70% ARV In NYC? Practical?

Question

Hey BP Family!

Brand new member and brand new to the real estate industry.

I am working with a real estate company here in Queens and I wanted to hear the communities thoughts. I am curious if the 70% ARV rule applies to the 5 Boroughs.

My friend likes making fun of me that I ask silly questions so I will try to explain where I am coming from.

The 70% ARV rule is meant to make sure we make money on our deals. So lets say we have a property at $200,000 ARV.

The math would come out that you should offer $140,000 less the rehab and other costs. The total you would be expecting to make is the $60,000 correct?

So if we are dealing in a market where properties are averaging $400,000 Based on the 70% rule we would be offering $280,000 and we would be expecting to make $120,000.

Why would I want to use the 70% ARV rule when if I go a bit above those numbers I will make less but be able to do more deals?

I think that this question wasn't so coherent. Please ask for any clarifications.

If you are still reading this you are very patient indeed and I thank you for that.

Either way,

Sam Harris

Account Closed · Answer

Silly questions are way better than expensive mistakes.  Many close to you may taunt and mock you as you venture forth.  Surround yourself with those supportive.

I applaud you for your ability to put yourself out there and ask.

Shmuel Harris · Answer

@Russell Brazil

Hey, thanks for taking the time.

Yeah I guess that makes sense to me. I feel like the 70% rule makes me ask this question though.

1) Is the primary purpose of the 70% Rule to give a guideline on appropriate risk management? If that is the purpose then whatever the numbers are, the 70% rule would still apply seeing that the risk will be larger.

2) However if the 70% Rule is meant more as a guideline in what your expected returns should be then any Flipper should be looking at the market they are in to determine their returns and not be as tight with the 70% Rule.

Jeff S Na

Thank you for your support!

Shmuel Harris · Answer

@Brent Coombs

Hey thanks for taking the time. And thanks for pointing out what I missed

Brent Coombs · Answer

@Shmuel Harris, some people may include "Commissions, Holding Costs and other assorted expenses" within their "70% minus Repairs" Offers, though in your second example of a $400k ARV property, you forgot to deduct ANY "Repair" costs before suggesting offering $280k.

Depending on your market, it IS true that such a large discount as 30% from ARV - R can be very hard to find, hence the many BP threads that aim to help wholesalers/flippers/investors find motivated sellers BEFORE they list.

You said it well: "any Flipper should be looking at the market they are in to determine their returns"! Cheers...

Jeff S. · Answer

No.

You are misinterpreting this rule-of-thumb.  It states you should pay no more than 70% of the ARV minus the estimated repairs.

For an ARV of $400k you should pay no more than 70% x $400k – Repairs.  If, for example, you have a $50k repair estimate, you can't pay more than $280-$50=$230k.

Using this rule-of-thumb for screening only.  If you do a detailed pro-forma P&L, you'll see you'll make about 15-16% of the ARV in profit.  This assumes you purchase with a hard money loan and pay at least one side of the sales commissions.

Though lightening can strike, in this competitive environment it's extremely unlikely you find anything viable using 70%.  Here in LA, we won't loan on any project where the Purchase Price plus Rehab estimate exceeds 75% of ARV, and these deals do exist.  I suspect this would work in NYC as well.  Using 75%, a careful rehabber will net between 10 to 12% of ARV, which is a fair return.  Beyond 75%, you'll make a lot of money for everyone else but you.

Roughly every 5% you go above 75% will reduce your return on ARV by about 5%.  That is, if you use 80% you can only expect to make about a 5% return on ARV.  That's crazy low and doesn't account for rehab overages, reasonable counteroffers against your asking price, deal falling through a few times, etc.

Never think you're different, or that you can somehow get around profit equaling income minus expenses.  Unfortunately, we see this a lot.

Experience rehabbers won't push the numbers, and neither should you.

Good Luck, Sam.

Russell Brazil · Answer

The higher the price on the property is, then the narrow the percentage can be and still make a descent profit.  The 70% rule is merely a rule of thumb. In much of Maryland people say you need to be at 65%. In much of DC you can be at 80% and still make plenty of profit.

The key for any market though is identifying where there is a large spread in prices between rehabbed properties and non rehabbed properties.