Finding deals that meet 70% rule: Mission Impossible?

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Finding deals that meet 70% rule: Mission Impossible?

Ashley Benning
Woodland Hills, CA · Member since 2016 · 98 posts · 40 votes
Fellow BPers in Los Angeles and environs, I've been doing deal analysis for MONTHS and cannot find properties that meet that 70% rule for fix and flip and BRRR. I'm wondering if these can only be found off market and through wholesalers? I'm ready to reach out to HMLs and then push the button on a property, but I can't find any! Am I doing something wrong, or just being impatient? Granted, my LA realtor hasn't set me upon the MLS yet so I'm sort of wading through Redfin, etc. but still, just doing analysis you'd think I could find something that would work. Maybe LA is just not in the cards for me? Seems a shame because I grew up in the San Fernando Valley and know it pretty well. Investing elsewhere would be a learning curve AND a commute for my first property. I am also looking in the Phoenix area since I lived there for a few years, but my heart is in making the Valley a better place, one home at a time. Thanks, everyone!
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Account Closed
Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
9y

@Ariou B.

70% rule: PP = 70% x ARV - Rehab

So, in your case:   $615 = 70% x $879 - 0.0

Unless your rehab is zero you are not following the 70% rule.

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  • Archie Robb
    Los Angeles, CA · Member since 2016 · 62 posts · 20 votes
    9y

    Hi Ashley! 

    The 70% rule doesn't necessarily work in SoCal. It may in some parts but for the most part it simply will not. 

    Major Market Area:
    All real estate is local, and major market areas influence the formula. You will need to adjust the formula based on the market you are buying in. For instance, in California you may need to adjust the 70% figure to go as high as 80 or 85%. Compared to the Dallas – Fort Worth Texas where housing is more affordable the 70-78% should serve you well. Even more important is the hyper local factors based on the subject property itself. The ARV % you can buy at will fluctuate from zip code to zip code, subdivision to subdivision, even within the same major market area.

    2Reply
  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    9y
    Ashley Benning Yeah, 78% here is a steal. :) Almost impossible but there's always an exception. Maybe after looking at 500,000 properties, there could be 1 at 70%....Nah, maybe not.
    1Reply
  • Mike Flora
    Investor · Menifee, CA · Member since 2015 · 534 posts · 216 votes
    9y
    They are out there, they are off market properties. Set up mail campaigns and a good website with pay per click or pay SEO. It's still tough but this is how you will find them.
    1Reply
  • Ashley Benning
    OP
    Woodland Hills, CA · Member since 2016 · 98 posts · 40 votes
    9y
    Archie Robb and Manolo D. Difficult to refinance for BRRR without at least 70%LTV, yes? So I wonder how people do it out here. Maybe they just have longer initial loan periods with their private or hard money loans, and refinance conventional in a couple of years rather than 6-12 months. Mike Flora Thanks for the encouraging tips! Glad to know the deals are out there.
    0Reply
  • Ariou B.
    Specialist · Lakewood, CA · Member since 2014 · 42 posts · 12 votes
    9y

    @Ashley Benning I just picked up a deal in LA and noticed it meets the 70% rule. I honestly don't really care about rules, as longs as the numbers make sense I go with it. This house we just picked up we bought it for $615K and comps go for any where between $875K-900K.

    The last house we picked up and we are going to list it on MLS meets a 63.3%. We picked it up for $210K and will list for $329K (which is a bit under market value, but we want to sell it ASAP so it's OK with us).

    These are the only 2 deals that I've done and I personally only care about the 85% ARV rule and that's it. Money is money and if I see an opportunity, I will jump in and grab it =)

    - My only advise to you is try to increase your network and don't get stuck in analysis paralysis. 

    0Reply
  • Account Closed
    Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
    9y

    @Ariou B.

    70% rule: PP = 70% x ARV - Rehab

    So, in your case:   $615 = 70% x $879 - 0.0

    Unless your rehab is zero you are not following the 70% rule.

    4Reply
  • Ariou B.
    Specialist · Lakewood, CA · Member since 2014 · 42 posts · 12 votes
    9y

    @Account Closed thanks for the info David, but I just don't see what's the big deal about any of these "rules" are. I've talked to a few HML and mostly told me we only look for 85% value.

    I always try to think how much money am I going to make at the end of the project and what is my ROI. If I like these numbers, I just go for it. It takes less than 1 or 2 min to know if there's really a deal or not.

    1Reply
  • Account Closed
    Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
    9y

    @Ariou B.

    The rules should be backed up by a more detailed analysis. If your more detailed analysis shows an acceptable ROI then you're fine. But I have to say, if you don't know the rule of thumb it makes me wonder about your ROI calculation.

    0Reply
  • Ariou B.
    Specialist · Lakewood, CA · Member since 2014 · 42 posts · 12 votes
    9y

    @Account Closed mentioned, the 70% rule doesn't really work in SoCal so my question is why is the 70% rule even important in the first place? Why can't we all just stick to the fundamentals? 

