Deal Philosophy: Buy Enough Room for the Risk

TLDR

A great renovation won’t rescue a bad purchase. I want a deal with enough room for the work, the other costs, and the things I haven’t found yet. The 70% rule gives me a quick starting point; the actual project math decides what I can pay.

Table of Contents

• The House That Changed How I Look at Deals
• Three Ways a Property Can Pay You
• The Deal Is Where I Create Room; the Work Uses It
• Use the 70% Rule for a Fast First Look
• Where That Other 30% Goes
• My 80% to 85% starting point
• Cosmetic Work and a Full Gut Shouldn’t Have the Same Risk Margin
• Don’t Spend the Margin Before You Buy

The purchase decides how much room you have to work with. If the deal only works when every contractor hits the budget, the house sells right on time, and nothing breaks, you haven’t bought yourself much of a business.

I got very good at renovating houses because I thought that was the thing that made this business work. Build a crew. Get better at construction. Manage the project harder. Squeeze another few thousand dollars out of the budget.

Those skills help. I still use them. But you can’t renovate your way out of a shitty deal.

The House That Changed How I Look at Deals

I walked into a boarded-up house with mattresses on the floor, used syringes, and human crap in the middle of the living room. It was rough.

I bought it for $21,000. We did around $30,000 of work. A couple of months later, it appraised for $180,000.

That changed how I thought about investing. I could keep trying to save a little money through better construction, or I could get much better at the purchase itself.

Here’s what those numbers actually describe:

That wasn’t $129,000 in cash profit. An appraisal isn’t a sale, and purchase plus rehab doesn’t include every project cost. The point is the amount of room that purchase gave me before the rest of the job even started.

I don’t need every deal to look like that one. I do need to understand why it worked so much better than a deal where I had to fight for every dollar.

Three Ways a Property Can Pay You

I separate three things that people tend to lump together when they say they made money on a house.

A house that’s worth $300,000 today might be worth $320,000 a few years from now. Great. That’s the market paying you. It doesn’t prove you were good at construction.

Then there’s the work. If the work would cost somebody else $50,000 and I can get the same result for $40,000, my skills have created an advantage. That may come from knowing what work matters, knowing contractors, or managing the project well.

But there’s a third piece: the deal I negotiate before any of that happens. That’s the margin I get for putting my money, or borrowed money, at risk.

This is why I use the car trade-in example. A private-party sale price and a dealer’s trade-in offer aren’t the same number. The dealer has to take the car, deal with its problems, and resell it. The dealer needs room for that job.

When I buy a house, I’m taking responsibility for the work and the unknowns. The seller and I have to agree on a price that makes that worth doing.

The Deal Is Where I Create Room; the Work Uses It

I look at a project through the deal, the strategy, the work, and the market.

The deal is the purchase. The strategy is what I’m going to do with the house. The work is getting the project done. The market is where I sell or hold the finished property.

For years, I put most of my attention into the strategy and the work. That’s where I knew how to be useful. But a good purchase gives those later stages room to go wrong without wiping me out.

I once thought I’d bought a home run. Somebody had sent me pictures, and I was already talking about how good the deal was. Then I got there and found roughly 300 tires in the backyard.

Getting rid of them cost me around $15,000. That made the deal pretty marginal.

The tires weren’t on the spreadsheet. They still cost money. That’s what I’m talking about when I say the investor takes the risk.

Use the 70% Rule for a Fast First Look

The basic 70 percent rule is:

Purchase-price starting point = ARV × 70% − repairs

ARV means after-repair value. It’s what the house should be worth in the finished condition supported by the neighborhood’s comparable sales.

For a house with a $300,000 ARV and $50,000 in repairs:

That gives me a quick way to decide whether a house is worth pursuing. It also gives someone working with me a starting point for a conversation without pretending they know every detail of the project.

Don’t change the order of the formula. Take 70% of the ARV, then subtract the repairs.

And don’t call the other 30% your profit.

Where That Other 30% Goes

On a $300,000 house, 30% is $90,000. That $90,000 has to cover the other costs and whatever money is left for doing the deal.

People ask what holding time or profit the rule includes. It doesn’t know your holding time. It doesn’t know your lender, your taxes, or what you’ll spend getting the property sold.

• Interest and lender points: Two buyers can finance the same purchase at different costs.

• Holding time: A longer project keeps interest, taxes, insurance, and other bills running.

• Acquisition closing costs: Buying the house has costs beyond the price.

• Utilities, insurance, taxes, and upkeep: These vary by house, location, and length of ownership.

• Selling costs: Sale-side fees reduce what comes out of the closing.

• Desired return: I need the remaining money to justify the cash, work, and risk.

That’s why I use a more detailed calculation before making the final decision. The quick rule gets me into the conversation. Then I replace the shortcut with the actual inputs I know.

A cost being paid at the sale doesn’t make it disappear. It may change when I need the cash, but it still changes what I get to keep.

My 80% to 85% starting point

After the purchase, the work, and all the other project costs, I want to be into the house for roughly 80% to 85% of its ARV before I sell or refinance. That includes the financing and holding costs I’ve incurred along the way. Selling costs come after that.

On a house with a supported $400,000 ARV, that means $320,000 to $340,000 in total project costs before the exit. It doesn’t mean the remaining $60,000 to $80,000 is my profit. I still have to sell the house or refinance it.

Let’s say I sell for $400,000 and allow 7% of the sale price for selling costs. That’s another $28,000.

At 85%, the math is $400,000 − $28,000 − $340,000 = $32,000. That’s what is left after the project costs and the sale. The $60,000 gap between my cost and the ARV wasn’t all mine to keep.

The 7% is the selling-cost assumption in this example. Use the costs you actually expect on your deal, and don’t assume the house will sell for more just because you need it to.

If I refinance instead, I have to work through that exit’s costs and loan proceeds separately. The sale-profit calculation doesn’t tell me what I’ll get back from a refinance.

Cosmetic Work and a Full Gut Shouldn’t Have the Same Risk Margin

Do I prefer cosmetic projects or full guts? The deal has to fit the risk.

If I’m sure it’s a cosmetic rehab, I know the neighborhood, and I have strong evidence for the finished value, I may accept a smaller margin. I’ve done wholetail deals where I knew the value very well, sometimes because I’d just done the house next door.

A full gut is different. There are more places for things to go wrong. If I already know the area or type of house tends to have cans of worms, I want more room in the purchase.

• A known cosmetic job with clear comps: Less uncertainty may justify a smaller margin.

• A wholetail in a neighborhood I know well: Confidence in the as-is resale matters; skipping a rehab doesn’t excuse paying too much.

• A full gut with unknown conditions: More uncertainty means I want more compensation for taking it on.

• An odd house I can’t value or a problem I don’t understand: A low price alone doesn’t make it a deal I should do.

I judge the actual house and my ability to carry out the plan.

Don’t Spend the Margin Before You Buy

“If I get it done in three months.” “If the contractor comes in low.” “If I get the top sale in the neighborhood.”

Listen to how many things have to go right before you call it a good deal.

I’ve been doing this for years, and I still pay lesson tax. Problems show up that I didn’t know to put in the estimate. A spreadsheet can help me think, but it can’t make those problems stop existing.

I want the numbers on the front end to leave room for the back end. Then I work on getting better at the construction and project management so I can keep more of that room.

Start with an honest ARV. Find out what the work takes. Account for the other costs. Decide what the risk is worth to you. That’s how I get to a purchase price I can stand behind.