What is the 70% rule in house flipping?

The 70% rule is a widely used guideline in house flipping that helps real estate investors determine the maximum price they should pay for a distressed property to ensure a profitable flip. It’s a quick calculation designed to protect investors from overpaying and to provide a buffer for repair costs, holding expenses, and profit.

How Does the 70% Rule Work?

The rule states:

You should pay no more than 70% of a property’s after-repair value (ARV), minus the estimated repair costs.

• After-Repair Value (ARV): The price the property is expected to sell for after all renovations are complete.

• Estimated Repair Costs (ERC): The total cost to bring the property to its ARV condition, including materials, labor, permits, and a contingency for unexpected expenses.

Formula:

                     Maximum Purchase Price=(ARV×0.70)−Estimated Repair Costs

Example Calculation

Suppose you find a distressed home with:

• ARV: $300,000 (what you expect to sell it for after renovations)

• Estimated Repairs: $45,000

Calculation:

                Maximum Purchase Price=(300,000×0.70)−45,000=210,000−45,000=$165,000

According to the 70% rule, you should not pay more than $165,000 for this property.

Why 70%?

The 70% threshold leaves a 30% margin to cover:

• Your profit as the flipper

• Other costs not included in repairs (closing costs, financing, holding costs, agent commissions, etc.)

This buffer helps ensure you don’t lose money if costs run higher than expected or the market shifts.

Does the 70% Rule Show How Much to Pay for a Distressed Property?

Yes, the 70% rule is specifically designed to help investors decide the maximum price to pay for a distressed property. By factoring in the ARV and repair costs, it ensures you have enough margin for profit and unforeseen expenses.

Limitations and When to Adjust the Rule

• Market Conditions: In a hot seller’s market, you may need to offer more than 70% of ARV (sometimes up to 80–85%) to compete, but this reduces your profit margin and increases risk.

• High-End or Unique Properties: The rule may be too conservative for expensive or unique homes, where a higher percentage might still yield a substantial profit.

• Experience Level: Novice flippers should stick closely to the rule, while experienced investors may adjust it based on their expertise and risk tolerance.

• Accurate Estimates Required: The rule is only as good as your ARV and repair cost estimates. Inaccurate numbers can quickly erode your profit.

Bottom Line

The 70% rule is a fast, effective way to estimate the maximum price you should pay for a distressed property to flip. It’s not a substitute for thorough research, detailed cost estimates, or local market knowledge, but it’s a valuable starting point for making smart, profitable offers in house flipping.

In summary:
The 70% rule states you should pay no more than 70% of the after-repair value of a property, minus repair costs. It’s a proven guideline for house flippers to avoid overpaying and protect their profit margins when buying distressed properties.

Frequently Asked Questions: 70% Rule in House Flipping

How accurately does the 70% rule reflect actual profit margins in house flipping?

• Provides a rough estimate but may not account for unexpected costs.

• Accuracy depends on precise repair cost and after-repair value (ARV) calculations.

• Actual margins vary based on market conditions and project scope.

• Best used as a starting point, not a definitive profit gauge.

Can the 70% rule help determine a fair offer for distressed properties?

• Yes, it suggests offering 70% of ARV minus repair costs.

• Helps ensure a cushion for profits after expenses.

• Requires accurate ARV and repair estimates for fairness.

• Adjusts based on local market demand and competition.

How do market fluctuations influence the effectiveness of the 70% rule in real estate deals?

• Rising markets may reduce its effectiveness by inflating ARV.

• Declining markets can make properties harder to sell at predicted ARV.

• Volatility requires frequent reassessment of values and costs.

• Local trends can render the rule less reliable over time.

What are common mistakes investors make when applying the 70% rule to distressed homes?

• Underestimating repair costs, leading to lower profits.

• Overvaluing ARV based on outdated or optimistic data.

• Ignoring holding costs (e.g., mortgage interest) during renovations.

• Failing to adjust for unique property conditions or market shifts.

Does relying on the 70% rule account for all costs involved in house flipping projects?

• No, it primarily covers purchase price, repairs, and ARV.

• Excludes holding costs, financing fees