June 18, 2020

How to Crunch Your Numbers When Analyzing Deals and It's NOT by Using "The 70% Rule"


If there is something outdated in this house flipping industry it is the way gurus preach to determine your offer price. The 70% Rule is outdated and irrelevant in MOST markets.

I have good news, though! I'm sharing my Profitable Flip Formula™ with you in this episode.

With this formula, your desired profit drives the offer. With the 70% Rule, your profit is an afterthought.

Profit drives your business, shouldn't it drive your offer?

Thought so!

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Transcript

 

Intro 00:01
You're listening to the flip houses like a girl podcast where we educate, empower and celebrate everyday women who are facing their fears, juggling family and business, embracing their awesomeness and wholeheartedly chasing their dream of flipping houses. Each episode delivers honest to goodness tools, tips and strategies you can implement today to get closer to your first or next successful house flip. Here's your spiky haired breakfast taco loving host house flipping coach, Debbie DeBerry.

Debbie DeBerry 00:38
Hey, what's up you guys, thank you for tuning in and hanging out with me a little bit today. I really appreciate it. So to kick things off, I want to do another listener shout out. So if you haven't already, and you feel like you're getting value out of this little podcast of ours, would you please do me a huge favor and leave a rating and a review on iTunes. I know not everybody listens on iTunes. And for whatever reason, iTunes is where it's important to have these ratings and reviews. Depending on the feedback a show gets. It gets more basically it gets more visibility. So all right, this shout out goes to username Haley, TX, she says worth it super informative, inspiring and thoughtful episodes on everything you need to get started flipping houses. Awesome. I love that review. Thank you so much for taking the time to share your feedback. It means a lot to me. It does. All right. My whole goal is to inspire women to chase their dream of flipping houses. And I do so by having authentic conversations with you. And sharing stories of everyday women who are successfully doing this. I don't believe in interviewing gurus that are on every other podcast out there or experts. I don't want to hear from the same people over and over. And I don't think that inspires people. What inspires me. And what I understand inspires many of you, based on conversations we've had is seeing someone who is like us successfully doing what it is we want to do. So that's not gurus and experts, that's everyday women out there crushing it. And all of that is to instill in you that you absolutely can do this successfully. All right.

All right, I just had to have that little pep talk with you. Okay. So now that that's out of the way, let's go ahead and jump into the controversial topic of me, totally not agreeing with the real estate investing gurus, a 70% rule that they throw around when it comes to flipping houses. And I want to, I'm going to give you some very specific reasons why that rule should be taken out back and gotten rid of, and I'm going to give you an even better formula to follow. All right. So let's get into it. What the heck is the 70% rule, Debbie? All right. Many of you are gonna know many of you won't. And if you don't, I'm kind of glad. All right, because like I said, you shouldn't be using it. Because like I said, I don't agree with it. Anyway, the 70% rule is considered the golden rule from old school gurus. All right. Basically, what it says is your maximum offer should be 70% of the ARV. All right, so ARV after repair value 70% of the ARV minus the repairs, all right. So minus the estimated repairs. All right, let's use some numbers just so we can understand that. Okay, let's say the house is going to be worth $350,000. Okay, that's the ARV after repair value, all right. And let's see the estimated repairs around $60,000. So according to the good old boys 70% rule, your max offer should be 70% of 350,000 which is 245,000 minus the $60,000 repair estimate. That brings you to $185,000. Okay, your math Some offer should not exceed $185,000. All right, so let's talk about some variables here because we need some definitions, we need some variables that are crucial to understanding what the heck even goes into creating an offer. All right. So the ARV we have that that's the after repair value, what the house will be worth, once it's renovated. You've also got purchase closing costs charged by the title company, or the attorney, whoever's closing the transaction. You've also got purchase closing costs associated with the loan. All right. So when I talk about purchase closing costs, we're talking about those all costs associated with the purchase, including title fees, and loan fees, right? Then we've got carrying costs. Okay, so carrying costs are going to include anything that you're paying to own the house. Okay? So it's determined by the length of ownership. You've got loan payments, property taxes, builder's risk, insurance, electricity, water, sewer, trash, hoa, if applicable, and any other ongoing costs like that. All right. Now, you've got the sale, closing costs. Alright, so closing costs associated with the sale of the property. Again, you've got some title fees in there. Or whoever is closing, whoever your closing company is, they have fees associated with the closing. Usually it's the title company, sometimes it's an attorney, whatever it is, all right. And then you've also got real estate agent commissions. Okay. So when I talk about closing costs associated with the sale, I'm talking about any title fees, and any real estate agent commission, so anything you have to pay to sell the property, all right. And then your net profit is what actually goes into your pocket after the sale once all of the expenses are accounted for. All right, so it's what is left. It's not the check that you take home, because usually that's got some other fees built into it. It's what's left after all expenses are accounted for. Okay. All right. So in summary, we've got the ARV. We've got the purchase closing costs. We've got the estimated repairs, we've got the carrying costs, and we've got the sale closing costs. Okay. We also talked about net profit, but those first items without the net profit, that's what's going into the 30% margin in that 70% rule. Okay, so some of you I've lost, Alright, so, if you, if you've got 70% out of 100, the remaining amount is 30%. Right? Okay, so in that 30%, all of those things are accounted for the estimator repairs, the purchase, closing costs, the sale, closing costs, the carrying costs, all of those things are bundled into that 30%. Okay, so let's get into why this golden rule is way past its prime. Okay. So first of all, I really do think it's lazy. And let me tell you why. Your number one job, as a house flipping business owner, is to know your numbers. I know I didn't say generate leads. That's what all the Guru's say your number one job is to generate leads, which is totally false. Because if you're just generating crap leads, you are not benefiting anyone. Okay. So your number one job is to know your numbers. If you're generating leads, and your numbers are crap, you'll be out of business and there won't be any need for lead generation. All right, trust me. If you are simply lumping all of those variables that we talked about above, into that 30% margin, you're not breaking them out individually. All right. And if you aren't doing that, then you don't really have an understanding of the numbers that go into it. And you don't fully understand how you can control some of those variables. Influence some of those variables. So that's why, for me, it feels very lazy. It's like a real estate guru says, Hey, just go use this formula, it doesn't really matter what goes into the 30% just use the formula. No, it absolutely does matter. I want to teach you so that you are empowered to make smart decisions for your business. All right, I want to teach you all the things that go into it. So that you really do have, like this nitty gritty understanding. When you're just lumping everything in there, and not really dissecting it out and understanding each line item that I went over before. You're not understanding how to impact things. Okay, meaning, what's the potential net profit on that deal when you're just using the 70% rule? By using that rule, you aren't tweaking that net profit? You're just getting what's left over? Instead of saying, No, I'm not willing to take less than 25 grand on this deal. Or I'm not willing to take less than 70 grand because this is really involved. It's a longer project, and it's just going to be more intense. You're not able to do that with the 70% rule, you aren't able to change that number, because the profit is just what's left over after you've accounted for all the other things. Does that make sense? All right. So also, you aren't taking into account your specific lenders terms. If you're just using the 70% rule, it doesn't matter what your lenders terms are, it's all lumped in there. So if you are determining which lender to use, or do I want to use my own cash, you're not able to look at and break it out. what the difference is, between using your own cash using this lender with these terms, are you using that lender with those terms? It doesn't break things out. And that's my beef. All right, it doesn't give you any power over the outcome. I could go on. How does your net profit vary depending upon the project timeline, or the property taxes? Or what your insurance premium cost is? or any of the other variables? Do you see why I'm really frustrated with the laziness of that rule? Alright, so the first reason I dislike it is because it's lazy. Meaning it doesn't empower you to have control over your finances and over your project and over your business really. All right. And secondly, if you are trying to use this 70% rule in most major metro areas, where prices are at least two to 50 and above, you're going up against investors who are paying way more than that, and you are not going to get a deal. So the better option is to really understand the numbers and the variables that go into the formula to make a reasonable and respectable offer that will still make you money. Okay? I've never used the 70% rule since 2008. And I've made plenty of money without it, you do not need it. And again, if you are bidding on properties that other investors are bidding on, you aren't going to get the deal. You're losing money, you're losing opportunities to flip houses. So let's be smart.

