As a wholesaler here in Dallas, I often come across a ton of first time investors looking to start their first rehab project. It’s very exciting to see others as excited as I am about investing in real estate. However, as we start talking, I bring up some possible deals that I have in mind, and the number 1 response I get goes somewhere along the lines of “theres no money in it for me”, or “I need all of my deals at 70% minus repairs”
What is the 70% Rule?
When evaluating a house, the 70% rule states that you should pay no more than 70% of the property value minus any repairs that need to be done. For example, if a house is valued at $100,000 and needs $20,000 in repairs, your purchase price should be no more than $56,000.
$100,000 x .70 = $70,000
$70,000 - $20,000 = $50,000
Now, although these houses are being purchased at nearly half of what is could be worth, this 70% rule is still achievable, and it happens quite often. However, you, as a first time investor, should trade in your 70% deals… for 80% deals! For now, at least. I know I sound insane, but bare with me. Here is why:
Your deals won’t need as much work
Bigger rehabs, bigger problems.
Part of the reason a seller would be willing to give up their house at such a significant discount is that they understand that their house is not a quick fix. In other words, a leaking roof or horrible foundation will give a seller much more motivation to sell than some minor upgrades in the kitchen and bathrooms. Since these big ticket rehab items are costly and require significantly more expertise, it could be quite risky to take on these projects as a beginner. It would behoove you get a few wins under your belt before you mess with them.
Other wholesalers have passed on it for a reason
Although you hear the real estate gurus pushing the 70% rule to newer investors, many markets consider a 70% deal to be more of a wholesale deal. Often times, when a 70% deal becomes available in the market, the buyers who get first dibs will be other investors (wholesalers). They are looking to get this property, mark it up slightly, and sell it to other investors at a wholesale price.
Since they have first dibs to visit and evaluate the property, they have to pass on the deal in order for you to even get a chance. If they pass on the deal, you have to immediately wonder why. Why would they give up their chance to simply blast this out to their hundreds of investors for a quick profit? There is probably something missing in the deal. If it doesn’t make sense to their seasoned investors, it probably won’t make sense for you, either.
This isn’t always the case. Their analysis may be totally different from yours, and they may be passing up on a gold mine. But at this point, you're simply rolling the dice.
You don’t have the resources (Time & Money)
Deals don’t grow on trees!
The reason wholesalers get first dibs on cheaper properties is quite simple, availability. Bigger wholesalers have the availability to live, sleep, and eat the market if they choose. So while your 9-5 might include corporate calls, meeting with clients, and running through excel sheets, a wholesalers 9-5 job includes one thing… Finding deals.
I work for one of the biggest wholesalers in the nation. In our office alone, we have six guys who do nothing but scan the MLS all day, answer calls from direct mail, and ride around inspecting properties to make offers on.
Sure, you can invest a couple of thousand on a direct mail campaign yourself, drive neighborhoods on the weekend, and rely on referrals for sellers looking to sell their house. But who will answer your phone when leads call? And how many people do you need to know to build a sustainable business from referrals alone?
Again, this can all be done with the right amount of time, patience, and MISTAKES. But if you can get nearly the same result forsaking all of this, why not? Can you realistically compete with bigger wholesalers on finding deals?
Save your time! Let them find do the legwork for the 70% deals, and be willing to pay for the higher 80% deals. You are basically paying a premium for deals.
Can’t beat em’ Join em’!
Turnaround time is less
Most contractors can knock out paint and flooring on a house within a few days. Kitchen and bath upgrades, a week at most. Need to knock down a wall or two? Cool, get some guys to come in and let out their anger and frustrations by swinging a sledge hammer around for an hour or so.
You will be looking at much more time to get a roofing crew, foundation expert, and HVAC contractor to come and do their thing. Also, this means more invoices and more people to manage!
Your confidence will grow
With all of this being said, one of our biggest fears in investing is what? Losing money! This is money that you have worked extremely hard for, and can’t afford to throw it out of the window. So the idea of coming out of pocket with tens of thousands for a potential flip can be a little overwhelming. Just as your first time in doing anything, your fear is at its peak right before you do something. But as soon as you finish and realize it wasn’t that bad, it turns into a feeling of relief.
Investing is the same way. As you begin to complete rehab projects, your fear will begin to be less and less, until it is gone completely. Once it takes you a week and a half to get a rehab finished and list your property for a quick profit, you will realize that you just made $10-15k in a month without lifting a finger! By this time, your confidence has grown into a feeling of assurance, and you feel like you are ready to take on the world!
Of course everybody loves home run deals, but never shy away from the base hits when you have the opportunity. Life never amounts up to the “get rich quick” schemes you are pitched at in seminars and networking events. It is more like the “get rich slowly, but get rich surely” mentality that our reality validates. Investing in real estate is a marathon, not a sprint.