|search engine by freefind|
Explain to me the original 70 rule for flipping houses and let's see if we're missing something here. Is it outdated?
Over the years, investors and house flippers alike have come to live and die by the 70% rule for flipping houses. In these times, we have some much more data to go on, so it's often ok to step out of our comfort zone of antiquated rules and make better decisions.
In the simplest terms, if you can score a deal that is 70% or less of the current market value for the house (provided it's all fixed up), it's a deal that you can make money on.
In this a short YouTube video, Nick Foy does a really nice job of explaining this guideline for making money with real estate (thank you, Nick!). Click on the link to watch:
When using other people's money, like a hard money loan, the inspections need to be as through as possible. These are costs you can pass on to the end buyer, if you are flipping the property.
I feel that this is more of a guideline, not a hard and fast rule, and you need to analyze each deal independently from one another. Some will be good deals where you can make a nice spread, and others won't.
Often a property might need more work than originally estimated to get it to market value, so if you stuck by the 70% "rule" you'd be at a loss.
As an example, just last year my fellow investor friend Laurie purchased what she thought was a slightly distressed home, we discussed the profits expected when the rehab was complete and penciled it out. It looked really good on paper.
Soon after closing on this project, her contractors began removing drywall to open up the living space. It was a nightmare.
There were signs of termite damage going into the supporting beams. Most of the rot was in the attic, and it was a major rebuild, which put her project in the red. This speaks to how the 70 rule for flipping houses can only apply to what is visible.
My first response would be all deals. But that's not entirely true.
If I was to purchase a property from a wholesaler, I would most likely use the rule as a guideline, and make my offer based on those figures. Typically, when I purchase from a wholesaler I know and trust I don't do much more than a visual inspection.
However, if I was purchasing the home directly from the homeowner, I might be a bit looser with the guideline. In this instance, I would have the opportunity to have a home inspector check it our before we closed, and be able to ask lots of questions about the recent upkeep.
Then again, if I was making an offer to option a property, I'd have less risk here, and could raise the offer to accommodate a simple assigning of the option to someone else.
In every deal, knowing your end game will help you make better decisions from the start.
ARV (after repair value) is what similar homes, in the same neighborhood, have recently sold for. Many of us use Zillow to figure that out, however it's not exactly accurate. Your favorite Realtor would be in a better position to to share with you more precise data.
I like this free ARV calculator provided to us by REI/kit. You can use to sort out what your best offer might be, and it's designed for the 70 rule for flipping houses. It's easy to use, a good starting point for a quick look while analyzing your deal.