NOT FOLLOWING 70% rule, CAN i still Make Money?

Question

i'd like to start off by saying this is my first deal.

I've been negotiating back and forth with this seller for about a month now. Have not yet put it under contract for a set price. property is located in Manteca CA.

2bd/ 2bt built in 1922 total sq ft. 1200.

The comps show the property could go for 180k after repairs. But thier is 2 huge energy transformers 2 houses down. (Not sure if that is going to scare retail buyers and ultimately devalue the properties ARV??) The house it self is completely thrashed. I tryed partnering with another experienced local investor, he says the property might need new plumbing new electrical and redo the kitchen, bathrooms and bed rooms. Prettymuch the whole thing. He says its going to cost 65-70k to fix (if we get a good contractor). I have no idea how to estimate rehab cost, dont know if these numbers are correct.??

He offered her 63k for the property. She denied. Ultimately she contacted me again 2 weeks later and said she will do if for 80k and she owes 4k in back taxes and wants me to pay that 4k plus all closing costs.

I don't know how to go about this, all i know is i want to wholesale it to another investor but dont know if theirs enough meat on the bone for me to get something if i agree to her terms at 80k???

PLEASE HELPPP!!

Kevin Fox · Answer

Hey @Fernando Ruiz

Absolutely. Every market is different. The 70% rule is intended to be used as a rule of thumb, not something to live and die by.

Where I invest in San Diego, the 70% rule essentially just goes right out the window.

Tamara Elliott-Deering · Answer

I don't think you should waste your time. If an experienced investor offered her $63,000 and she wants $84,000 there is no way you can wholesale it. Check out the wholesaling calculator or the flipping calculator to verify but here are my quick numbers having not seen the property I came up with a repair price of $62,000 so your investor is probably spot on, for someone to pay cash for the property, flip it and still make a profit their maximum offer should be $65,600 so you would need to lock the property up for $65,000 - your wholesaling fee.

You really need to spend more time learning your numbers before you negotiate the deal. Find the free calculators out there and run numbers until they stick in your head.

Best of luck.

Manny Cirino · Answer

@Fernando Ruiz 65% is can be subjective based on your area. Every Market is different some areas support 65%-70% and others support 80%-85%. This all depends on the common rates provided by your local HML. If you talk to a few you will see a common rate a raise.

With that said take a look at the numbers from an investors point of few if they were to flip the deal

example

$180,000 ARV

$80,000 Purchase Price

$70,000 Rehab

$10,800 6% commission

$3,600 2% closing cost

$4,000 Delinquent back taxes

$5,000 Assignment fee paid to wholesaler

$6,600 Gross Profit

Keep in mind this does not even include the cost to borrow money, holding cost(points, interest, utilities,  monthly, inspections) or closing cost to purchase.

Now do the same math sticking to your offer of $63,000

example

$180,000 ARV

$63,000 Purchase Price

$70,000 Rehab

$10,800 6% commission

$3,600 2% closing cost to sell

$4,000 Delinquent back taxes

$5,000 Assignment fee paid to wholesaler

$23,600 Gross Profit

If she came back that is a sign she is losing patients and is willing to negotiate. That's is a good thing. Just remember to never fall in love with the idea of a deal only fall in love with the numbers, they never lie.

Kurt Gardner · Answer

agree with @Tamara Elliott-Deering...you are not in the sweet spot on this one (from the guy who buys properties fairly lean, himself!).  All of my deals are below 70%, a couple are below 50%, but I do come close to the mark sometimes if it really intrigues me.

the seller is not in the driver's seat on this deal, and you will only hurt yourself by bending to their demands.  they owe $4k in back taxes and are trying to get out of a house that is decrepit.

YOU are the negotiator, and the fact that she is reaching back to you indicates that.  the problem is, she's probably so underwater, no amount of negotiating will help her at this point.  this will probably need to be negotiated as a short sale at best, and most likely picked up after foreclosure.

stick to your numbers...it's formulaic and it works...keep looking.

Scott Schultz · Answer

Thats a pretty high rehab budget, for $90K you could build a new 1200 sq ft house with a basement and a garage, the biggest rehab we did was $44K it was a full gut, to the studs new plumbing, electrical, roof windows drywall, Hickory cabinets, Real Wood floors, new tubs,  everything in 1650 sq ft. we did some of the work, but still,  unless contractors are big money out there, and you need top of the line everything, i think the rehab is off. but i could be wrong.

Cole Swartz · Answer

Some good advice in this thread.

Only thing I would add is stick to your numbers no matter what and don't be afraid to walk away.. Being that you are trying to wholesale, that makes iteven more important, because as you say, you need enough on the bone for both yourself and your investor.

Also, I would definitely devote some time educating yourself on rehab costs. Going tobe very hard to get your numbers right, if you can't properly estimate rehab costs. J Scott has an excellent book on the subject that might be worth looking into.

Fernando Ruiz · Answer

@Jason Hirko i will definitely take your advice and make that firm offer, with a contract ready to go.  Thanks!

@Manny Cirino i like the way you put that in perspective! Huge help!

Thanks again

Jason Hirko · Answer

@Fernando Ruiz I would make her a firm cash offer of $63k and let her know she can call you if she changes her mind. Heck, leave the contract with her so that money is staring her in the face when the tax man comes (and if she owes backed taxes on it, he will come).

Did you find out what she owes on it? A straight up purchase may not work if she owes more than $59k on the place... Might have to get creative

Dan H. · Answer

Every market is different but in my area of San Diego that unit would likely be purchase by an investor at $80k with $65k rehab for a $35k potential profit.  It would be by a smaller investor that could self finance.  They would hope to fix and flip fast.

I agree with @Kevin Fox that 70% deals in San Diego are rare for any straight rehab.  To get 70% typically requires more extensive construction effort.

Is there something that can be done to increase the return such as adding a BR?

I would not purchase this as a flip but other investors in San Diego likely would.

Good luck

Fernando Ruiz · Answer

Thanks guys, both of your comments have been helpful and have givin me a boost of confidence!! I will stick to the original plan and numbers!!

NOT FOLLOWING 70% rule, CAN i still Make Money?

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