Competition is getting stiff out there. In many markets inventory Month of Supply is far below the normal equilibrium. As a result, more and more investors are beginning to market directly to home owners, and with this comes increased competition. We are all familiar with the 70% rule and how it works but, in this market, it can be very difficult to purchase at such a discount.
Sometimes it can be very difficult to get offers accepted because they are lower than what the seller is willing to accept. This can be a very frustrating experience going on numerous appointments and getting zero houses under contract. This is especially true if you intend to assign the contract since you will have to build in additional padding for both yourself and the end investor. If you blindly attempt to implement the 70% “rule” without paying attention to your local market your competition will likely run circles around you.
A New Solution:
The answer is relatively simple. Figure out what inventory is going for in your subject properties subdivision. Do this by getting on the MLS and see what the cash “as is” sales are in the area. This will allow you to see what margins other local investors are operating on. Figure out what % ARV investors are buying in that subdivision, and try to get your subject property slightly under, even if that number isn’t 70% minus repairs. This allows you to keep your offers more competitive at a hyper local level. Here is a real life example of this to help illustrate.
I went on an appointment about a month ago. I could tell based off the sellers description and area, the best exit for this particular house would be to wholesale it.
MLS Comp 1: 52k cash “as is” sale
MLS Comp2: 49k cash “as is” sale
MLS Comp3: 54k cash “as is” sale
If you need help with this read this guide on choosing comparables.
I was able to get the property under contract at 47k and assign the contract within 24 hours. The numbers on this property were not at 70% minus repairs. However looking at the cash as is sales I could see investors in this particular subdivision were regularly buying at 81% ARV. I was able to give them a better deal than that, and I had multiple people jumping on it. Had I not utilized this method, the seller would likely not have considered my offer.
Master Your Market
In addition, learn the major markets in your area. For example you can break up a large market like Dallas into multiple submarkets with each having its own unique nuances. Sometimes flips might be at 80% or sometimes 60% it really depends on the target subdivision and local market what you can afford to pay.
Pay attention to your local market, and become an expert at it. I know investors who have let deals slip through their fingers by not implementing some of the techniques discussed in this blog post. It must be stressed the 70% rule is a guideline, you need to fine tune it to suit your local real estate market.
What kind of solutions do you all have for getting more offers accepted? Let’s discuss…