    • Is the ROI Acceptable?
    • Does it meet the 85% rule (important because many HML look for it)
    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y
    Originally posted by @Ariou B.:

    @Account Closed mentioned, the 70% rule doesn't really work in SoCal so my question is why is the 70% rule even important in the first place? Why can't we all just stick to the fundamentals? 

    • Is the ROI Acceptable?
    • Does it meet the 85% rule (important because many HML look for it)

    You mean you actually have to think and do real analysis, including but not limited to questioning why the rule is important?!? Wow, that just sounds like way too much work ... you can easily avoid all that by just blindly following the 1%, 50%, and 70% rules ... LOL :)

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    It is better to buy a wonderful property at a fair price than a fair property at a wonderful price.

    2Reply
  • Rob Rice
    Wholesaler · Douglasville, GA · Member since 2014 · 72 posts · 63 votes
    9y

    Congratulations on being ready to pull the trigger Ashley.

    But first here is some food for thought...

    The 70% rule only exist as a frame of reference for most fix and flip, buy and hold, and BRRR investors because it is right around the LTV Maximum that most Hard Money Lenders will lend at.

    That is an overall industry thing put in place to protect lending.  That is all.  It does not mean a deal is bad if you go over 70% of value when you purchase.  For instance, if you paid 80% for a property appraising at $500,000 you would have 100k in instant equity.  The scales of the dollar amount go up as the percentage of price does.  I know a lot of people that would pay for that 100k in equity, especially with interest rates rates low, and rental rates high.  Just something to think about.....

    I have found that in your part of the country when I get a deal.....

    The 70% rule does not work there.  When I go to wholesale a deal on the west coast, I use the following technique to evaluate the numbers, find a buyers, and see what the investor buyers are up to in an unknown market.  Every investor buyer that I have sold to on the west coast could care less about the 70% rule.  

    I simply go to Listsource or use realeflow, and pull absentee owners in that zip code that have purchased for cash in the last 3-6 months.  These are investor buyers in the zip code of my deal I'm trying to get rid of.  I purchase the list.  I will research the deals they bought and run comps on their purchases.  I now know what they will buy and what is working in that market for those guys.

    It is a little time consuming, maybe a couple of hours, however, after that. I now have a list of active buyers, I know what price they bought at, and I know how much their properties are worth now. I know whats happening, and at what price to buy at compared to the properties on the MLS. You will often see duplicate buyers. When you do. Look at their last 5 properties. You will see what they are doing and understand how they are finding good deals.

    I hope that helps.

    Good Luck.

    3Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    9y

    These deals are everywhere.  It is about knowing your market , knowing when it is a deal and marketing.

    0Reply
  • Lesley Resnick
    Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    California is tough place for RE.  If you look at most metrics it does not work and there is a lot of cooption for the same deals.  All the major cities are having that problem now.  You need to consider the second tier cities.  The numbers are typically much better and fewer people competing for them.

    The other option is to get into the c-d neighborhoods.

    0Reply
  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    9y
    Ashley Benning I've seen banks refinance at 75%. In CA, it's appreciation that counts, not rental income.
    0Reply
  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y
    Ashley Benning I think your figuring out why so much investment capital is leaving California! It's the same story in San Francisco, San Diego, Orange County, etc. You're also, especially in the valley, competing with owner-occupants who aren't investors. They don't need to see a return, they aren't planning to sell, etc. Those buyers want a place to live and (if anything) look to long-term appreciation. So go where fewer people want to go, it doesn't have to be Arizona but you can look at Lancaster, Palmdale, etc. Really what you have to do is rank what you prefer: geographic convenience or adherence to your 70% rule. There's no right vs. wrong in that one. The one advantage of sticking to Los Angeles on the valley is that prices are high. Even if you only capture 10% of a $1M flip it's still $100K. Do the same thing in Alabama and you might capture 30% in profit but it will only be of a $120K property so you'd have to 3 flips to get ahead (in dollars) of your one California flip. Which, as an aside, always explains why so many people (who have the money) would rather flip here.
    0Reply
  • Dylan VargasPro Member
    Rental Property Investor · Chico, CA · Member since 2016 · 633 posts · 336 votes
    9y

    @Ashley Benning Welcome "Valley Girl". Sorry, couldn't resist. Stay at it. "Relator hasn't set me upon the mls" don't get this part. You can look at most listings yourself on Realtor.com, Zillow, Craigslist etc. Most deals will be off market though. I would attend some REI meetings as I am sure there are plenty. Remember, if there is a deal on the mls you have to act within hours so make sure you are prepared to offer immediately. Call houses that looked like fixers you drive by. Never know. The deals are there just tougher. @Ariou B. agree with his "paralysis by analysis". People spend forever doing this and never actually do a deal. You can try a Realtor that is investor (find deals) friendly but they are hard to find and actually produce for you. Anywho, stay at it till you get a deal. You can do this! Many others are every day in your backyard!

    1Reply
  • Ashley Benning
    OP
    Woodland Hills, CA · Member since 2016 · 98 posts · 40 votes
    9y

    I am so thankful for the BP forum! Thanks to all of you for sharing your expertise. I am glad to be reminded yet again that there is no ONE right way to do this; I have to find what works for me. (Which is both liberating and intimidating!) 