All right. Understand the variables understand the numbers. All right, you've totally got this. Okay, so just as an example, let's compare that previous example I used for the 70% rule formula, right? The ARV was 350,000, the repairs were 60. And we came up with using the 70% rule, we came up with a maximum offer of 185,000. Okay, now, using my profitable flip formula, your offer would be 204 950. All right, so you're basically offering 20 grand more to the seller, which offer Do you think the seller is going to take all things being equal on both of those offers except for the period Price being about $20,000 different. Which one would you take?

That's exactly. Problem number two with the 70% rule. Okay. All right. So I mentioned it just a minute ago, but I'll tell you exactly what my profitable flip formula is. All right, you're ready. If you're driving, don't worry, just listen to this later and write down the formula. It's very simple. It's all those variables that we talked about. Okay? So here's what you're doing, you're using the ARV from that you're subtracting the purchase closing costs, minus the carrying costs, minus the repairs, minus the sale, closing costs. minus a buffer, always add a buffer, always add a contingency minus your minimum profit that you are willing to take on this deal on this deal, that's a pickle on this deal. Right? Do you notice how the other formula again, you don't get to say what your minimum profit is? It tells you what your minimum profit is? No, I don't want to be in that kind of business. So recap. ARV minus, purchase closing costs, minus your carrying costs, minus your repairs, minus your sale, closing costs, minus your buffer, and minus your minimum net profit that you're willing to take. All of those things bring you to your maximum offer. Done.

All right. That's it. That's all you have to know, in terms of the formula. Okay, do you see how much more control you have? over the deal? And how much more of an understanding you have of the specific numbers and variables that go into it. Okay, so can we just stop talking about the 70% rule? I'm seeing it less and less, thankfully. But maybe that's because I'm just not hanging out with certain certain people anymore. So maybe that's why and I'm okay with not seeing it. Because it's really, it's just it's a disservice to people. It does not teach or empower you.

All right. I hope you got a ton of value out of that, when you can listen to it when you can write down some notes because I know Look, I'm super visual. And so I need to see numbers and I need to map it out like that. So I get it. All right, when you can do that. Sit down and and listen to it again. Okay. All right. You know the drill. Until next time, go out there, flip houses like a girl. Leave people in places better than you find them and make it a great day. Bye.