doing the BRRR strategy but buying at 80 - 85% ARV are you talking about leaving some money in the deal after you refinance cause most banks will only refinance for 75% ARV. Just curious how you approach that?
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