Joe Homs explains why the 70% rule for real estate flipping doesn't work in expensive markets like Orange County. He breaks down the math behind the rule and recommends using a real estate agent or his Pellego website instead to calculate accurate offers and protect your profit.
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After today's video, you're gonna stop using that 70% rule. Coming up next. If you're a house flipper or have spent any length of time on YouTube, you probably recognize the 70% rule and how it pertains to making the maximum allowable offer. In certain markets, it might work to help wholesalers determine how much they can get a house under contract for. Unfortunately, in places like Southern California, this could end up costing Causing you to lose out on some great deals. Let's take a look now. Welcome back to the channel. I made this channel for the new and experienced investor. Make sure that you like and subscribe so that you never miss a thing. What is the 70% rule? 70% rule, basically you determine what the after-repair value is, what you can sell it for, okay? And you don't really want to pay more than 70% of that value. If you really want to break it down in there, you're going to talk about the rehab costs, which I usually do 10% of the ARV. Then you have commissions, closing costs, another 5% around there. You've got profit in there as well. So that's 10%. We're up to 25%. So really 70%, could be 75% or even less, determines How much profit you want to make at the end of the day. Why sometimes it doesn't work? Well, it really kind of depends on the area that you're in. If you're in Southern California, the housing prices are pretty expensive here. So that 70% rule may not work. It may be that your competition is offering 80% on the dollar, which is what usually happens here in Orange County. As we move out into the other counties, Riverside, San Diego, San Bernardino, that 70% rule kind of applies. As we get into San Bernardino, which is the largest county in— actually, it's the largest county in the United States— and the furthest out there, as you get closer to the desert, then you're going to find that the 70% rule works really good for you, and you may even start looking at 65% or even 60% out there. How do you determine your maximum allowable offer? There's different ways to do that. You can contact a full-time real estate agent that actually works with investors and knows what they're doing, and they can do what they call a comparable market analysis. You can go to my website, which is pellego.com, and literally put the address in there. You put the address in there and it does all the calculations for you. It gives you the comparables So this is the aftermarket value, and then it goes in through all the expenses that you're going to have— the rehab expenses, the closing costs, the buying costs— and it lets you adjust all those numbers as well. And then gets down to the bottom line, which is where everybody wants to be, is your profit. So there's a couple of ways to determine your after-repair value. If you're real estate agents, it's really easy. If not, contact a real estate agent that knows what they're doing. The best way that I found is literally go to the Pelago website, put the address in there, and let that website do all the calculations for you. Remember, it's better to make more money on fewer deals than to do more deals and risk losing money or only breaking even. Protect both your profits and your time by being precise and conservative on your cost estimate, and you'll find yourself working less and earning more as you find houses to flip. If you're new to investing and want 5 reasons On how to invest in a recession, click on this video right here. As always, feel free to reach out. I'm here to help.
