San Diego Fix & Flip Investor - New to BP

[Joshua Ruse]

Hello,

New member to BP out of San Diego, 20 years of experience in construction working for development organizations. I'm primarily looking to purchase properties with the goal of fixing and flipping. Hoping to find some off market properties here, connect with others in this market and learn from other REIs around the country. 

Question: It has been really difficult to find any properties that meet the 70% rule here in San Diego. Are other investors following the 70% rule in Southern CA? Or is there another rule you try to stick to in the Southern CA market?
Thanks!

[Jeff S.]

It’s not a hard rule, @Joshua Ruse — it's a rule of thumb. A guideline. Something you can use to quickly screen deals. If you insist on using 70% in Southern California, your offers will be so low that you'll never buy a property. Fortunately, for homes with an ARV above about $250K, which is now basically all homes in Los Angeles, you can use 75% instead.

This rule of thumb says: the purchase price plus rehab costs should not exceed 75% of the ARV. In other words, pay no more than 75% of the ARV minus rehab costs. If you follow this, you'll typically earn a profit of around 12% to 15% of the ARV. That's a fair return in our view, and it's how we structure our loans. For both our protection and that of our borrowers, we won't fund a deal unless it meets this standard.

This rule of thumb assumes you're using private/hard money financing and paying a real estate agent to sell the house. If you're self-funding or selling FSBO, you can afford to pay a bit more. Use the rule of thumb but always run the numbers in detail. If you don't know how, call a local friendly HML for their spreadsheet.

For some odd reason, there are those on this board hate this method. Some advocate deciding their desired profit, estimating all expenses, and backing into an offer price from there. That’s fine — but it doesn’t change the math.

We always run both approaches — using our spreadsheet to estimate every cost — and they lead to the same place: if you want to earn 12% to 15% of the ARV, you'll end up paying about 75% of the ARV minus rehab.

Fair warning: once you exceed 86% of the ARV minus rehab, you'll likely break even — if you're lucky. Run the detailed numbers and you'll see. At 80%, your profit drops to around 6% of ARV. Only the desperate or inexperienced are paying that much. Don't be one of them and don't let yourself get desperate.

Prices right now in Southern California are flat to declining. Rehab costs are increasing. There’s no rush. Don’t push the numbers, Joshua.  You’re not immune to losing money or working your butt off for six months to earn minimum wage.