Ep 14: The Seventy Percent Rule That Protects Every Iowa Flip Budget

Episode 14

The Seventy Percent Rule That Protects Every Iowa Flip Budget

 

[NEIL] Here's a number that'll change how you write offers. Two houses, same street, same square footage. One's worth twenty thousand dollars more than the other on paper. Same comps. Same neighborhood. And almost every investor in Des Moines would price them exactly the same.

 

[MAGGIE] Wait, twenty thousand dollars off, on paper, using the same comps?

 

[NEIL] Same comps. Wrong comps. That's the whole episode.

 

[MAGGIE] Welcome back to Flipping Iowa. I went down a rabbit hole for this week's post at littleguyloans.com, and by the end it came down to one formula almost every flipper in this state already thinks they know.

 

[NEIL] The seventy percent rule.

 

[MAGGIE] The seventy percent rule. Neil's run this math on more Iowa deals than anybody I know, so today he's basically showing his work.

 

[NEIL] It's not complicated. Max offer equals after repair value times zero point seven, minus your rehab cost. Two inputs. One ceiling. That's it.

 

[MAGGIE] Why seventy percent specifically? Why not eighty, why not sixty?

 

[NEIL] Because that gap between seventy and one hundred is where everything else lives. Holding costs while you own it, selling costs when you list it, commissions, closing costs twice, insurance, utilities, interest the whole time you're carrying it, and then whatever's left is supposed to be your actual profit. Seventy percent isn't a magic number. It's roughly what's left once you back out everything a flip costs beyond just the purchase and the rehab.

 

[MAGGIE] So it's less "why seventy" and more "here's what the other thirty percent has to cover."

 

[NEIL] That's exactly the right way to think about it.

 

[MAGGIE] So if it's that simple, why do we need a whole episode on it?

 

[NEIL] Because the formula's simple and the inputs aren't. Get the after repair value wrong and the seventy percent rule will let you overpay and you won't even see it happening. It'll feel like discipline. It's actually just bad math wearing a discipline costume.

 

[MAGGIE] So walk me through it. What's the rule actually protecting you from?

 

[NEIL] Falling in love with a house before you've run the numbers. I see it constantly. Somebody walks a property, pictures the finished kitchen, and starts negotiating from the feeling instead of the formula. The seventy percent rule is a wall between what you want to pay and what the math says you should pay.

 

[MAGGIE] And that wall only holds if the after repair value behind it is actually right.

 

[NEIL] Exactly. That's the part nobody talks about enough. The rule gets all the attention. The after repair value is doing all the work.

 

[MAGGIE] So let's get into that. What does it actually take to get an after repair value right on an Iowa flip?

 

[NEIL] Comps. Sold comps, not active listings. An active listing tells you what somebody's hoping for. A sold comp tells you what a buyer actually paid, which is the only number that matters when you're the one writing a check.

 

[MAGGIE] How recent do those comps need to be?

 

[NEIL] Three to six months. Des Moines metro pricing has moved enough this year that a comp from last spring is basically a different market. I'll pull something from eight months back and it's already telling me a story that isn't true anymore.

 

[MAGGIE] And it has to be the same neighborhood, not just the same zip code?

 

[NEIL] Same streets if you can get it. Beaverdale doesn't price like Waukee. Waukee doesn't price like Norwalk. I've had investors bring me a deal where the comps were technically in the same city and forty thousand dollars apart in reality.

 

[MAGGIE] That's a big gap for "technically the same market."

 

[NEIL] It is. Same bed and bath count, similar square footage, similar lot size, and a finish level that matches your actual scope, not the nicest flip on the block that somebody dropped ninety grand into.

 

[MAGGIE] Let's make this real. Walk me through an actual example.

 

[NEIL] Say you're looking at a three bedroom bungalow in Beaverdale. You pull comps off the same streets, sold in the last four months, and they put your after repair value at two hundred ninety thousand. Your contractor walks it and says kitchen, both baths, flooring, new roof, that's fifty five thousand.

 

[MAGGIE] Okay, so run the formula.

 

[NEIL] Two hundred ninety thousand times zero point seven is two hundred three thousand. Subtract the fifty five thousand rehab and your max offer is one hundred forty eight thousand dollars.

 

[MAGGIE] And if the seller wants one hundred sixty five?

 

[NEIL] That's not a negotiation problem anymore. That's a math problem. The math says walk, or find a completely different angle into the deal, seller financing, a longer close, something that changes the equation. It doesn't say talk yourself into it.

 

[MAGGIE] So if someone skips that discipline and just offers what feels close enough, that's where the money actually goes, isn't it. Has that ever happened to somebody you've worked with?

 

[NEIL] Constantly. That's basically the whole next story.

 

[MAGGIE] Before we get there, one more thing on this. The rule only covers purchase and rehab. What about everything else, holding costs, selling costs, all of that?

