Let's Talk About Contingencies: More on Navigating the Recent Rate Hike!

Underwriting your deals accurately right now is more important than ever.

And as we have all been aware for the last couple years now, the market has been fairly slow and it continues to slow down.

There's been a continuous softening in the market.

That doesn't mean that you can't do good deals and it doesn't mean that you can't succeed or win.

You just have to be more careful, right? And so when you are looking at deals right now, what's the old sort of golden rule? If you're not familiar with the 70% rule, that's been a tried and true number and a tried and true formula.

um forever right 70 rule so let's talk about the 70 rule what that is and what that means when you are underwriting a deal i'm going to use dfw today specifically but this applies to oklahoma it applies to arkansas it applies to all across the united states okay this is something that is applicable to no matter what market you're in or where that deal is that you're looking at So the 70% rule is talking about the percentage of the ARV.

So when you are looking at a deal, let's say in this example, you're kind of right in the middle of the median home price in Dallas-Fort Worth, okay? So on the Fort Worth side, you're looking at maybe 350.

On the Dallas side, you're looking at maybe an average of 450.

So I'm going to use $400,000, okay? So if your ARV is $400,000.

70% of that is $280,000, okay? When you are analyzing, hey, what would make this a good deal? You're looking at what would this property be worth after I'm done fixing it up.

You're coming up with your rehab estimate.

You're walking the property, coming up with a budget, coming up with a bid from the contractor.

And let's say in this scenario, the property needs about $60,000 worth of work, kind of a standard You know, cosmetic rehab, for example, right? Maybe some of the majors are good, but it still needs, you know, new bathrooms, flooring, kitchen, all that stuff, right? Maybe it needs a new roof.

And you need to put $60,000 into that property.

Okay, so what should you feel comfortable under the 70% rule paying for that property? You got a $400,000 ARV.

you've got a 70% of that number laid out at 280,000 and your rehab estimate is 60 grand.

So if you subtract the 60 from the 280,000, which is 70% of the ARV, your max purchase price is 220.

So that's the ceiling, right? You don't want to be going above that.

Ideally, you're at that level or lower.

So 400 grand ARV, 60K rehab budget, max purchase price of 220.

Now, that doesn't mean that we bake in 30% profit, right? And I think we all understand that.

But let's break it down a little bit further and why 70% is so important and why that is still a good benchmark.

to make sure that you're really getting yourself into a deal where you've got plenty of room.

Underwriting your deals accurately right now is more important than ever.

And as we have all been aware for the last couple years now, the market has been fairly slow and it continues to slow down.

There's been a continuous softening in the market.

That doesn't mean that you can't do good deals and it doesn't mean that you can't succeed or win.

You just have to be more careful, right? And so when you are looking at deals right now, what's the old sort of golden rule? If you're not familiar with the 70% rule, that's been a tried and true number and a tried and true formula.

um forever right 70 rule so let's talk about the 70 rule what that is and what that means when you are underwriting a deal i'm going to use dfw today specifically but this applies to oklahoma it applies to arkansas it applies to all across the united states okay this is something that is applicable to no matter what market you're in or where that deal is that you're looking at So the 70% rule is talking about the percentage of the ARV.

So when you are looking at a deal, let's say in this example, you're kind of right in the middle of the median home price in Dallas-Fort Worth, okay? So on the Fort Worth side, you're looking at maybe 350.

On the Dallas side, you're looking at maybe an average of 450.

So I'm going to use $400,000, okay? So if your ARV is $400,000.

70% of that is $280,000, okay? When you are analyzing, hey, what would make this a good deal? You're looking at what would this property be worth after I'm done fixing it up.

You're coming up with your rehab estimate.

You're walking the property, coming up with a budget, coming up with a bid from the contractor.

And let's say in this scenario, the property needs about $60,000 worth of work, kind of a standard You know, cosmetic rehab, for example, right? Maybe some of the majors are good, but it still needs, you know, new bathrooms, flooring, kitchen, all that stuff, right? Maybe it needs a new roof.

And you need to put $60,000 into that property.

Okay, so what should you feel comfortable under the 70% rule paying for that property? You got a $400,000 ARV.

you've got a 70% of that number laid out at 280,000 and your rehab estimate is 60 grand.

So if you subtract the 60 from the 280,000, which is 70% of the ARV, your max purchase price is 220.

So that's the ceiling, right? You don't want to be going above that.

Ideally, you're at that level or lower.

So 400 grand ARV, 60K rehab budget, max purchase price of 220.

Now, that doesn't mean that we bake in 30% profit, right? And I think we all understand that.

But let's break it down a little bit further and why 70% is so important and why that is still a good benchmark.

to make sure that you're really getting yourself into a deal where you've got plenty of room.