Currently, the market is very tight for buyers in most parts of the country.
In most regions, REO is much lower and sales are lower than they were a few years ago. Good deals to fix and flip are much harder for investors to find. Due to the tight market, the Bigger Pockets forum is always asked if you are willing to pay more than 70% of the post-repair value (ARV) minus repairs and flip-over repairs. My answer is yes. Under certain circumstances.
What is the 70% rule?
The 70% rule stipulates that you should not pay more than 70% of the repaired amount. minus Necessary repair. If your home is $ 150,000 and you need $ 20,000 for repairs, the 70% rule states that you shouldn’t pay more than $ 85,000. $ 150,000 x .70 = $ 105,000 – $ 20,000 = $ 85,000. This is a commonly used guideline for many investors to determine how much to pay for adjustments and reversals.
I always pay over 70% of ARV
I don’t always follow the rules and pay over 70% of ARV with many modifications and inversions. There are currently 6 in the pipeline, each with a calculated ARV.
You can see that 62% of ARVs have one good fix and reversal, and the rest are slightly above the 70% rule.
History of my experience with the 70% rule
Before I found Bigger Pockets, I hadn’t heard about the 70% rule. To calculate the amount paid for a flip, I would like to write down the estimated cost and forecast ARV (a new term for me) and make a profit of at least $ 20,000 for a home that sells for less than $ 150,000. Higher risks and more money are tied up, so more profit is needed for more expensive homes.
I wasn’t aware of it at the time, but basically I used the 70% rule for regular flips.
Is the 70% rule a good guideline?
Yes, I think it’s a great tool for investors to determine correction and reversal transactions. Still, I think investors always need to list all estimated costs and calculate profits as well. The 70% rule can be a good indicator, but it is not the only tool used to determine corrections and inversions.
Costs to consider for corrections and reversals
1. Repair (always conservative)
2. Shipping costs (interest, points)
3. Monthly fee (utility, hoa, insurance, tax)
4. Purchase cost (refund tax, key cash, ryen, code violation)
5. Selling expenses (commissions, closing fees, transfer fees, title insurance)
6. Unexpected cost (always add $ 5,000 for safety).
I’m sure I missed some, but these are the basic costs we always consider. I receive the ARV, deduct these costs, deduct the minimum profit ($ 20,000) and get the purchase price. The example used here is a rough number. This is a house purchased from MLS, so there is no purchase cost.
$ 150,000 ARV
-$ 20,000 Repair
-$ 5,000 freight costs
-$ 2,500 per month
-Purchase cost of $ 0,000
-Sales cost of $ 6,000
-$ 5,000 cushion for unforeseen circumstances
Break-even point of $ 111,500
-$ 20,000 profit
You may find that this method produces a purchase price higher than the 70% rule, even with a $ 5,000 cushion. If you look closely at the numbers, you’ll see why.
How can I buy a property that exceeds the 70% rule?
The number one reason I can buy with over 70% rules is that I’m a real estate agent. I bought all the homes in the pipeline from MLS, except for one that was a public trustee sale. When I bought the house, I received a commission check of 2.5-3% of the purchase price. When we sell a home, I can list it myself, saving an additional 3% on commission. Being taxable income, not all 5.5-6% is profitable, but you can pay a rule of 70% or more. In the figure above, if most investors need to calculate at least 5.5%, they are only calculating 3% for sales commissions. I didn’t even calculate the money returned for the commission when I bought the house. Chalk up to income tax for the total commissions I have made.
I’ve been upset for over 10 years and know the market better than anyone else. I’m pretty good at nailing my ARV and I’m sure the price isn’t 10% off. Thanks to that confidence, you can be 1-2 percent higher than the 70 percent rule, even if you’re not saving money on commissions.
The last reason I can pay a little more than the 70% rule is that I have great money alongside my bank. Currently, you can finance 75% of the purchase price at 5.25% at 1.5% points. I can’t cover the entire purchase price as you might be able to do with hard or private money, but I’ve been doing this for long enough to build a bankroll that allows you to pay down payments and repairs. (I also have a little personal money at 6%) If you have to pay 3 points to a hard money lender in addition to 15% interest, your shipping costs will more than double prize.
Great advantage over other investors
I will talk about why being a real estate agent is such a big advantage Click here for this article.. In this example, you can see how much money you can save. Not only does it save me money, but I save all that money, so I can pay more homes than any other investor. I think this is a big reason why there are currently 6 fixes and inversions in the pipeline.
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Photo: Ricardo N. Cabral