Overview
The 70% Rule says you should pay no more than 70 percent of a property's After Repair Value, minus your estimated repair costs. On a house with a $200,000 ARV that needs $65,000 in repairs, that's ($200,000 x 0.70) minus $65,000, or a $75,000 maximum offer. The 30 percent you hold back covers your profit and your fixed costs.
Key Takeaways
- The 70% Rule caps your offer at 70 percent of the After Repair Value minus your repair costs. It is also called your Maximum Allowable Offer, or MAO.
- The 30 percent you hold back is not profit. It is roughly 15 percent profit and 15 percent fixed costs (buying, holding, selling, and financing).
- It is a fast screening tool, not a final answer. Use the Maximum Purchase Price formula to run the real numbers before you make an offer.
- Your percentage should be your own. Cash buyers with a license may go to 75 or 80 percent, while investors using hard money and an agent often need 65 to 75 percent.
FAQ
What is the 70% Rule for Flipping Houses?
Based upon years of experience, flippers developed a quick rule of thumb called the 70% Rule to help them quickly and roughly analyze the Maximum Purchase Price they should offer for a property.
The 70% Rule states that you should buy a property at 70% of the After Repair Value minus the Repair Costs.
The number this produces goes by a few names. You will see it called your Maximum Allowable Offer (MAO), your maximum purchase price, or simply your offer cap. They all mean the same thing: the most you can pay for a property and still make the deal work.
FAQ
Why Do house flippers use 70%?
In order to successfully flip houses you need to buy properties at a big enough discount to make a profit and cover all of the other 'Fixed Costs' (buying, holding, selling and financing costs).
When you multiply the After Repair Value by 70% you are discounting the property by 30% to cover your Profit and Fixed Costs.
The 30 Percent Is Not Your Profit
This is where new flippers get burned. They see a 30 percent gap and assume that is what they are taking home. It is not.
That 30 percent has to cover every cost of the deal that is not the purchase price or the rehab:
- Buying costs, roughly 1 to 3 percent of the purchase price: title work, attorney fees, and inspections
- Holding costs, often $500 to $1,000 per month: property taxes, insurance, utilities, and maintenance
- Selling costs, roughly 6 to 8 percent of resale: agent commissions and closing costs
- Financing costs: points and interest if you are funding the deal with a hard money or private lender
- Your profit, which is whatever is left over
Split roughly down the middle, that is about 15 percent for fixed costs and 15 percent for profit. If your fixed costs run higher than average, your profit is what absorbs the difference.
70% Rule Formula Example
A flipper finds a distressed property that a seller is asking $85,000 for, in a neighborhood with $200,000 resale values. Based upon your estimates you feel the property needs $65,000 in repairs.
What should the flipper offer based upon the 70% Rule?
Answer
Maximum Purchase Price = (After Repair Value x 70%) - Repair Costs
Maximum Purchase Price = ($200,000 x 70%) - $65,000
Maximum Purchase Price = $140,000 - $65,000
Maximum Purchase Price = $75,000
In this scenario, the seller is asking $85,000, which is $10,000 more than the recommended purchase price from the 70% Rule.
The 70% Rule has exactly two variables, and both are estimates you make yourself:
- Your After Repair Value, which comes from recent sold comps, not from what you hope the house is worth
- Your repair costs, which come from a detailed scope of work, not a guess
Get either one wrong by 10 percent and your maximum offer is off by tens of thousands of dollars. The formula is the easy part. The inputs are where deals are won and lost.
FAQ
Can you offer more than 70% for a property?
Reality check
Yes! You can offer more or less than the 70% Rule! In fact, you need to establish a % Rule that works best for you and your market!
It's important to remember that the 70% Rule is just a rule of thumb to help you quickly gauge whether a property is a good deal or not. The 70% Rule will vary from investor to investor and market to market.
A cash investor who also has their real estate license can save money on expensive loan payments and save 3% commission on the sale, so they may be able to offer more aggressively at 75 to 80% of ARV. Whereas an investor who is using a hard money lender and a real estate agent to sell their property may need to buy at 65 to 75% of ARV to account for their higher fixed costs.
