The 70 percent rule in house flipping is a simple rule of thumb by which you can easily assess what an investor should offer on a potential property, all in one simple, compact formula that you can use. It is useful to both the experienced investors and newcomers to house flipping who may not yet be confident in their ability to come up with solid offers. Let’s now take a look and what this rule is about and how to use it appropriately.
What is the 70 percent rule?
When you are determining the maximum price you are ready to pay for an investment property, the 70 percent rule in house flipping simply dictates that you shouldn’t pay more than 70% of the After Repair Value (ARV), minus the cost of repairs. After Repair Value is your estimate of what your property’s future sales price will be once you have made repairs and upgrades.
(Property ARV x 0.7) - Repair Costs = Maximum you should pay for the property
Let’s say your property’s ARV is $700,000 and the house needs $80,000 more to be fixed. The 70% rule says that the maximum you should pay for the property is $410,000. Let’s calculate this: Multiply $700,000 by 0.7 to get 70%, which equals $490,000, then subtract $80,000 for repairs. And there you have it: an offer of $410,000.
When you carve out that 30 percent, you leave room for your profit, holding and closing costs as well as the unexpected or miscellaneous expenses.
Of course, this rule is not something you have to follow to the letter, but it gives investors a quick guideline that they can refer to.
Advantages and caution if using the 70% rule when flipping
The great benefit of this rule and formula lies in its simplicity and how quickly you can apply it. Also, the more you learn to accurately calculate the ARV and the repair costs, the lower your risk profile becomes and the higher your chances for a successful flip.
When deciding if using this rule is appropriate in a particular situation, the main factor should be to make sure that you have a good, solid grasp of your local real estate market, as the profit margins that you can make from your deal may vary from place to place. It is quite possible that in some situations it would be more prudent to customize the percentage formula to fit your own business purposes and circumstances.
How accurate is the 70% rule in house flipping?
Although many investors find the 70% rule useful, they also tend to treat it as merely a guideline. After running all the numbers and conducting a detailed analysis, the outcomes don’t always match. Depending on the market or the specifics of the project, you may end up with an offer price that is lower or higher than the 70% rule would suggest. This is why you always have to double check your numbers and never rely solely on the 70% rule.
So, to summarize, for beginner investors, the 70% rule is a simple, easy rule for back-of-the-napkin calculations that gives them a rough estimate of what they should be paying for a property. It produces a ballpark figure of where you should start your analysis. However, you should never be the only way to determine your offer price. Before actually submitting an offer, a savvy investor should always run a more detailed analysis as there are many variables to take into consideration, such as the cost of financing, the carrying costs, the exit strategy, major repairs, higher-end property, etc.