    @Rob Rice   I am also going to look into Listsource and Realeflow, resources I have never before used. But I am here to learn, so learn I will! Thanks for the advice.

    @Andrew Johnson You make such a good point about the capture! I have considered what you said, and I am feeling like working locally but with larger numbers may be more sustainable for me for the immediate future (since I still have a day job). It will take more creative financing, but I look forward to that challenge. Eventually I would like to diversify and have properties in Arizona as well, and perhaps it is THOSE properties that will lend themselves more to BRRRR and out here in LA/Orange County/Ventura County I will just focus more on flips.

    @Lesley Resnick How can I identify second-tier cities? Do you mean cities just outside of Los Angeles, or completely different areas entirely? For example, I am seeing that properties are a little less expensive south of LA (Costa Mesa, etc.), and there seem to be more rehab properties available than up north of LA where I am. Is that what you mean? Or do you mean somewhere else entirely, like Palmdale? Thanks for clarifying. 

    @David Faulkner I love that philosophy! I'm adding it to my motivation board. 

    Thanks again, everyone!

    0Reply
  • Ashley Benning
    OP
    Woodland Hills, CA · Member since 2016 · 98 posts · 40 votes
    9y

    @Dylan Vargas Yep! I'm a Valley Girl, through and through, dude! :) Thanks for the motivation. I am starting to feel the "analysis paralysis" and that's no good. I am very Type A, so I like to make spreadsheets and checklists and projections, but at some point you have to trust that you have learned what you can and then go for it, I guess. Go team!

    2Reply
  • Dylan VargasPro Member
    Rental Property Investor · Chico, CA · Member since 2016 · 633 posts · 336 votes
    9y

    @Ashley Benning I would also connect with other flippers as they may know about some deals or pass on some if they are too busy. I know this sounds odd but works. Go check their current flips out to verify who is real. People always want to help others in this business I find. We have done this in Chico and I feel it helps motivate people, give them confidence and physically show them a deal as it is happening. Good luck and keep us posted on when your first deal happens.

    0Reply
  • Account Closed
    Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
    9y
    Originally posted by @Ariou B.:

    @Account Closed There could be 1,000 rules of thumbs, are we supposed to remember all of them? In every state you go as you probably know the rules of thumbs are slightly different. As @Archie Robb mentioned, the 70% rule doesn't really work in SoCal so my question is why is the 70% rule even important in the first place? Why can't we all just stick to the fundamentals? 

    • Is the ROI Acceptable?
    • Does it meet the 85% rule (important because many HML look for it)

     Of course not, you don't need to know any of the rules, and that's fine.  If your detailed analysis pencils then bingo.

    I lend money to flippers, talk to them all the time.  You can tell a lot about somebody in the first 30 seconds of a conversation.  When a conversation starts with my deal follows the 70% rule, when in fact it doesn't, red flags go up ... it makes me wonder if you have a deal at all.

    0Reply
  • Ariou B.
    Specialist · Lakewood, CA · Member since 2014 · 42 posts · 12 votes
    9y

    Dave this conversation has blown out of proportion LOL

    First you say I don't know what ROI is and now you're telling me I'm making all these stuff up to win an argument over internet LOL you're something else man!

    Pup: $615k

    Rehab: $10k

    ARV: $900K

    (615+10)/900= 69.4% 

    Of course you're going to think I'm making this up as well.

    To wrap things up btw me and Dave because our convo is getting too long, I think we both agree 70% and many other rules of thumbs are good if you meet them, but they're not critical. 

    0Reply
  • Ashley Benning
    OP
    Woodland Hills, CA · Member since 2016 · 98 posts · 40 votes
    9y
    David C. Ariou B. Haha! I so appreciate that both of you were willing to provide me with such great advice. I think this is a great example that, when it comes down to it, there are many ways to interpret if a deal is "right" for each of us. I guess we all have certain expectations, and they vary, so as long as I feel like the payoff is worth the effort, that's the key. :) Thanks again!
    1Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    Make sure you can cover the downside first and foremost, then and only then figure out if the upside is worth the effort. This advice is true in any market, but especially true in ours. The only people that ever lost long term investing in SoCal were those that didn't do this, then sold or got foreclosed on at the worst possible time and never were able to make it to the long term.

    1Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y

    The only thing I use "rules of thumb" for is whether it even makes sense to go look at a property in person. I have bought profitable houses that violate the rules, and I have bought profitable houses that make the rules look ridiculously conservative. Every house is a deal unto itself. Further, percentages become less important the higher you climb in price. The 70% rule is probably asking too much if you are talking ARV of $1 mil+, because how many sellers are going to leave several hundred thousand dollars on the table? On the flip side, 70% of a house with an ARV of $50k is probably going to make you lose money.

    Focus on your niche and evaluate your ability to make money on the specific house, not from any percentage. If you are married to 70% because you aren't bringing any/much cash to the table, and thus need a bigger margin to refinance your equity back out, you either need to come up with more cash or think about shifting into cheaper markets. 

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