 

[NEIL] Right, the seventy percent rule isn't a full deal analysis. It's a filter. It tells you in about thirty seconds whether a property's even worth a closer look. If it clears the filter, then you run holding costs, selling costs, and a contingency for whatever's hiding behind the drywall in a hundred year old Iowa house. If it doesn't clear the filter, you never get to that part, because you already know to walk.

 

[MAGGIE] And some investors push past seventy percent on purpose?

 

[NEIL] Experienced ones, sometimes, on a deal with low holding cost risk or a fast cosmetic rehab. Seventy five, even eighty percent of after repair value if the numbers and the timeline both support it. That's a judgment call for somebody who's tracked their own rehab estimates against reality for years. If you're newer, hold the line at seventy percent while you're still learning how your own numbers actually play out against what really happens on site.

 

[MAGGIE] That's a good gut check. Push the ceiling once you've earned the data, not before.

 

[NEIL] That's exactly it.

 

[MAGGIE] Give me a real example. One where stretching past seventy percent worked, and one where it didn't.

 

[NEIL] Sure. Had an investor in Waukee eyeing a ranch, after repair value around two hundred forty thousand, rehab estimate only eighteen thousand, mostly paint, flooring, a quick kitchen refresh. Seventy percent of two forty is one sixty eight, minus eighteen thousand rehab puts the ceiling at one fifty. They offered one fifty eight, about seventy eight percent of after repair value.

 

[MAGGIE] That's well past the standard line.

 

[NEIL] It is, but the rehab was two weeks, not two months, and the market was moving fast enough that holding cost risk was low. Deal closed, they were in and out in under sixty days, made their number.

 

[MAGGIE] And the one where it didn't work?

 

[NEIL] Different investor, different property, similar stretch, except the rehab estimate was wrong. What they thought was eighteen thousand of cosmetic work turned into forty two thousand once they opened a bathroom wall and found old galvanized plumbing that had to be replaced. Same seventy eight percent offer, except now the real numbers put them past ninety percent of after repair value once the rehab actually finished.

 

[MAGGIE] So the stretch wasn't the problem. The rehab estimate was.

 

[NEIL] Exactly. Stretching the seventy percent rule only works if everything else underneath it is airtight. Get one input wrong and the stretch turns into the reason the deal loses money instead of the reason it worked.

 

[MAGGIE] One more piece before the break. You mentioned lenders use a similar cap. How does that connect to what we financed?

 

[NEIL] It's not a coincidence, it's the same ceiling. On a typical Iowa fix and flip loan, we'll finance up to ninety percent of the purchase price and up to one hundred percent of the rehab budget. But the whole loan is still capped at seventy percent of after repair value. That's the controlling number. Even if purchase and rehab financing would add up to more, the loan stops at that line.

 

[MAGGIE] So underwrite your own offer to the same ceiling the lender's going to use anyway.

 

[NEIL] Do that and closing goes a lot smoother, because you're not surprised when the loan comes back capped somewhere you didn't expect.

 

[MAGGIE] Okay, you said that skipping the discipline is basically the whole next story. Let's hear it.

 

[NEIL] This one still bugs me a little, in a good way. We had a deal come across our desk, full package, purchase price, rehab budget, after repair value, all filled in like it should be. And we started digging into it the way we always do.

 

[MAGGIE] What turned up?

 

[NEIL] The property didn't have a basement. Slab, no basement. And every single comp the borrower used to build their after repair value had a basement.

 

[MAGGIE] So the whole after repair value was built on comps that weren't actually comparable.

 

[NEIL] Right. So we went back and reran it ourselves, using only properties without a basement, slab and crawl space, the actual apples to apples set. And the real after repair value came in about twenty thousand dollars under what the borrower had on paper.

 

[MAGGIE] That's the twenty thousand dollar number from the top of the show.

 

[NEIL] That's it. So we brought that to the borrower, showed them the comp set, walked through why a house with a basement and a house without one don't sell for the same money in this market. And the deal died. About a month of silence.

 

[MAGGIE] It just died?

 

[NEIL] For about a month, yeah. But then it came back. Turned out the borrower took what we'd shown them and used it to educate the seller on what the home was actually worth in the current market, basement or not. They renegotiated. Ended up with about a twenty seven thousand dollar retrade off the original ask.

 

[MAGGIE] So catching the bad comp didn't kill the deal, it fixed it.

 

[NEIL] That's the whole point of being the annoying one who checks the comps. We're not trying to talk anybody out of a deal. We're trying to make sure the deal that closes is one they can actually be profitable on. Even if we could make a little more money funding a deal that's too thin, that's not the business we want to be in.

 

[MAGGIE] Why not, purely from a numbers standpoint?

 

[NEIL] Because a borrower who loses money on a flip doesn't come back. And repeat borrowers are the whole business. I'd much rather tell somebody their after repair value is twenty thousand dollars too optimistic today than watch them find that out the hard way at closing, or worse, at the sale six months later.

 

[MAGGIE] It pays to actually dig into what the comps are, not just what somebody hands you.

