Why the 70% Rule is Dead

After moving to Tampa, FL - the real estate guru capital of America - from San Antonio, I keep running into people quoting the 70% rule, I believe coined by Ron Legrand.  But after examination of more than 10,000 transactions our company has conducted nation wide I must say, I think this rule is out of date.

I'm sure this was extremely applicable back in the 80's and 90's before MLS was a thing in the real estate world.  I remember my dad's big binder full of all the active listings and the fax coming in every morning with the listing updates.  He'd spend an hour going through his binder, removing the old listing, and placing the new one in it's place.

You used to really be able to make a killing investing in real estate back then.  Information just wasn't accessible to anyone, even real estate brokers.  In a non disclosure state like Texas where the sales price of real estate is not recorded it must have been absolutely impossible for anyone to conduct any type of real estate business without the consistent help on an agent.  At least the local board of realtors kept records of what houses sold for in their market.

I remember the first iteration of MLS in San Antonio which ran of MS DOS.  With an AOL trial CD and no one picking up the phone in your house you could quickly research what was happening in your area.  Before mapquest (remember that one) you had to have one of the large Mapsco books that gridded the city over and flip between pages trying to find what street you were going to.]

But that's over.  Margins are becoming tighter for real estate investors.  The reason is the ease of access to information.  Moving to Florida is like getting in a DeLorean and shooting thirty years into the future from small town San Anton.  The amount of information available here is staggering - and if you have a real estate license and pay for MLS access you can do some pretty incredible things.

The profits you can make in residential real estate aren't shrinking because the market is hot or cold.  The tools available are making consumers - sellers - more informed than ever before.  It's becoming more difficult to tell someone selling their home to you that you can only pay $50,000 when they know it's worth $120,000.  Of course their are deals out there but because of mass marketing tools such as Zillow, Hubzu, Auction.com, and now even county auction websites, more eyes are on the limited amount of deals out there.

Good ol' Texas... I miss you.  I used to read the actual MLS feed constantly throughout the day and when I saw a deal I'd usually be the first person at the house, the first person with an offer in, and the person who ultimately got the deal.  Tampa seems to have 100 times as many people doing the exact same things I do.  If you think that 70% deals are still out there, I beg to differ.

To the people who tell me, "I only buy houses 70% of value less repairs," I say, "And how many of those deals are you actually doing?"  I can't walk into the grocery store, pick up a sack of potatoes that's advertised for $8.99 and tell them, "I only pay $6 for sacks of potatoes."  The high school cashier is going to look at me like I'm out of my mind.  It just doesn't work like that.

This guy named Adam Smith wrote a book before Legrand called An Inquiry into the Nature and Causes of the Wealth of Nations a few years earlier, 1776 I believe.  What I was beginning to describe earlier was the basis of the efficient-market hypothesis, something most business majors dabble in during college.  To break it down, the more information consumers have in the market place the more efficient the market and thus, the more difficult it is for investors to achieve a sale price of less the actual value (ARV - repairs).

The other factors effecting the market rate for real estate investments are things such as number of competitors, average availability of capital to those parties, the availability of credit, etc.  "The 70% Rule" really has to change depending on what market you're buying in.  Truly buying at 70% of a houses actual value less the repairs will basically always yield you a profit.  Something seriously catastrophic would have to happen for you to lose on that deal.

But the reality is, people aren't paying that.  In super desirable areas such as South Tampa you're paying around 81% of a houses value less repair work.  In wildly undesirable areas such as  South St. Pete, you can't even really get an ARV as all purchases in the area are investor purchases looking to rent the house out to a Section 8 tenant and is focusing more on cap rates than resale values.

In a nation wide study examining our offices in the markets of Atlanta, Austin, Dallas, Denton, Ft. Worth, Houston, Las Angeles, Philadelphia, San Antonio, and Tampa we haven't found a place that's selling a true 70% deal.  Sure, you can inflate the ARV on it ten or twenty thousand dollars, that will get you there.  I love deals where I'm told that a 1,500 sqft house only needs $10,000 in work, something I've never been able to pull off even on my rentals.

In summary the 70% model of buying houses teaches you something in the end.  You need to be careful that you're building enough room into your offers for profits, holding costs, realtor commissions, and closing costs.  You do need to remain competitive however.  If you're constantly getting beat out in multiple offers the market may be bearing less margin for profit than you're trying to achieve.

https://www.biggerpockets.com/renewsblog/2014/02/14/70-rule-bible/
https://www.biggerpockets.com/renewsblog/2012/11/03/flip-houses-formula-math/
https://www.youtube.com/watch?v=JpfnAMRj-2Y

OFF MARKET in the Northeast

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Awesome little house in a cul-de-sac with over a quarter acre lot. Needs some foundation and cosmetics throughout. HVAC was replaced last year and the roof has some life left in it. Great for a cash flowing rental or a quick flip! Don't miss out on this little Gem! FYI- it's not on MLS.

