what is the 70% formula? how can i find out the accurate numbers?

49 Replies

what is the breakdown for the 70% formula?

how much of a % can i expect purchase closing costs and selling costs?

holding costs?

hml with holding costs?

how come nobody explains the breakdown of the actual 70% rule??

the 70% rule doesnt work the same on a 600k property as it does with a 200k property so how do i find out the accurate costs involved

The 70% rule states that I'd you take the property's ARV, multiply by 70% and then subtract rehab costs, you have a rough idea of what you can pay for the property. It's only a guideline and does not work with all properties. The best way to get more exact numbers is to do you own due diligence on the specific property. Call lenders to know what their costs are. Have a contractor walk the property to give you a rehab estimate. Research what property taxes and insurance will be, etc.... The 70% rule is simply used to quickly rule out properties that just aren't deals. Once you eliminate the obvious bad deals, you can get specifics on the possible deals

There’s no ballpark anyone can give on what closing costs are going to be? No ballpark on what holding costs will be with a HML?
Why won’t anyone break down a deal?

There are some breakdowns in the forums but, every deal is different. You can’t really breakdown estimated closing costs since it can vary greatly from state to state (or even city to city).

Quick example of 70%.

ARV is $125k
Needs $30k rehab

125k x .7 = $87,500

87,500 - 30,000 (rehab) = 57,500 max offer price

The 70% rule really just is a guide to ensure you are getting a deal on the buy. Is it everyone’s “rule”? Nope. But it’s a good guide

Closing costs are probably around 5k assuming it’s single family residential

Thanks. I understand how to do the 70% rule I just don’t understand why they use 70%.

People say to analyze a deal using 70% but don’t say why or how or break it down.

For example. How much of that 70% is going towards my profit ? Is 5% of that 70% my profit ? 20%?
Is that 70% estimating my holding costs to be 5%?

Let’s say a property has an ARV of 100k and needs 20k in rehab. So 100*.7-20 is 50. But you want to make 5 grand on an assignment fee so the max offer you can make is 45k.

70 percent is used because you need to leave enough room on the spread for your cash buyer to make money, otherwise they won’t want to buy it from you.

Wholesaling is hard because you have to find not just good deals but great deals, since there’s that added fee. If I’m a flipper, and I find my own properties (in this scenario) I saved myself 5k on the spread. You need to find the most motivated sellers when you’re wholesaling.

i understand how to do 70% of something..........................................................................

nobody is able to explain what that 70% consists of though?

I would steer clear of hard and fast rules like the 70% rule in general, they are too broad and don't work in a lot of markets in Southern California for example there is no way you are getting a house at 70% ARV -expenses unless it is off market and you are comfortable taking advantage of someone, or maybe raw land. If you keep evaluating properties in your market you will get a sense of what an average deal will look like and you will know when a better than average deal looks like, and those are the ones you want to move quickly on. In summary have your mathematical criteria, but just evaluate enough properties that you know a good deal in your gut when you see one.

@Aaron Klatt

its not taking advantage of someone if you're upfront and honest about everything. 

if you're putting in the time and effort and money into a fixer upper for 6 months you deserve to get paid as well as much of that 70% is for closing and holding costs.

If someone is behind on payments you deserve to get paid for bringing them up to payment on time.

Obviously you should be telling them that they are able to make more money on the traditional real estate market, but if they dont have time to wait 30-60 days then this is where they need an investor

When I ask a very simple question like this, it leads me to believe that 90% of BP has no idea how this formula actually works . And maybe they’ve done a deal or maybe two but definitely haven’t been too successful in the business

@Jeff Jerma

The 70% rule is used to make sure there is enough equity or profit margin in the transactions. Also, 70% is the number for cash out refinance to get your money out of the transaction.

Terry

@Jeff Jerma

The 70% rule is also part of Brandon Turner's BRRRR strategy.

@Jeff Jerma I'm not saying that wholesaling or investors directly marketing to homeowners is taking advantage of them and I do believe that you should get paid for your effort. I was making commentary specific to my market where if you were able to purchase at 65% ARV - repairs (assuming 5% wholesale fee) there would be other investors willing to pay cash, close just as quickly and offer significantly more. I agree being honest is the best policy and my point is the only way to get these type of numbers in my market would be by not informing someone of all their options.

