Why Homeowners Lose with the 70% Rule

“We’ll buy your house for cash TODAY!”

For many homeowners looking to sell due to a sudden life change or financial circumstances, this is a tempting proposition. The “cash now!” buyers promise to purchase a house no matter what state it’s in. Leaky roof? Cracked foundation? Outdated kitchen? No problem!

But wait… There is a problem. What homeowners often don’t realize is that when they’re dealing with “cash now!” real estate investors, they’re playing a game using the 70% Rule.

Whats the 70% Rule?

Unlike a private buyer who wants to purchase your home and live in it, a real estate investor is planning to make money off of your house as quickly as possible. Because of this, when they find a home with major repairs that need to be done, the game of subtraction begins right away.

What kind of subtraction, you ask? The 70% Rule means that the seller immediately calculates that they will only offer you 70% of the estimated After-Repair Value (ARV). This gives them the ability to make a cozy 30% when they flip it and sell it.

For example, let’s say the ARV of your home is $399,999. The seller will agree to pay you $279,999. But the subtraction doesn’t stop there…

They also need to cover the cost of major repairs. Those will total another $35,000. After that, subtract $22,400 for the holding, closing, and commission costs. Finally, the mortgage payoff will cost an additional $75,000.

Selling to a “cash now!” investor without doing the repairs first means that your maximum proceeds on the transaction will be $147,599. That sounds nice until you realize all the cash you’ve left on the table.

Repair First and Avoid the Investors

Real estate investors are only interested in homes they can fix up and flip for a fast profit. If you make the necessary updates and repairs to you home first, your target seller will change from money-driven investors to average home buyers looking for a nice place to live.

The difference in numbers when you aren’t dealing with the “cash now!” folks is stunning. Let’s take the same house and sell it at the same ARV of $399,999. In this scenario, however, the homeowner doesn’t automatically lose 30% of the value by selling to an investor. Instead, they choose to work with a contractor that offers a “fix now, pay when you sell” solution. These options include the cost of the updates, any required temporary housing while the repairs are taking place, as well as tasteful staging of the home once it’s ready to sell.

For this home, the costs associated with repairs and staging are $56,000. Holding, closing, and commission costs are $31,999. Finally, the mortgage payoff is $75,000.

By making the necessary repairs before selling, the homeowner made $237,000 off of the deal. That’s $89,401 more than they’d have made through selling to a real estate investor.

When you’re hoping to sell quick, a “We’ll pay cash for your old house now!” offer can seem too good to refuse. If you’re hoping to pull the maximum value from your home, however, the numbers show that repairing first is the way to go.

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