How I Broke All 3 House Flipping Rules…and What Happened
What happens when you break the 3 sacred house flipping rules? How much trouble can you get into? We reveal why and when you actually CAN do it here...
It seems like us real estate investors always want to break the rules. We’re independent rebels who are taking control of our lives and turning the status quo upside down…
In fact, I seem to get at least one call per week from my previous coaching students asking me if they should break the rules of house flipping – namely The ARV Rule, The MAO Rule and The 70% Rule.
As you may know, The ARV Rule, The MAO Rule and The 70% Rule are the three most important house flipping rules you should always stick to.
The After Repair Value (or ARV Rule) is the number that you believe you can sell a house for after renovations. You get this from your real estate agent or from running comps in the area.
MAO Rule (maximum allowed offer) is the maximum amount that you should pay for a house .
And of course, The 70% Rule is what you use to make all these numbers work.
These rules work, they’ll keep you out of trouble and they will help you make money whether you are house flipping, long-term real estate investing, buying-and-holding real estate or even real estate wholesaling. Said another way, you need to know these numbers.
Even for all you real estate wholesalers out there – you should know the 70% rule inside and out, in order to make your wholesale deals far more attractive to your potential buyers.
But how do these house flipping rules all work together? The question is , can you break these rules every once in a while?
House Flipping Rules in Action
Here's how all these house flipping rules work together:
- Let’s say your real estate broker determined your ARV is $200,000.
- Use the 70% Rule to determine what you should pay for it – factoring in your rehab and other costs.
- Take that $200,000 and multiply it by 70%, which then gives you $140,000.
- Your general contractor has told you that you need to spend $25,000 on the rehab.
- Then take the $140,000 and subtract the $25,000, which then gives you $115,000.
- Your maximum allowed offer (or MAO) is $115,000
So using these three rules, you’ll keep yourself out of trouble and in the black on nearly every house flip you’ll ever do.
As long as you don’t break the rules…ever.
Or can you break the rules...maybe just sometimes?
What Happens When You Can’t Make The House Flip Numbers Work?
On a recent house flip in Middleborough, Mass I had all my costs figured out right down to the penny. I even thought the ARV of 200,000 might actually be a little bit on the conservative side.
House flipping “eraser math”? A little bit, I admit it.
The house flip was located in a market I knew fairly well – but it was not my primary market by any stretch. So, if I broke the house flip rules, there was going to be a fair amount of trepidation on my part.
I just knew it was a good deal and I knew I could make money on it - even though I could probably acquire the house for $115,000, I decided to break my own rules anyway.
Sometimes – you do need to break the 70% Rule.
There, I said it.
Although I can’t believe I actually said it…
And at other times, you also need to adjust your ARV upwards, even though your realtor tells you differently
How and When to Break The House Flipping Rules
Don’t get me wrong, breaking the house flipping rules is not for the novice house flipper. No way. It’s an advanced strategy for even seasoned real estate investors.
And even when I do it, I’m still quaking in my boots… (although I don’t own any boots, LOL)…so to speak.
What makes it even more interesting is that on this property, we actually made an offer over our 70% Rule when everyone else was bidding tens of thousands of dollars below what we offered!
Did I absolutely need to break every rule I’ve ever advocated here on this blog?
Probably not.
But if I didn’t, I would have entered into a bidding war with some rookie real estate investor and lost precious time. I knew the numbers worked - even when I broke all three rules at the same time.
Why did I do it?
It’s simple: inventory was disappearing at the time, the market was heating up, and I could sense this deal would not last long – especially with the other professional real estate investors starting to catch wind of it.
I felt the vultures circling so to speak…
Also, at the time we were doing about one house flip per month and I had set a goal to do three house flips per month on average, so I was feeling a bit of pressure to get things going.
The good thing is we did not substantially overpay for this property – so I felt pretty comfortable in my decision to break my own sacred rules.
What happened next?
The bottom line is this:
If you understand exactly how these rules all work together, you can bend them in order to get into lucrative deals and make more money. Don’t get me wrong - this can be nerve wrecking, scary stuff – especially if your own money is on the line.
Therefore it is vitally important to know what you are getting yourself into, should you decide to break one of these House Flipping Rules.
This is exactly why my team and I put together the below House Flipping School Members video. In this video I dive into the exact details of how I pulled this off with my Middleborough, MA property.
Remember, it’s OK to bend the House Flipping Rules every once in a while-you just have to fully and completely understand exactly what you are doing. If you don’t know exactly what you are doing, you risk setting yourself up for financial failure.
And obviously losing money on a house flip is what we want to avoid at all costs.
Looking Forward on House Flipping School...
For all you new House Flipping School members, I wanted to let you know that we just posted a new batch of videos to the membership side of House Flipping School yesterday.
As always these HFS member videos dive into the nitty gritty of what I have going on right now in my house flipping business. I hope you find them useful and I hope you are able to take away at least one beneficial piece of wisdom from each new video.
Keep me posted on what you think of the new membership side of HFS by leaving a comment below or in our members forum. I am having a blast watching our new House Flipping School community grow.
Take care and see you at the top,
Mike
