The 70% Rule in House Flipping Explained

The 70 percent rule is a quick way to estimate the most you should pay for a house you plan to flip: 70 percent of the after repair value, minus the cost of repairs.

The formula

Maximum offer = after repair value × 0.70 − repair costs

The after repair value, or ARV, is what the house should sell for once the work is finished. The rule builds in about a 30 percent cushion of the finished value for buying costs, holding costs, selling costs and profit.

A simple example

A house that should sell for $250,000 after $40,000 of repairs.

70 percent of $250,000 is $175,000.
Subtract the $40,000 of repairs: $135,000.

The most you should offer under the rule is $135,000. These are example figures.

Where the rule falls short

The rule is a fast filter, and it ignores most of the things that decide whether a flip makes money:

Financing. Loan interest and points are not in the formula.
Time. A job that runs longer costs more in holding costs and interest.
Your actual selling and buying costs. They vary by place.
The market. In an expensive area a deal may need a different margin, and in a slow market a bigger one.
The ARV itself. The rule is only as good as that estimate, which comes from recent sales of similar finished homes nearby.

The rule against the full numbers

The house flip calculator has an example deal that shows how the two can disagree. It buys at $175,000 and sells at $300,000 after $40,000 of repairs plus 10 percent contingency.

The 70 percent rule gives a maximum offer of $166,000. The price is $9,000 over it, so the rule flags the deal.
The full calculation, with a loan and six months of holding costs, shows a net profit of $35,200 before tax.
Paid for in cash instead, profit rises to $49,000, but much more of your own money is tied up.

The rule is a prompt to look harder. It is not a reason to reject a deal or accept one, and the full profit figure is the better guide.

How to use it

Estimate the ARV from recent sales of similar finished homes nearby.
Get repair quotes, and add a contingency for surprises.
Work out the maximum offer with the formula.
Run the full numbers with your financing, timeline and costs.
Walk away if the full numbers do not leave a margin you are comfortable with.

This guide is general information, not financial advice. Check any deal with people who know your market, and with a lender and an accountant.

Questions

Is the 70 percent rule based on the purchase price or the after repair value?

The after repair value. You take 70 percent of what the finished house should sell for, then subtract the repair costs, to get the most you should pay.

Should the repair costs include a contingency?

Yes. Surprises are common on older houses, so put a contingency into the repair number before you apply the rule.

Can I use 75 or 80 percent instead of 70?

Some investors adjust the percentage for their market. The right figure depends on local costs, competition and how much margin you need. Whatever percentage you use, check the result against the full profit calculation.

How do I estimate the after repair value?

Look at recent sales of similar finished homes nearby, adjusting for size, condition and features. It is the single most important number in a flip, so be cautious and check it with a local agent.