Would you still follow the 70% rule when buying on auction?

Question

When looking at homes in auction would you still follow the 70% rule? And what costs does the 30% percent account for?

Ned Carey · Answer

@Seth Bryan if you believe in the 70% rule then why would it be any different because it is an auction? If it is an auction you might have to be much more conservative on your construction cost estimates because you may not be able to see the interior condition. But that would be true with any method of evaluating a deal.

The 30% represents what I call your soft costs and you profit. The purchase price and repair costs are a hard costs. The "soft costs" are all those hidden costs you don't think about until you really do a deal or a real analysis.

Examples

Closing costs to purchase

• points on any mortgage to purchase
• title fees and title insurance
• legal fees
• survey
• misc junk fees
• lender fees appraisal

carrying costs like

• interest, 
• taxes, 
• heat and cooling,
• Builders risk insurance
• Draw inspections on construction loans

Costs to sell

• sellers concessions
• transfer and recording taxes
• real estate agent commissions
• staging
• photos
• sellers side closing costs

These items can easily be 15% or even 20% of the deal. That leaves about 10-15% of the selling prices as your profit.

@J Scott prefers to use actual numbers a calculate this rater than rely on a crude percentage like 70%