70% ARV - What do you do?

Question

Evan Polaski · Answer

@Ryan Boutin, along the lines of Scott noted, the 70% rule is typically more tied to BRRRR when you are hoping to refi all your money out and hold the asset as a rental.

For a flip, and the issue with percentages as a whole, they don't account for the value of your time.  Hypothetically, if I were find a $30k house that needed $20k in Reno, I would only need to make about $20k, before selling costs, or likely netting about $12-15k.  That isn't worth my time and headache.

I want to make at least $50k, after all transaction costs, or 20% ROI on my invested capital, whichever is higher.  The latter sort of fits your 70% rule, as long as the investment amount is enough.

Jeff S. · Answer

The 70% rule-of-thumb has been around for years, and it works for flips, @Ryan Boutin.  Here's how to use it: Add the purchase price and rehab estimate together, and the total should be less than 70% of the after-repair value (ARV). For higher-value properties, say over $250k to $300k in ARV, you can push it up to 75%. Those who dislike the formula usually do not understand why it works or prefer to rely on intuition. It's only math, and it works.

I demonstrated the typical calculations from our spreadsheet in this recent thread: Costs needed to keep in mind for a flip.

You cannot let your purchase price and rehab costs total 85% of the ARV. Sales commissions will add another 5% of ARV, while loan charges will typically add another 5%. That already adds up to 95% of the ARV, without considering other expenses such as escrow purchase and sale, property taxes, transfer taxes, fire and liability insurance, title insurance, utilities, staging, and more. This means you'll exceed 100% of the ARV, leaving no room for profit.

Deals will not “… make sense at 80% or even 85% depending on how much rehab (if any) is needed …” because the rehab is already included in the percentage. Similarly, if you're rehabbing $350k properties, aiming for a profit of $50k on each property might make sense (and I’ve flipped properties in Cincinnati). However, it doesn't make sense for an $800k property, where a small market drop or a reasonable counteroffer could eat up the $50k profit. That is, assuming a fixed dollar amount for your profit only works if you assume a fixed ARV. I doubt the ARVs are fixed in your area.

Nor do we use ROI. The reason is many borrowers are experienced and can borrow all or nearly all of their purchase and rehab money.  Thus, whether their profit is $1 or $100,000, their ROI is infinite.

A good deal for us is where the rehabber earns 12% to 15% of the ARV in around 6 months. This won't happen if your purchase price and rehab cost total 80 to 85% of ARV.  Do the math and stick with 70% (or 75% for >$300k properties).  Use it for screening only and when you run all the numbers in detail, as you must, you’ll see that it makes sense.

Scott E. · Answer

Came to say what @Larry Turowski said.

You should ignore those arbitrary rules when you're getting into house flipping. Underwrite every single deal, because every deal is very unique. After you do this enough times it'll only take you minutes to do a rough underwrite on a deal. Here's the formula:

ESTIMATED SELLING PRICE (ARV)

-Purchase price

-Purchase expenses (inspection, survey, etc)

-Rehab cost

-Misc soft costs (designer, architect, engineers, permit)

-Loan costs (interest payments, points)

-Other holding costs (utilities, landscaping, pool maintenance, etc)

-Selling costs (commissions, closing costs, staging, buyer warranty, etc)

=PROFIT

Carlton B. · Answer

@Larry Turowski eluded to the time needed to complete the rehab. If the job takes too long addtional cost and risk will start to appear. Even if a job has a high return and 70% is on the high end I will pass if the job will be longer then 4 or months.

Caleb Brown · Answer

Most investors will want to be all in of the ARV at 70-75%. The nicer the area the more you'll find buyers willing to sacrifice the equity, the reverse is the worse of an area the more investors will want off of the deal. But everyone is different, it'll also be based on the amount of work/time required for a deal.

Ryan Boutin · Answer

I didn't realize that the 70% was referring to the BRRRR strategy, but that makes sense.

Ryan Boutin · Answer

Great replies!

I am flipping homes I will purchase around the $250-300 mark plus rehab. I use a the detailed spreadsheet from houseflippingspreadsheets.com. It seems to work well. I am a little discouraged because of the market here. Because the inventory is a lower than normal, there is a ton of competition for homes that need rehab. When I say this, I speak of the MLS listings. I am looking at other methods right now to find off-market properties. I am not sure that there is enough profit in MLS listings, especially when there are multiple offers.

70% ARV - What do you do?

Most Popular Reply