70% rule in flipping

26 Replies

The 70% rule works out fairly well in my opinion. If you're running the numbers in spreadsheets and have experience in estimating the rehab costs (tough part) you'll find it works. On my current project the 70% rule told me to purchase at $68K. End up paying $75K. I could have offered less but didn't want to lose the deal.  

Remember it's a rule of thumb. If the property is reallllly distressed I'd throw it out the window. 

If you doing a flip you need to know your numbers. As is value, repairs and ARV. Youu need a good team, realtor, lender and contractor. If the numbers don't work don't buy the house. Remember don't fall in love with the house. Numbers Numbers.

Originally posted by @Jeremy Quilon :

Does the 70% rule always work out? What other rules are there in flipping?

Yes. This is a gross profit margin so as long as you estimate costs and ARV correctly you will make a 30% profit on the deal.


 

I have never flipped a property but my opinion is that it does not work well for the cheapest properties.  Those properties that @James Wise indicates is best left to experts.  I get emails from him, he is very open about the risks, that are dirt cheap.  Like literally in most of the nation you could not buy the dirt/land for the price he is requesting for the RE.

So lets say that his $15K duplex (I believe that is the price of the duplex he emailed me this weekend (again fully disclosing condition and the type of location - no slam to James Wise he seems to be very up front (with full disclosure) about the risks - just using his price range of properties as an example)). Lets say I can rehab it for a cost of $55K and it has an ARV of $100K. Meets the 70% rule. $30K profit, not bad. Take out selling fees and holding costs, $20K of profit if I can flip it fast (probably less for all but the most experienced flippers). That is a lot of work for a max upside of $20K. Most people who can actually bring this in at a profit of $20K deserve to be better compensated for their skills.

So my qualifier to the 70% rule is that the 30% must be greater than $50K in all markets and approaching $100K in my market.

Good luck

@Fred Shatzoff

What's the best way to determine ARV? I watched YouTube ask BP podcast with Brandon Turner and a lot was looking at the comps and properties being sold. There's a 3/1 sold several months ago at 328,000 and I'm looking at a similar unit, however the home is fairly decent and possibly don't need much work but a lipstick on a pig type work. Please advise any way possible.

@Jeremy Quilon ,   @Dan Heuschele makes a great point on the low end property.  On the other end of the spectur, I feel you can get a little more aggressive on the upscale properties assuming you know the area as the larger margin spread creates more cushion.  If I buy for 325k, put 105-125k into it and sell at 575-600k, I'm good with that margin as we've proven it works, have a grasp on that market and hold time, and floor price.  It's less than 70% rule, but still very profitable after accounting for all costs. 

Also note that buying a property for 100k and putting 25k into it is not the same as buying for 25k and putting 100k into it. Yes, on a spreadsheet those all-in costs are the same, but the odds of going sideways and the overall holding costs are much higher on the 100k rehab scenario.

As others have said, this is just a rule of thumb and there are lots of variables.  I wrote a BP blog discussing all the true costs of a flip and how to build your own calculator, but I don't think I'm allowed to post here (it would be viewed as self-promotion).  Feel free to DM me and I'll send it your way or just check it out on my profile page.  

Lastly, as @Fred Shatzoff mentioned, pull in the relator you would use to list the final product. Let him know the gameplan, provide some type of CMA, and solicit his thoughts on best bang-for-your-buck options.

@Tom Shallcross

Good point! One question that I have when you mean lower end for example 1/1 or 2/1 condos as oppose to higher end value 3/2 single family home?

Also with your numbers buying at $325K and able to resell at 500-600K I’m curious what’s the comps around the area? Are you mainly gearing towards distressed homes with a lot of TLC going into the rehab?

@Jeremy Quilon I just mean lower dollar end, as you have less room for error.  

For the second question, yes comps are going to be in the 500-600k range as we base our selling price off of sold comps, and yes we are going to do a good amount of rehab to create that value.  You can check out my profile page to see some of the specific deals I'm referencing.  

@Jeremy Quilon You really need to dial in on those comps and NO lazy rehab numbers...pennies add up quick in this buisness. Being a real agent is a massive advantage. I would highly recommend you find a good one in whatever locality you choose to buy in. The more practice you have the better you get at it!

@Jeremy Quilon   "nearly 100K less than asking price"...  Now you're thinking like an investor!! 

That's the deal you want to find. No other way around it. Unless you want make $10K or worse for months of work. Locating/hiring contractors, swinging a hammer, purchasing materials, it takes time and you deserve to be paid for it. 

@Jeremy Quilon  

The 70% rule is just a guide. Same as the 1% and 50% rule. Run your purchase numbers, rehab costs, holding costs, utilities and of course profit. It's all based on comps. Compare a 3/1 to a 3/1. Same neighborhood preferably, same school district and schools, same finishes and I always go make at least one improvement the other properties don't have. One neighborhood over could have a major impact on ARV. It's all about the numbers. Profit margins are up to you. Some investors won't do a project if they don't make a $40K profit while others are satisfied with $20K it depends on your strategy, time to rehab, time to sell.

Originally posted by @Lance Liebenow :

@Jeremy Quilon worst they can say is no! Make the offer and see what happens! It might not be appealing now to them, but if it does not sell in x amount of time and you have a solid proposal they may counter offer way closer to what you offer.

Bingo. I've even shown comps I used to determine the offer. Maybe it's a stupid tactic but I think it shows honesty behind the number. 

 

one caveat: this rule is extremely hard to implement on mls listings. it won't hurt making these offers, but unless your agent is investor-friendly, you'll likely get fired as a client.

Originally posted by @Jeremy Quilon :

Does the 70% rule always work out? What other rules are there in flipping?

First, it is NOT a rule, but just a “guideline” and no, it does not “always” work. Price points, amount/level of rehab, and the investors individual abilities, skills, and capital make a big difference. As others pointed out, in lower end properties, you may need to do better than 70% and in other price points, 75% works all day long. Even 80% deals can work if the rehab is light and the time line can be super quick. Keep in mind this percentage is a quick, back of the napkin calculation to do a quick “test” to see where approximately the deal sits. You still need to dial in all your numbers and execute a full plan before pulling the trigger.

Lastly, the 70% rule doesn’t give you 30% “profit”, it gives you 30% cushion to cover holding costs, resale costs, financing costs, and your profit.


Updated 9 months ago

Everybody wants to purchase a property around 70% of the ARV, but they are rare to come by. From my experience selling fixer uppers, if you can hit that 80-85% mark you'll still be making a good profit off the top. You have to take into account closing costs and agent fees so I think 80% is a good number to shoot for. If you rehab yourself, it would end up being a lot cheaper but take a lot longer. It just all depends on the comps, how cheap/nice your rehab is, and the area. Hope this helps.