Your real estate market will also affect the profit margins you can make on your deals. In today's hot and competitive marketplace, and especially on the East and West Coasts, many investors' profit margins are shrinking from 15% of ARV down to 10%. In order to get deals, many investors are offering more aggressively at 70 to 80% of ARV.
| Your situation |
Typical % of ARV |
Why |
| Cash buyer with a real estate license |
75 to 80% |
No loan costs, and you save roughly 3% on the sale commission |
| Using hard money and an agent |
65 to 75% |
Higher fixed costs to cover |
| Hot, competitive market |
70 to 80% |
Margins compressed from 15% of ARV down to closer to 10% |
For this reason, it's important for you to customize YOUR OWN PERSONAL % that you will use for acquiring deals in your real estate market.
When the 70% Rule Breaks Down
The rule assumes an average deal in an average market. It gets less reliable at the edges:
- High-value properties. On a $1,000,000 ARV, 30 percent is $300,000. Your fixed costs do not scale up that fast, so the rule leaves far more cushion than you need and you will lose deals you could have won.
- Low-value properties. On a $60,000 ARV, 30 percent is only $18,000. That may not cover your fixed costs at all, let alone leave a profit. Cheap houses often need a lower percentage, not the same one.
- Heavy rehabs. A longer timeline means more months of holding and financing costs, so a gut job needs a wider margin than a cosmetic refresh.
- Thin or uncertain comps. The rule is built on your ARV. If you cannot support that number with solid recent sold comps, be more conservative until you can.
In every one of these cases, skip the shortcut and run the full
Maximum Purchase Price formula.
How to Calculate Your Own % Rule
When you are first starting to analyze deals you should use the more detailed
Maximum Purchase Price Formula approach to calculate all of the project costs on your projects.
Calculating all of the project costs will require you to work out the Buying, Holding, Selling and Financing Costs on your projects, and will help you determine an accurate % that you can use as your own '70% Rule.'To calculate your own %, use the following formula:
Purchase Percentage = 1 - ((Buying Costs + Holding Costs + Selling Costs + Financing Costs + Profit) / After Repair Value)
Let's use the Detailed Maximum Purchase Price Example above:
Calculating Your Own % Rule Example
A flipper finds a distressed property that the seller is asking $85,000 for, in a neighborhood with $200,000 resale values. After performing a detailed analysis of all of the project costs, the flipper calculates the following:
- Repair Costs = $65,000
- Buying Costs = $2,000
- Holding Costs = $3,750
- Selling Costs = $16,000
- Financing Costs = $7,500
- Desired Profit = $30,000
What is the flippers purchase % of the ARV?
Purchase Percentage = 1 - ((Buying Costs + Holding Costs + Selling Costs + Financing Costs + Profit) / After Repair Value)
Purchase % = 1 - (($2,000 + $3,750 + $16,000 + $7,500 + $30,000) / $200,000)Purchase % = 1 - ($59,250 / $200,000)Purchase % = 1 - 0.29625
Purchase % = 70.375%
In this scenario, our purchase % lands right at 70% of the After Repair Value.
Does the 70% Rule Apply to BRRRR and Rentals?
Not directly. The 70% Rule is built around a flip, where you sell at the end and pay agent commissions and closing costs to do it. A
BRRRR investor refinances and holds the property instead, so they skip the selling costs entirely and can often pay more for the same house. If you are buying to hold, run the numbers on your refinance and your cash flow rather than relying on a flip rule of thumb.
TAKE ACTION
Now that you have calculated your own % Rule, start analyzing deals in your marketplace. The more you practice, the better you'll get at quickly determining the value of a property.
Our
House Flipping Calculator walks you through every one of these costs step by step, so you can calculate your maximum purchase price without missing anything.
FAQs about the 70% Rule Formula
What is the 70% Rule in house flipping?
The 70% Rule is a quick guideline that says you should pay no more than 70 percent of a property's After Repair Value, minus your estimated repair costs. It gives you a fast maximum offer so you can screen deals without running a full analysis on every one.
What does MAO stand for?
MAO stands for Maximum Allowable Offer, which is the number the 70% Rule produces. It is the most you should pay for a property and still leave room for your fixed costs and your profit.
Is the 30 percent all profit?
No, and this is the most common misunderstanding. The 30 percent covers your buying, holding, selling, and financing costs as well as your profit. Split roughly evenly, that is about 15 percent for costs and 15 percent for profit.
Is the 70% Rule still accurate?
It is still a useful screening tool, but the exact percentage moves with your market and your cost structure. In competitive markets where margins have compressed, many investors are buying at 70 to 80 percent of ARV. Calculate your own percentage rather than assuming 70 works for you.
Does the 70% Rule include closing costs?
Yes, indirectly. Closing costs are part of the buying and selling costs baked into the 30 percent you hold back. They are not a separate line you subtract on top of the formula.