 

[NEIL] A basement versus no basement can swing an after repair value by twenty thousand dollars on an otherwise identical house. That's not a rounding error. That's the difference between a deal that pencils and one that doesn't.

 

[MAGGIE] Let's push on that a little, because I know what a listener's thinking right now. Somebody's going to say, I don't have a lender double checking my comps before I write an offer. Isn't this really a "must have a good hard money lender" problem, not a "you should know this" problem?

 

[NEIL] Fair pushback. But here's the thing, we catch it on the loan file, after somebody's already spent time and sometimes earnest money getting to that point. If you know to check basement versus no basement, garage versus no garage, lot size, finish level, before you ever submit the deal, you skip the whole month of silence and the stress that comes with it.

 

[MAGGIE] So the lender's a backstop, not a substitute for doing it yourself.

 

[NEIL] Exactly. Think of us as the second set of eyes, not the first. The habit still has to be yours. Pull the comps yourself, sold only, three to six months, same streets, similar finish. Then let us stress test it before you close. Both things can be true at once.

 

[MAGGIE] Practical question. If somebody's just starting out, where do they actually go to pull sold comps themselves?

 

[NEIL] A few places. If you've got a realtor relationship, MLS access is the cleanest, sold data filtered by radius, square footage, whatever you need. No agent yet, the county assessor site will show you sale prices and basic property details, it's public record. And honestly, driving the neighborhood still matters. Pull the comps on a screen, then go look at the actual houses, because a listing photo won't tell you the roof's been replaced or the driveway's cracked in half.

 

[MAGGIE] So data plus eyes on the property.

 

[NEIL] Every time. The spreadsheet tells you what sold. Standing on the sidewalk tells you why.

 

[MAGGIE] What if you're not in the Des Moines metro at all? Say you're working a small town with barely any recent sales.

 

[NEIL] Then you widen the radius before you widen the rule. Go further out, six months instead of three, look at towns with a similar size and price point instead of just literal distance. What you don't do is grab three stale comps and call it good just because that's all that's available. Thin data means you tighten your rehab contingency, not loosen your discipline.

 

[MAGGIE] So less data means more caution, not less.

 

[NEIL] That's the rule out in the rest of the state. Fewer comps just means you lean harder on the ones you've got.

 

[MAGGIE] What about somebody who says, my comps are close enough, I don't need to be that precise?

 

[NEIL] Close enough on a house is not close enough on a spreadsheet. "Close enough" is how a two hundred ninety thousand dollar after repair value turns into a two hundred seventy thousand dollar after repair value, and how a max offer that should be one hundred forty eight thousand quietly becomes one hundred sixty two thousand because somebody rounded generously three different times. Small gaps compound. That's the whole lesson from the basement deal.

 

[MAGGIE] So before we wrap, and this is a bit of a tradition around here, we like to close with a piece of Iowa history. This one's not about real estate at all, but stick with me, because I think you'll see where it lands.

 

[NEIL] I'm listening.

 

[MAGGIE] On September eighteenth, eighteen seventy three, a banking giant called Jay Cooke and Company went belly up overnight, and it dragged the whole country down with it.

 

[NEIL] I did not know that one.

 

[MAGGIE] The firm had bet everything on financing the Northern Pacific Railroad, one more red hot speculative play that ran way past what the real economy could actually support. Eighteen thousand businesses failed over the next two years, and the country didn't fully climb out until eighteen seventy nine.

 

[NEIL] So a firm that stopped checking whether the numbers still held up, and it took the whole market down with it.

 

[MAGGIE] That's basically it. Every flipper who's ever watched a hot market go quiet overnight is looking at a much smaller version of the exact same lesson. The math stops working the second you stop checking it.

 

[NEIL] That lands a lot closer to today's episode than I expected.

 

[MAGGIE] Right, it always does.

 

[NEIL] Alright, let's bring it home. Three things. First, the seventy percent rule is only as good as your after repair value, so get sold comps, three to six months old, same streets, similar finish level, before you ever run the formula.

 

[MAGGIE] Second?

 

[NEIL] Second, the rule is a filter, not the whole deal analysis. It clears a property for a closer look, it doesn't replace holding costs, selling costs, and a contingency once you're actually underwriting.

 

[MAGGIE] And third?

 

[NEIL] Third, a basement versus no basement, or any mismatch like it, can swing your after repair value by twenty thousand dollars on paper. Check the comps like the deal depends on it, because it does.

 

[MAGGIE] I love that this whole episode started with two houses that looked identical on paper and weren't.

 

[NEIL] That's Iowa flipping in one sentence. The numbers only tell the truth if you ask them the right question.

 

[MAGGIE] If you got something out of this one, share it with a friend who's about to write an offer, and be sure to subscribe so you don't miss the next one.

 

[NEIL] And hey, thanks for sticking with us through the math. It's worth it.

 

[MAGGIE] Catch you on the next episode.