Three 4-Plexes

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4 Units with 4 beds/2 baths

PP: $150k

Rehab: $5k (deferred maintenance)

4 Units with 3 beds/2.5 baths

PP: $150k

Rehab: $5k (deferred maintenance)

4 Units with 4 beds/2 baths

PP: $150k

Rehab: $5k (deferred maintenance)

The following is a project analysis for one of the properties:

Cash flowing Quad-Plex along with two more Quad-plexes right next to it for a great opportunity to buy 12 units on the same street. Most units have been rehabbed and tenants are on leases. 2005 build with little to no work needed. Tenants pay electricity, water, gas, and trash. Landlord only pays for taxes and insurance. Take a look at the quick analysis attached in the packet. Call for a showing only 2 out of 12 units are vacant!  Contact Ryan Harthan at 210-710-1617 for more information!

Windcrest Wholesale Property!

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·         Location! Location! Location! 

·         Low days on market, and rents on this would be about 1700 a month
·         All brick
·         Legit sunlights, massive fire place that’s in awesome shape, and great layout.
·         No foundation

·         Newer roof, HVAC, and Water heater

·         Pool that is in great shape with newer equipment

·         We are the biggest house/lot of the comps, and the houses are outdated and still selling quick the pending in the packet is at 130k

WINDCREST!! This property is clean as a whistle, with minor cosmetic updating this home will stand out from the competition. The house has a pool that is in great shape with newer pool equipment. Other highlights on this deal is low days on market, through the roof rents, .35 acres, newer HVAC, newer roof, great layout. Call now this will
sell fast!  Contact Ryan at 210-710-1617 for more information!

4/3/2

2537 square feet

1974 build

.35 acres

Woodlawn Lake

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Awesome little house in Woodlawn Lake area. Close to the highway and downtown! Needs a good sized rehab for this little gem to shine. Needs some foundation(pier&beam) and cosmetics throughout! Woodlawn Lake is a transitional area that has a lot of nice properties selling quickly. Get this rehab done nicely and it will sell quick! Call now to take a look!

The Importance of Rehabbing Right the First Time

Getting it Sold

I tell every new investor that there are four pieces to the puzzle of flipping a house.  This also means you need four critical people on your team to make sure that you make money:

1. Buying the property - having an awesome acquisition agent
2. Financing - making sure you can pay for it and are getting the best terms
3. Repairing the house - Getting the best quality for the most reasonable price
4. Listing the house - Having a beast of a Realtor® to make sure you sell quick

It only takes one mistake in this chain to lose money on a project.  Periodically you will likely see me refer to this list identifying where I see investors make critical mistakes that either cause them to break even or even lose money.  This article is dedicated to my own personal experience in fumbling between stage 3 and 4

So you're rehab is done, time to list right?

Well yes and no.  Let me give you an example how you can shoot yourself in the foot as an investor.  The following picture diagrams the history of my house.

Listing Summary

Listing History

MLS No: 980543 Cur. Status: ACT Type: Single Residential List Price: $118,900 Orig. LP: $119,000 Sold Price:   List Date: 01/11/2013 List Agent: 535649 List Office: RMAX00 DOM: 54

Change Description Status LP/SP Modified Date Updated By STATUS: BOM -> ACT ACT $118,900  02/22/2013 Call Broker STATUS: AO -> BOM BOM $118,900  02/11/2013 Call Broker STATUS: PCH -> AO AO $118,900  01/28/2013 Call Broker LISTPRICE: $119,000 -> $118,900 PCH $118,900  01/23/2013 Call Broker STATUS: AO -> PCH PCH $118,900  01/23/2013 Call Broker STATUS: NEW -> AO AO $119,000  01/18/2013 Call Broker STATUS: DRF -> NEW NEW $119,000  01/11/2013 Call Broker

Being in the business for so long I was sharp enough to hire an awesome agent to list my house, Zachary Taylor.  In four days, 4 DAYS, Zach got an offer on my house. I priced it right but a lot of getting an offer falls on the on the shoulders of your listing agent.  Now had I not made a critical mistake between completing my rehab and listing it I would have 120 grand in my pocket by now. 

So where was the mistake?

