Purchasing Investment Properties at 70% of FMV??

Question

Investors seem to throw out the 70% rule as a standard in purchasing investment properties. I understand that it varies by markets, but as markets continue to get more saturated and more competitive, is it fair to say that the 70% rule might be an outdated, over-generalized benchmark? Especially considering the dynamic and organic nature of these types of markets...

Jon Klaus · Answer

All markets are local, and competitive demand varies. That said, it is possible to buy at 70% of ARV, even in a hot market, it's just harder. Will Barnard is doing great at higher buying points, but the exit values are so high, that his absolute margin beats almost everyone else.

If you bend the "rule" too much, you could get burned, Do you have numbers on a deal you are considering as an example?

If you bend the "rule" too much, you could get burned,  Do you have numbers on a deal you are considering as an example?

Will Barnard · Answer

you are correct in that the 70% guideline need be adjusted according to market conditions! but more importantly, to different exit values and extent of rehab.

A 73% deal can be spectacular if your exit value is between $125k and $400k. I would call that an easy double all day long on any state of the union, granted your holding times should be considered.

If the exit is under $100k, I would warn you that the 70% rule may not be good enough and going to 73% would be a no go in my book.

Exit values play an extreme role in how you adjust this rule of thumb.

If you can provide the exit value and rehab amount, I can better give you an idea of how well you should look at your 74% deal.

Mark Ferguson · Answer

I will got up to 75% all day long on our flips. I am also a Realtor so I save 3% listing commission when selling and many times I get back a commission when I buy the property as well.  I think you will be fine buying 73 to 74 percent, but you may not make quite as much money as many investors want to justify the risks involved.  If you know what you are doing and know rehab costs then you can justify going a little higher.  Make sure you aren't fuding the numbers to make a deal work.

Timur Medaric · Answer

Hey Paul,

Well it isn't necessarily a minimum profit criteria. I would personally prefer a $15,000 profit over a $20,000 profit if the $15,000 is a cosmetic rehab with low DOM. And to be honest with you, with many investors that I have dealt with, they will pick up deals where ever they can get them and DOM is more of an indication of risk  and investment "worthiness" than the potential $5,000 difference in profit.

With regard to the 73%, you can plug in the numbers and arrive at 73% but my criteria for investment lies much deeper than a percentage point difference in profit. Which brings me back to my point...I can't understand why an investor would completely pass up a deal because it doesn't meet a $15,000 profit criteria. That logic would lead you to believe that a $14,500 profit isn't worth it. A little ignorant if you ask me. But that's just my 2 cents

Paul Z. · Answer

Could you present your analysis on one of the 73-74% properties you're looking at? I'm interested to see where your profit margin lies.

I'm assuming you have a minimum profit criteria for you to go through with a deal and now since the percentage is higher you might have some doubt? Or am I wrong?

Timur Medaric · Answer

Yea i figured so. I've never even dealt with something above 80% unless it was the greatest cash flowing deal of all time.

Jon Klaus · Answer

I think you'll be fine at 73-74%, especially in a hot market.  I thought you might be talking about 85%.

Timur Medaric · Answer

Thanks for the response Jon. I have numerous deals that I am working with and many of them are ending up in the 73%-74% range. I feel like they are still deals, especially for all CASH buyers, but sometimes I feel like Investors are sticking to their guns on the 70% idea and potentially "burning" themselves in the big picture, on the deals they pass up on.

Purchasing Investment Properties at 70% of FMV??

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