For people who have researched and looked into house flipping and real estate investing there’s a few terms and concepts you’ve likely seen. ARV, or after repair value, POF (proof of funds). And a principle called the 70% rule.
What’s great about the internet is all of the information that is there but what is not as great is how many of those concepts and ideas may not be as reliable as they once were.
With the real estate market, there are always changes going on. Some may be large and some may be small. Maybe some have happened before and perhaps we are experiencing them for the first time. And let’s also factor in the predictions or the speculation and you can find yourself
That’s why I put together this article. I want to share with you the reason why I don’t solely rely on the 70% rule when I am flipping a house.
I am going to start out by stating that there is nothing wrong with the 70% rule. In fact, if you have been able to purchase properties to flip or hold as rentals that have had their numbers line up then congratulations. That’s quite an accomplishment and it means you got a deal on your properties.
So let’s look at the idea of how the 70% rule would ideally work:
You find a house that will sell when fixed up for $200,000
It needs $50,000 in repairs to get it to be worth $200,000
To calculate your maximum allowable offer you take 70% of $200,000 ($140,000) and then you subtract your repairs from the $140,000-$50,000 = $90,000 for your offer. A great deal if you can get it. But what if the seller has this house listed and the price is $110,000?
That’s nowhere close to the offer you calculated using the 70% rule. Add into this let’s throw in the fact that there are actually multiple offers on the house too.
This happens all the time. So what should you do? Let’s take a closer look at the numbers. There’s a couple things you could do to improve your numbers if you were supposed to make an offer at $110,000. You could consider adjusting the renovation budget or making a lower profit on the house. Buying the house for $110,000 and making Renovations for $50,000 you would be all in for $160,000. That leaves a rough estimate for potential profit of $40,000 which is not too shabby considering that this house may only need 8 to 12 weeks the renovations. This means in the course of 45 months you could be looking at a profit F32 $40,000.
Whats the problem with the 70% rule?
So the problem with the 70% rule truly comes in when you look at it in terms of creating a significant amount of profit as possible even on a relatively inexpensive low-risk flip and the reality is when you flip more expensive houses the 70% rule just continues to really inflate the prophet to the point of if someone truly followed this principle they would never have their offers accepted in a market that is any way shape or form healthy.
One of the reasons I did not use the 70% rule when I was getting started flipping was because I wasn’t giving myself an overarching number for profit that would have been considered in process. My number one goal in the first three years of flipping houses was to not lose money and to learn. and having flipped now for 13 years and more than a hundred and fifty houses I can tell you confidently not a single one of them met the 70% rule. so how do I analyze my projects? By using the public sale information that it available to everyone. I look at the specs first when I find a house that I am interested in . Then I search for similar homes that have sold. If when I look at that information I see there is a large enough gap between the asking price or listing price and the sale prices of similar houses, I will go look at the property.
What do I make note of when flipping a house?
I make a note of the items that need to be repaired or replaced to support the value when I walk through. I am making sure that the specs match the listing and that there is an ability to create a house similar to the ones I am using for price.
In using a recent example there were comps for $450,000 for a house that was listed for sale at $199,000. That house was way below anything else in the area and needed a significant amount of work from the photos. The only way the house could be improved to a value of $450,000 was if the upper level could be finished to add a master bath and bedroom.
Once I knew this, then I was able to confirm that there was space to add those rooms. Make sure that the measurements and other details listed are correct when you are also considering a house. From there, I determine my renovation estimate, my acquisition cost and offer price.
So what next?
The 70% Rule makes for an easy and quick calculation to provide a rough figure for offers. Before you actually write an offer make sure you run a more detailed analysis of the numbers.
Most important, if you are just getting started find a resource to help you with your deal assessment. Be generous with your repair costs and conservative with your after repair value. Especially when you are just getting started. Better to sell quickly than to have a higher priced house with no offers.
As you’re calculating your offer be mindful to include any other costs you know you will have, like financing. And remember, there is so much value in learning when you are just getting started. You can’t get to the larger profit projects without starting with some of the smaller profit projects. The most important part to the house flipping process is buying the first flip.
Ready to take that next step when it comes to flipping?
Now that you know how to fund a flip, here are some additional resources to help you get the information you need to move forward on creating your flipping life.
Make sure you have the Fixer Upper Checklist so you know which areas are key to added value in a home.
There are several videos available on finding houses, renovations, and funding on the Threshold Homes YouTube Channel. Check out your favorite flipping topics and new videos weekly.
You can’t close a successful and profitable flip unless you start. Let me know what your biggest challenge is with getting started house flipping. I’m here to help.
Want to buy a property and renovate it?
I have a freebie checklist that will help you — 8 Things I look for When Purchasing a Home. Just click here to download it.
Love before and afters?
Looking to buy a house to renovate? Check out the fixer upper checklist to help you find the house with the most “flip” potential.
For more inspiration follow me on Pinterest @thresholdhomesmn