I’ve just pulled a driveway to one of the new properties in Freetown, Massachusetts.
Today was “demolition day” And I was excited!
It’s been a while since I disassembled it, but I was really looking forward to seeing the excavator tear everything into pieces.
I felt like a kid on Christmas morning … I was completely excited to take some videos in the process of seeing it happen.
Just then, my 2009 Chevrolet pickups started making Interesting sound.
I’m not an auto mechanic, but I knew that these “noises” weren’t just the result of temperatures below freezing in Wareham, Massachusetts’ recent winter season.
I thought I could probably go to Freetown, but I did the right thing, My local Sullivan tire To get them to see it.
After throwing them on the lift, they said my “ball joint” was shot. I didn’t know what these were, and even less thought about what it would cost me.I secretly asked for the price, and after the technician did some calculations on his computer, he said it would be. $ 798..
I told them to do it because I couldn’t “shop” exactly for a better deal because I was busy with time.
At that time, I thought it was as easy to calculate how much to pay for a truck repair as it would be to pay for the inside out of a house …
Amount to pay for flips using the 70% rule
How much to pay for real estate … things that are always difficult to keep track of.
It’s difficult … unless you have Strict rules..
Determining the comps in the area is a great start I talked a few times here..
From there, you are heavily dependent Your ARV And from there, you need to know what the cost of repairs will be.
Repair cost Is also very important, and you can find out the number by walking through with the general contractor.
Now you know the ARV and the repair cost. These are the two most important numbers in the company.Number 1 is ARV No. 2 It is a repair cost.
Once you know these two numbers, you can apply the formula.It is known as 70% formula or alias 70% rule..This is a very common formula and is mostly used by me as well as thousands of other investors. Because it works very well.
70% rule makes you money
Some investors do not fully understand how the 70% rule works. They just know to do it, but they don’t really understand why.
But for you, you want to understand how it works, so you know how to control it and use it for your benefit to make more money. increase.
You may want to use a different percentage than 70% because you need to adjust based on the properties. But most of the time, when you start, you should just use the 70% rule – just 70%.
Now let’s look at the actual behavior and explain why it works.
Example 70% rule regarding the amount to pay for a flip
1. Get ARV
For example, suppose ARV is considering buying a property for $ 200,000.
To reach that number, our realtors have done a complete comprehensive market analysis (CMA) and all of the neighborhoods are priced at $ 210,000, $ 215,000 and $ 205,000. All of these are basically within that range. Therefore, based on the CMA, we have determined that $ 200,000 is a very realistic and somewhat modest price.
The mechanism of the 70% rule is as follows.All you want to do is take that $ 200,000 and multiply it by 0.7-it will give you $ 140,000..
Now, if the house is complete and ready for sale, our maximum permissible offer (MAO) will be $ 140,000.
In that case it’s perfect for you!
But the reality is that you don’t buy a home in perfect condition as a flipper. So you probably have to make some modifications.
in the end, Distressed property that looks like this What you ideally want to chase.
These are properties with failed septic tank systems, moldy properties, garbage-filled properties, and the world’s wreckage of properties.
You want a property that everyone wants to run out right after they step into it. These are the ideal type of properties for you. There are some remarks around the office about these gems.
Mold is gold
Smell like money
good…The last one has nothing to do with these properties, but always say it anyway!
The reason for targeting these types of properties is simple. Generally, it does not compete with retail consumers.
I deviate … go back to the 70% rule …
2. Get the repair cost
For discussion, the cost of repairs $ 40,000..
To reach this number, we had our contractors come and look at the plumbing, roofs, siding, everything you have, and more. He is quite convinced that repairing real estate will cost $ 40,000.
3. Get MAO
The next part of the expression is when subtracting it $ 40,000 from $ 140,000 It’s you $ 100,000.
Now we are looking at the maximum allowed offer (or MAO) $ 100,000 With this property.
So you go and offer $ 100,000 …
Wait for your partner … not so fast!
The last thing you want to do is provide your MAO right away. This is a common mistake for new real estate investors. Entering the maximum permissible offer amount leaves no room for negotiation.
And when that happened, you are now stuck.
Remember it This number is the maximum number you will payTherefore, always start low.
caveat! caveat! About ARV
Yes, the 70% rule works great – no doubt, but keep that in mind The formula is as good as the starting number.. In other words, ARV must be very accurate in the first place.
Please let me explain.
You have a brand new real estate broker and she is very excited to get your business and she tells you $ 215,000.. You are excited You can already imagine all the cool stuff you’re going to load with your huge profits …
But she is too ambitious and her ARV is too high.This unrealistic number Currently affects all other downstream numbers.
in this case, $ 215,000 And multiply it by 70% – we are now $ 150,500..So instead $ 100,000 And that $ 140,000We are now $ 150,500..
Other ARV numbers are only 7 or 8% more than $ 200,000, but these mistakes start to add to your earnings …To make matters worse.
So now we actually buy the property at $ 110,000. Second, let’s say it takes longer than you expected to sell.
You may be crazy about it for 6, 7 or let’s say 8 In this scenario.this is 8 months Soft costs such as interest, maintenance and maintenance costs are actually totaled in 8 months.
In the meantime, your repair will cost you $ 50,000 Instead of $ 40,000 You projected.
To make matters worse, you go for sale and the realtor (the one who told you to sell it) $ 215,000, By the way) come back and say you need to sell it $ 200,000..
You’re stuck now … Beyond your budget, under ARV, you’re crazy about it two months longer than you expected.
The nightmare isn’t over …
Suddenly, the offer started to come in They are not even close $ 200,000.. They are coming in at $ 190,000, $ 194,000, and a little less.So if you have a tail between your legs, you will settle into your ARV $ 195,000.
In this scenario, finally Less than the minimum wage for this flip… Despite 8 months of hard work.
“Less than minimum wage” numbers
Let’s look at the numbers:
Now, let’s face the facts. Making $ 9,000 isn’t too bad. But if it took eight months to do that, take it into account for more than eight months …It’s like earning $ 6.39 and time for all your hard work.
The minimum wage in my state is $ 11, which is less than the minimum wage.
Calculation: 22 business days / month x 8 months x 8 hours / day = 1,408 hours / $ 9,000 = $ 6.39 / hour = Really terrible payment for you
I certainly don’t want to make less than the minimum wage with my flip …
And that’s these numbersAnd I can’t emphasize it enough, that is very important.. And more importantly, it’s very important that you stick to them.
70% rules are not plugged in
I like the removed ones, like the unplugged version of my favorite song Like here.. very…
Now let’s see why the 70% rule works well in this section.
One of the biggest questions I always get with the 70% rule is “What’s the other 30%, Mike?” Its very simple, here’s a breakdown:
- Ten% Soft costs such as financial costs, broker fees, maintenance, maintenance and snow removal.
So with a $ 200,000 ARV flip, you should be able to predict a profit of $ 40,000 if everything else is equal. If it’s turned off in any part, as in the example above, it’s profit to suffer.
And if you stick to all these rules, you won’t be less than the minimum wage … you’ll make much more, and you’ll probably want to repeat it over and over again … make Maximum wage All the way.
If you get this far, leave a comment below! What do you think? Please leave a comment and share your question — or ask me whatever you want about flipping the house!