@Jeff Jerma no one can give you a closing cost, or a holding cost, or a lending cost number... it will vary on every single project, often by a lot. I don't have much holding costs, I have no lending costs... that means if I do a 70% rule deal I will make more than the guy who has both. Same with closing costs, the vary state to state and town to town. Taxes on a $200k house 2 miles from me in one direction isn't $4500, in the other direction can be $10-11,000... both will have very different end results.

You want someone to hand you the math, but it isn't possible to tell you of the 30%, 28.26% will be profit and 1.74% will be "costs"... it just isn't that easy. You will see when you start doing deals.

Firstly I would do some research in your specific market and find out what the norm is that people are willing to pay for wholesale deals. In Phoenix you won't be finding a lot of deals at 70% ARV minus repairs unless you're sourcing the deals yourself through door knocking, skip tracing owners, direct mail etc. The market is just too competitive. Here, 80% ARV minus repairs is more common.

The rehab costs are also going to vary by market. You'll need to find investor friendly contractors and find out what they charge to do specific things. You can have a contractor tell you it'll cost 5-10k to do a bathroom vanity/shower for an ARV 200-300k house and you can find a contractor who will do it for 2500-3500. The material cost is roughly the same so the guy charging the higher amount is upcharging big time and I'd probably rule that out or an investor friendly contractor. A retail contractor deals more with one offs such as home owner remodels, an investor friendly contractor is expecting to do multiple jobs and stay busy, thus keeping their subs busy, and will do the work for less of an upcharge.

Once you have those two numbers figured out then it's just plug and play like stated above. Holding costs/selling costs are going to depend on your buyer. What are their hard money rates, or are they cash? Are they an agent who is going to list it themselves or are they paying 6% to list it? That's on them to figure out not you.

@Jeff Jerma

When everyone is telling you what you do not get it is often best told by a story.

There once was a new race horse owner who told his trainer and jockey that at a point quarter pole he wanted the horse to be 4rd, then half point pole third, then top of the stretch to be in second, and at the finish line to be in first. Both trainer and jockey were looking at him with a look that said " what the heck".

Jeff, as each horse race is different, each house is different. You want a set number for each cost, but you don't even have the house. The house could be a wreck and the price is low, but the repairs are high. On the other hand, you can have a house that is almost complete, and the repairs are low. 

Not sure what to tell you............maybe buy a race horse instead of a house.

Terry

I think I understand what you are asking.... The 70% is what you will have in the property when finished. The remaining 30% is what is left to account for selling and holding costs, with enoigh left over for a decent profit

so you guys are all saying that there isnt a specific % or number for closing costs and holding costs.... So did this 70% rule just get made up out of thin air?  

How did someone figure that 70% of something will be what you need.  

Obviously whoever made this said "okay my holding costs are usually around 10% of the purchase price and closing costs usually run around 10% and i want 10% profit"  .  Unless you are trying to tell me he just pulled a random percentage out of thin air

Wow, this is going nowhere :-0
That race horse is dead.....and getting a good beating ;)

@Jeff Jerma

You are ***-backwards...............literally. You work your numbers backwards, to arrive at 70% LTV. You are going the wrong way with your approach. I hope you don't mistake a horses rear end for the head.

@Brandon Turner

Brandon, I think we need your intervention on this one. 

Terry

@Jeff Jerma

The 30% you deduct represents

15-25% profit for flipper

1% purchase costs

3% sales costs

3% holding costs

3% “fudge factor” for unforeseens (many run this at 5%)

Obviously, in higher ARV areas, there is more wiggle room for MAP profit margin at the discretion of the flipper...

Then you hafta subtract even more for the wholesaler’s fee!

Like a lot of things on BP it’s a rule of thumb. It won’t work for every marker but it’ll work for a lot of markets. If you want the actual numbers go talk to local flippers or rehabbers and ask them what they pay for stuff. Then you can just back it from there. Find out what rehabs cost etc

@Maggie H.

THANK YOU MAGGIE!!!!!!!!!!!!!!!!!!!!!!!!!!!!  

i know those numbers may be off a couple percent, but that is all i wanted.

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