I never got the house pre-inspected.  This was an 80's build house that had about 25 items pop up on the inspection report.  While all of these were minor things that I got knocked out in about three days it scared the buyer off when he saw the inspection report.  Now don't get me wrong, 99% of retail buyers act completely irrationally when buying a home and think that they're getting a new build house at a discount.  This particular lady thought that there was a possibility of mold in the house in the next ten years (WHAT?!?!?).  So I got it back on the market.  I got another offer in about another three days and had the same situation pop up again.

So how did I fix it?

First of all, make sure you put appliances in the house.  I never do a refrigerator but everything else is a must.  Most importantly, get the house pre-inspected. Granted, my contractor screwed up.  On a $12,000 budget I wound up spending an extra $3,000 to get someone in there who could clean up the mess he burned me with.  Had I addressed all the issues initially, I would have sold the house by now.  Another thing to do is to get your agent to the house and get their honest opinion about the condition of the rehab.  A good retail agent will shoot you straight because at the end of the day, they're the person that has to sell it.  

Keep in mind that your history on MLS can easily deter potential buyers.  If an agent sees that a house has been under contract and fallen out 5 or 6 times they're going to assume that there is something very wrong with the house.  You can always go down in price on MLS but you can't go back up.

Click here to view my latest rehab house.

Court House Auction Advice for New Investors

Court House Advice for New Investors

In my line of work I do a lot of wholesale real estate deals.  Currently in San Antonio I average about 20-25 deals a month.  I see quite a few investors who get frustrated after a while and begin to think that they are smarter than the system.  They get the idea that somehow, while juggling a full time job and one or two rehab projects that they can get better deals by going to the courthouse auction to purchase property.  Let me give you some stats for December of 2012 to put this in perspective for anyone who this idea has occurred to:

In December 2012:

• 863 Properties were posted
• 274 Were actually called for sale
• 211 Houses were purchased back by the lender/lien holder
• 63 Were purchased by private investors
• 23 of these houses were purchased by national REIT's

This means that 4.6% of all properties posted were sold to individual investors.

I work as part of a team that looks at every single property listed and runs title work on every single house in order to obtain even a small slice of that 4.6% of houses that have investment potential.  These 40 houses get competitive.  Many times rookie investors will bid properties up to the point that they no longer make sense as an investment.   I spoke with one of the larger buyers who had purchased two houses in a neighborhood off 35 and 1604 that I am very active in.  The last two houses I had bought I estimated being worth about $100,000, needing between $15-20,000 in work.  This means I sold them at $53,000- $58,000.  The houses that they had bought were around the $65,000 price mark.

A good lesson to take away from this is that often times deals that your professional real estate investment firms can find you are more than often better than deals that can be obtained elsewhere.  Don't discredit a lead source because deals may have come from actively listed houses.  If you purchase at the auction there's a high probability that you're over paying on a percentage wise basis for a house you can't even verify the condition of.  It equals a lot of work for minimal reward.  

Alta Vista - Buy at 36k sell at 135k!

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TOTALLY OFF MARKET HOUSE!!!!!

Alta Vista! This property is located in one of the best neighborhoods to flip a property however, it needs a complete gut rehab. Once your rehab is complete you should be able to sell at the top of the market within a short period of time. The rehab of this hidden gem should consist of maintaining the historic exterior charm while adding a modern flare to the interior. If you do that you will have a home run sitting in your lap. Call your New Western Agent today and schedule a showing and make this investment your next project.

Ryan Harthan

824 Broadway St. Ste 101

San Antonio, TX 78215
210-710-1617

rharthan@gmail.com

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Downtown San Antonio Investment Opportunity

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Cash cow near Blue Star!!! A stone's throw away from this up and coming Southtown and King William area, this neighborhood boasts quiet streets and eclectic charm that investors are craving at this very moment. This house is bigger than most in the neighborhood at 1350 sq. ft and also has a rentable 1/1 in the back which could mean combined rents of over a thousand dollars a month! Call your New West agent immediately to schedule a showing!

Northwest Huge New Build Foreclosure

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Large 2 story 2001 build in El Sendero subdivision. This home has a open floor plan with 2 large living areas, and 4 massive bedrooms. The house is all four sides brick exterior with a large back yard. With a cosmetic rehab this home would be a perfect flip or rental investment! Call your Ryan Harthan at 210-710-1617 today and  schedule a showing and don't let this rare opportunity pass you by!

New Hurst Investment Property!

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3-2-2 In Hurst South of 183. Already partially remodeled with all Travertine bathrooms, glass tile backsplash in the showers, new cabinets, faucets, counter tops  This house also has nice hardwoods in place that just need to be sanded down and refinished. Besides that just needs some minor foundation a new compressor,some landscaping and fresh paint. Will rent for $1,150 per month. Low DOM. QUICK 

JD Castillo

214-650-5493

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