Author Topic: 70% rule upper limit?  (Read 2228 times)

Longwaytogo

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70% rule upper limit?
« on: November 13, 2015, 07:55:42 AM »
Alright so I'm referring to the 70% ARV flip rule. Basically states your purchase cost + rehab cost should be no more than 70% of your projected sale price.

So if I'm planning on selling a place for 100k then my cost/rehab should be 70K max like the other 30K covers realty commission, carry costs and profit right?

Question is would this still apply on say a house with a potential resale value of 4 million? I assume it would since by definition a percentage should apply to any dollar amount.

Just trying to figure this out on a job I'm looking at. I'd be the contractor with a fixed job costs so I don't really have much to lose unless I figured my job cost wrong.

Investors buying the house around 2 mill to potentially sell for 4 mill. Reno cost is coming in at 800K. He's claiming now he may only make 100K. This does not seem possible. The remaining 1.2 mill should cover say - 240K realty/closing, 280K intrest, 20K property tax, 50K architect, 20K permits 50K misc still leaving - 540,000.

Am I missing something? Sure if the 4 million is a pipe dream and he actually only gets 3.5 than he's screwed but that's on his/realtors market research.

You think 10% interest/carry cost is a fair/accurate guess for that type of loan ?

DaveR

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Re: 70% rule upper limit?
« Reply #1 on: November 13, 2015, 01:57:33 PM »
Why is he claiming he may only make 100k? To negotiate down your piece? Not your issue.

70% is a rule of thumb, but several of the factors are non-linear: $20k in permits on $2M, but it wouldn't be $700 on a $70k property. $50k architect on $2M doesn't translate to $1750 on $100k. And agents are less likely to get 6% on high end properties. But a $4M property might sit on the market for a while (more carrying costs).

10% might be reasonable, but that's driven by local market conditions... inventory and absorption in that price range?

The one number that might be off is the $50k misc, depending on where other contingency dollars are hiding. If there isn't any contingency in the $800k, then the investor probably has more than $50k (6.25%) for that.

You have the basics, so I'm of the same mind: $4M may not be realistic, so the investor may make less than the pipe dream price.
 

Longwaytogo

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Re: 70% rule upper limit?
« Reply #2 on: November 13, 2015, 02:51:01 PM »
Why is he claiming he may only make 100k? To negotiate down your piece? Not your issue.

You have the basics, so I'm of the same mind: $4M may not be realistic, so the investor may make less than the pipe dream price.

Thanks for the response DaveR!

Yeah that sort of my guess, not going to work but that's my guess. The 800K isn't near as profitable as he thinks it is anyway; so it's not budging without serious scope/selection changes. there are a lot of allowances (flooring, cabinets, appliances, windows, etc.) so knowing his taste and the high end market he could certainly go over though I did my best to figure them high. But they could easily eat away the 50K misc.

Yeah he was originally saying 3.5 so not sure how confident he is on his sudden jump to 4 mill. though to be fair he did expand scope/end product a good bit.

I'm still pretty confident that even if it lands say in the middle at 3.75 he'll make plenty and certainly more than us (which is fine, he's the investor)

Based on the last one he did in the area and what the realtor said who works in the area a good bit I don't think it will sit too long. Old high end 1930's highly sought neighborhood without much inventory for souped up modern places.

arebelspy

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Re: 70% rule upper limit?
« Reply #3 on: November 15, 2015, 03:33:29 AM »
Percent is what matters.  With a big job like that, a few fluctuations either way, and you're looking at a big loss.  Market drops 10%?  The investor is carrying all of the risk.  They won't invest for a six-figure return, if that's small relative to the price.
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Longwaytogo

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Re: 70% rule upper limit?
« Reply #4 on: November 15, 2015, 05:42:44 AM »
Percent is what matters.  With a big job like that, a few fluctuations either way, and you're looking at a big loss.  Market drops 10%?  The investor is carrying all of the risk.  They won't invest for a six-figure return, if that's small relative to the price.

Cool thanks, figured the % should work either way. He admitted to me the other day he thinks it's the first time in his 25+ year investing career he may have over paid. But As DaveR mentioned i can't lower my price to fit his needs anyway so ball really in his court.

I'm fairly confident no other contractor would do the entire job any cheaper, so his only real other option is to GC/manage the project himself. He did that on the last one and it took forever and really stressed him out so he seems like he does not want to.

My father (boss) and I are spending ALL day next Saturday going over the job on site with him to get enough details to start moving project from proposal to contract. So, fingers crossed!

clarkfan1979

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Re: 70% rule upper limit?
« Reply #5 on: November 15, 2015, 08:41:00 PM »
Good  luck. Should make for an interesting story when it is all done.

Longwaytogo

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Re: 70% rule upper limit?
« Reply #6 on: November 16, 2015, 05:35:59 AM »
Good  luck. Should make for an interesting story when it is all done.

Thanks, it will defintley be interesting. I've worked on a few million dollar houses but never a 3-4 million dollar one!

I'll try and remember to update here if we end up contracting it.