Real estate flippers have been buying, upgrading, and selling homes at a profit for as long as the market has existed. Flipping real estate is a great way to make an investment.
Until fairly recently real estate flippers neglected to take advantage of the 70% rule.
According to real estate blog Bigger Pockets, the 70% rule is a simple investment tool. By calculating your bid based on the after-repair value (ARV) and estimated repair costs (ERC) of a given property, the 70% rule gives you some flexibility when it comes to pricing a home and it gives you some idea of the risk you’re taking before you make a bid.
For example, say there is a property going for $75,000. Cosmetically the home looks nice, but the plumbing and wiring needs to be re-done, and the kitchen requires updating. You estimate the repair costs at $20,000. So, you simply apply the formula:
[75,000 * .7] – 20,000 = 32,500
This is an estimate of what you’re looking at when it comes to bidding. However, the 70% rule is far from perfect. Especially since it may lead you to low-balling your bidding, and missing out on some investment opportunities. Even worse, though, the rule is far from useful for those who are playing a long game when it comes to real estate.
Think of it like a Guideline
Under ideal circumstances, if everything works out the way you have it down on paper, this rule would give you the exact number you need.
Rules are always important, but the “rules” will not work for every situation you find yourself in. That’s why, if you’re going to get involved in flipping real estate, it pays to know when to stick to the rules and when to break them.
For example, look at your investment, and at the costs. Ask yourself what the return is likely to be, and then take a step back to examine the deal from a different angle. Once you’ve gotten as complete a picture as you can, that’s when you need to know what sort of bids the property is likely to get. Are you in a competitive area, or one where property owners will take what they can get? Is your initial bid close to the asking price, or will you have to talk the owners down? What do you stand to lose, and what do you stand to gain?
The 70% rule has its uses, but it’s a lot like the rules of grammar. While there are some people who swear by the 70% rule, it’s important to remember that it is really more of a guideline.
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