70 % Rule or MPP

13 Replies

I am wondering how these 2 favor for new & seasoned investors. I personally like the MPP calculations because it seems as if you are allotting for  majority cost involved in a flip.... repairs, profit, holding & closing cost. However, I hear a lot of advice for new investors to use the .70% rule. 

I'm just curious to know which others are using and how it has worked for them. 

- Thanks

Toshia

70% is a easy number to go by.   It sets the guide line for investing.  I would say if a deal makes sense and you don't over extend yourself then go for it.   If not, set it up as a referral to another investor and get paid a referral fee on it.   The numbers may not work for you, But work great for someone else.   

The 70% Rule is just like the other rules of thumb we often talk about -- The 50%Rule, The 2% Rule, etc. -- it is great for doing an initial "back of the envelope" evaluation of a deal.  But, it's not a detailed analysis, and before making a purchase commitment, you need to do a detailed analysis.

For flipping, doing an MPP evaluation is the detailed analysis...

@ J Scott . Thank You, I agree, when I began to run figures it seemed the MPP calculation was just more reliable with a realistic snap shot of the bottom line. Then once you've allotted all cost, negotiating from that number with the seller made sense. 

what's MPP?

Originally posted by @Ron King :

what's MPP?

Ron - MPP is Maximum Purchase Price. It is often also referred to as MAO - Maximum Allowable Offer.

In all of my analysis I always use the MPP/MAO procedure since I have this automated in the custom software that I have built for myself. The 70% rule-of-thumb does not consider differences in closing costs, sales commission, or other costs that may be different for specific properties. I'm too much of a perfectionist to not have all of my costs automatically figured upfront - other than my on-site inspection of rehab costs (I'll use a rule-of-thumb for rehab costs with an inspection contingency if I have to submit my offer immediately).

Remember one thing to always keep in mind. That even if your do a great job of your figures it will all come down to whether your house is in an area where people are buying or an area where people will want to live. Nothing is going to happen if the house does not sell or does not rent. This is one of the hardest factors of analyzing a property. It is also one of the first things you should think about. 

Originally posted by @Gilbert Dominguez :

Remember one thing to always keep in mind. That even if your do a great job of your figures it will all come down to whether your house is in an area where people are buying or an area where people will want to live. Nothing is going to happen if the house does not sell or does not rent. This is one of the hardest factors of analyzing a property. It is also one of the first things you should think about. 

 Gilbert - That is exactly why, in my personal deal analysis software, I place a greater importance on the neighborhood and, separately, the school district where the property is located. In my built-in decision matrix, those factors weigh greater than the financial aspects of the deal. You are correct that location is the greatest consideration.

@Toshia Booker-Blakeley

We prefer using 65% of the price instead of 70%  Then subtract repair estimate, holding cost, closing cost, and if you plan to wholesale it subtract your assignment fee.

I think some or many rehabbers are missing this aspect of deal analysis especially newbie. 

I read post where someone will say, " I did everything right. I got a HML, I verified the comps, I got quotes from contractors but now my house isn't selling and I do not understand why". They try everything, discounting the asking price, asking people what features they want the house to have but the house still will not sell even after what appeared to be successful showings. If what you buy is not near a school, not near transportation lines, not near a hospital, not near a park, not near stores ask yourself why would someone want to buy your house especially why would they want to make an offer on it right away. You have to establish that there exist a demand for your house.

When I pick a house for which there will be a demand you will get people driving by during your rehab and ask to buy the house or rent it if you will be renting it. Many times I have had a house sold even during the rehab phase. During the last 3 weeks of rehabbing I get potential and interested buyers  calling me almost on a daily basis. 

I learned on my first flip that the 70% rule was not appropriate for my area. If I used that rule, I would pass on ever potential deal I've ever considered. Because of the lesson learned on that first deal, I have never and will never use the 70% rule. I'll run actual #'s on every potential deal assuming a 6 month turnaround. It takes more time, but is worth it for me.

(To be specific, the 70% rule said that I should pay $179,000 for my first project (which the seller would have NEVER accepted). I entered a bidding war and paid $205,000 for the home. I walked away with a net profit of $44,000 less than 3 months later)

Originally posted by @Scott S. :

I learned on my first flip that the 70% rule was not appropriate for my area.

Not trying to be pedantic, but I think it's more accurate to say that the 70% rule was not appropriate for YOUR CRITERIA, not that it wasn't appropriate for your area.  Just because you can't find deals at 70% doesn't mean it's not appropriate for your area, just that it isn't realistic (or feasible) in your area.  The rule of the thumb is still appropriate even if you can't find those deals (in other words, if you COULD find those deals, you'd use it).

When that's the case, you have the choice of changing areas or changing criteria.  If you change your criteria, that just means that you're willing to accept a lower return than you otherwise would in a different area or different market conditions.

*** NOTE 1: I'm not saying that anyone should make buying decisions with the 70% rule of thumb (or any rule of thumb). Just that it's a reasonable first pass in almost any market assuming your ROI target is somewhere around 15% of ARV. If your criteria isn't somewhere around 15% of ARV in ROI return, then using the 70% rule isn't going to be appropriate for YOU.

*** NOTE 2:  There are some cases where the 70% rule may not work in a particular area.  Those are areas where the fixed costs are completely out of whack with the cost of the property.  For example, extremely high transfer taxes (though not extremely high property taxes, as they will still be relatively small on a typical flip).  But, this is going to be pretty rare, in my experience.

@J Scott You're right. My original post was poorly worded.

I am in agreement that if you can find a property (ideally in the $200k+ ARV range) that meets the 70% rule, then it is worth pursuing or at minimum looking at in greater detail.

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