Applying Rules of Thumb to Inflated Markets

2 Replies

Hi there,

I'm looking to do some wholesaling in the east bay. However, when one considers the discount on the property after applying the 70% ARV rule of thumb, that's a pretty sizable chunk of money in this inflated market. Given a retail value of $600k, 30% discount on that is $180k. Is that still a reasonable discount or is the rule of thumb to be adjusted for higher ARV properties?

My understanding is that the rule of thumb is typical on a ~$160k property, thus equating to about a $48k profit margin.  Naturally, $180k is far different than $48k.  One can also argue that the risk is greater with a $600k house versus a $160k house.  But does that alone justify the huge margin in comparison? 

@Joshua Du

@Joshua Durrin  ,

Yes, flippers would still like to buy at 70% ARV minus repairs, but the margins do get thinner at higher price points right now it's looking like. But for the Bay, $600K isn't a very high price point. I paid a wholesaler $20K a couple months ago for big duplex in West Oakland for $300K. Was a great deal. Would be happy to do it 10 more times if you can find me some more properties there.

When you say "does that [size] alone justify the large dollar margin..? A lot of the costs are based on the gross, such as private lending costs, RE commissions, etc. So it's pretty proportional. Also, the ARV tends to be less certain in these areas, providing some extra risk in the exit price. We had an extensive discussion regarding these risks for $1MM+ flips recently...

Thanks for the insights J Martin. I appreciate your feedback. Great point on the scalability of the costs too. 

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.