Debunking the 70% Price Fallacy in the We Buy Houses Niche
Debunking the 70% Price Fallacy in the “We Buy Houses” Niche
In the realm of real estate investing, the 70% after-repair value (ARV) offer has become a widely discussed but often misunderstood concept. Let’s delve into the reality behind this perceived golden rule and shed light on the true numbers that should guide your property transactions in the competitive “We Buy Houses” niche.
The 70% offer is essentially a make-believe figure that represents 70% of the ARV. This calculation involves deducting repair costs, closing and holding costs, and any wholesale fees. However, when we examine real numbers in today’s market, the actual rehab costs for houses requiring updates and repairs typically range from 30% to 50% of the ARV.
Consider a recent case where I received a call from a seller with a property purportedly worth around $400,000. The house, last updated in 1980, required substantial improvements such as new flooring, kitchen cabinets, appliances, doors, windows, and even a new roof—a complete rehab.
Factoring in today’s rehab prices, the estimated cost to bring the house up to modern standards ranged from $200,000 on a good day to a more likely $250,000 after considering all expenses. Subtracting the rehab cost from the $400,000 ARV left a mere $150,000, offering no room for profit. Even at a modest 20% profit margin, which is considered low, there was only $80,000 left to justify the substantial investment of time and money. Consequently, the fair offer price for the home should be $70,000.
Despite the initial shock, the homeowner had previously entertained two offers—one at $250,000 and another at $200,000. Upon further investigation, it was revealed that the first potential buyer had never closed a deal and likely lacked the financial credibility to do so. The second prospective buyer attempted to secure funding through a hard money lender, but the deal fell apart when the lender rejected the proposal.
The crucial takeaway here is that a 17% offer price, rather than the commonly misunderstood 70% or higher, was necessary to turn this deal into a profitable venture. Many homeowners may have fallen victim to misinformation, led to believe their properties are worth far more than reality dictates by inexperienced or unscrupulous investors.
In this particular case, armed with accurate information, we successfully closed the deal at $50,000 just ten days after our initial conversation. This scenario illustrates the importance of dispelling the 70% fallacy and adopting a more nuanced approach to property valuation in the “We Buy Houses” niche.
So, are you still swayed by the 70% fallacy, or are you ready to embrace a more realistic and profitable strategy in your real estate endeavors?