@Brandon Sturgill The formula isn't pointless, it is better than pulling a number out of the air, but it does have its flaws depending on what your strategy is and who you are selling to. I buy properties to fix and flip to investors who can put tenants in and cash flow properties at greater than 1% of the purchase price. So what do I care if the ARV is 80,000? As long as my strategy works for the people buying the house, I know I need to buy really low, and use what @David Beard said about putting in a floor of $15k for your rehab. If all else fails too, know that you can rent the property and then sell it as a turnkey rental, in which case you have a more valuable product for an investor.

Brandon, you've got the formula screwed up. It's ARV * 70% minus repairs = purchase price. The 30% "gross spread" is intended to cover: profit, purchase closing costs, holding costs, sellling costs (commissions, concessions, closing costs), and of course financing costs. Ideally, your profit will be 15-20% of ARV. In your example, you would have to purchase the property at $48.2k, and you would earn $12k more than what you computed, or something closer to $14k. Many rehabbers also use $15k as a hard floor on their expected profit, due to the uncertainties in flipping, and the desire to make an adequate return for time expended. Think twice before trying to flip a $80k property. This is on the cheap end, and in our part of the country, the better flipping ARV is in the $115-200k range (that's certainly the case in the Cincinnati metro). Cheaper-end neighborhoods will have fewer qualified buyers and less retail sales activity.

Following your numbers, your purchase price should be $36,200 $86,200 (ARV) * 70% = $60,200 - all your costs ($24,000) = $36,200 Someone please correct me if my math is off.

And I would be curious to see how the financials would work for the rehab of a 300k home...what type/makeup of financing would you use for the purchase/rehab? Thanks

Belinda - I agree completely with your <100k comment. As far as the huge apparent profits on the low-luxury segment you describe, I can be a bit skeptical I admit, but do you have any addresses of properties that could be (or were) purchased at 300k, cosmetically rehabbed, and sold for 450k. Not doubting, but I'd just like to see that this is legitimate, at least in your market.

Thanks for the perspective, Belinda.

Much will also depend on your local market. Here in Houston, that formula is almost gone as there no longer any great deals to be had even at 70% because the market is so good. Some rehabbers are moving toward 80% and most folks are looking for buy and holds at this point with prices expected to rise 12% next year! I'm coming to the conclusion that anything under $100k is not worth the trouble as you will spend the same amount of effort as if you were working on higher priced homes. In a higher priced home even a small % an equal big gains. I don't know if there is a better formula for homes over $400k or more. I've seen some great foreclosures around $300k with an ARV of $450k with few repairs. Lots of room in there for profit.

@Brandon Sturgill Just so I can confirm my math, are you saying your total costs are $12k or $24k? I calculated $24k. Rehab $12k and the other costs at another $12k. Just wanting to make sure I read it right and calculated correctly.

Updated almost 12 years ago on 09/12/2013. Most recent reply

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Brandon SturgillPoster

Real Estate Broker
Columbus, OH

General Real Estate Investing

70% ARV Pointless?

Brandon SturgillPoster

Real Estate Broker
Columbus, OH

Posted September 10, 2013 05:38

I am struggling with the concept of 70% ARV for SFH investing. Is there something more to this? It seems to me a lot of SFH investors are not disclosing the entirety of costs associated with their investment. This is a reasonable example of using the 70% ARV formula where I live and it is a seemingly impossibe way of investing: SFH $60,200 purchase price (70% ARV) ARV $86,000 Fixed Rehab Costs $12,000 Entrance Costs (Closing Costs/Lender Fees) $3,000 Holding Costs $4,000 (150-days) Exist Costs (Realtor Fees/Buyers Closing) $5,000 Total Costs Including Purchase Price $84,200 ARV-Total Costs (Profit) $1,800 With this strategy, I would need to be looking closer to 50% ARV to profit.?

Brandon Sturgill
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70% ARV Pointless?

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