Reasonable profits

7 Replies

Relatively new to flipping/rehabing. The rule of thumb we always hear is 70% of the AVR and rehab deducted from there. In our market the median sales price is close to 300,000. I understand in a <100,000 market how that rule of thumb is super important but in our accelerating market we are not seeing people willing to walk from 90,000+ repair costs. We are also inclined to think a 30k profit is acceptable and reasonable. It seems that  an 85% ( - ) repair costs. would still amount to a successful 90-120 day flip

1) With regards to the 70% rule, does the dollar profit ever over shadow the percent rule? 

2) Does anyone have any good advice for still succeeding in an accelerating market?

@Dana Brown  

The answer, for me anyway, is it depends. But really, no.  I wouldn't do it.  You have to look at each deal independently .. but at a sales price in the $300k range ... and a $30k profit margin going into it, I would NEVER ... NEVER do that.  It's just to close.  Market shift happens or all the sudden has a larger pool of homes for sale (-2-5%) ... then has longer days on market (another -2-5%) and then they nit pick you because you have been on there and they know you don't have another buyer ... and there goes $3k for closing costs or something.

It's just not worth the risk/holding/taxes/larger project=larger unknowns ... 

In my opinion the dollar profit always over shadows the rule, I personally dont use the rule. I see it as a quick way to get you in the ball park, but we use real numbers on all our analysis. ARV - Holding, Closing, Selling Costs - Cost of Money -Projected Repair Costs - Desired Profits = Maximum Offer.

If I can make 30,000 on a realitivly easy rehab that can be done in 4-6 weeks I am ok with 30k profit on a 300,000 house.

Dana, we flip 150 houses a year, and I've occasionally bent "the 70% rule" after looking at the dollar profit.  Usually its because I think "I can't let the other guy make $30k on this deal when its that easy."

Follow the rule for now.  Since you are relatively new to rehabbing, the rule will protect you.  Wait until you have more experience before you start trusting your gut or making exceptions to a solid rule.  You have lots of unknowns at this point, and the margin of The Rule will insulate you from the risk of what you don't know.

Also keep in mind opportunity costs.  If you take the thin margin deal today and a fatter deal comes along tomorrow, will you have to pass on it?  If so, then wait for the better deal.... or increase your marketing efforts to find that better deal today.

In my experience (and location), the "median price home" is not the sweet spot... so maybe start looking at the less expensive homes in your area. You may find the formula works perfectly in cheaper neighborhoods.

Advice for succeeding in an accelerating market?  Its pretty hard not to. Everything works in an appreciating market. A rapid increase in price can erase a lot of mistakes. Its the potential for a suddenly flattening or declining market that scares me into following the 70% rule.... most of the time.

Thank you all for the amazing responses. There are may perspectives and is still clear as mud to us but we'll just dive in and see where it goes and what we can learn. Thanks  to you all!

I'm looking to start rehab/flipping houses in the Portland area and had the same question.  Thank you for posting this!

@Dana Brown  and @Bill Horton

I think "goal" is a better word for what you're going to find in the Portland Metro area right now. Our rule, or "goal" is to make 20% return on the cash required for our projects after private $ is paid. Many times we go down closer to 15% for easy remodels on well located properties. I see a ton of "wholesale" deals out there or deals purchased off MLS where investors are working on 10% margins. It's super competitive. It's not often you'll find the 70%-repair rule here. It happens, we get them, others get them, but they're not often. Values are too high and there are too many investors out there willing to pay more.

Look at all the costs you have associated in a deal. You'll find that a 15-20% cash on cash return (after paying $ costs) is going to be a deal that brings in very solid profit and is lendable by private $ standards.....and that is most likely going to fall in the 75-80% rule, rather than 70%.

It sounds like none of the "rules" apply to us here.. Thank you for the info!

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