Updated: Aug 29
The standard process for flipping a house involves buying a home or distressed property at a low purchase price, fixing it up and selling it for a higher amount. The goal for house flippers is to buy low and then sell high in order to boost their profit.
The 70% rule can help flippers when they’re scouring real estate listings for potential investment opportunities. Basically, the rule says real estate investors should pay no more than 70% of a property’s after-repair value (ARV) minus the cost of the repairs necessary to renovate the home.
The ARV of a property is the amount a home could sell for after flippers renovate it. When buying a home to flip, investors need to estimate how much they believe the property could sell for after it’s been renovated. They can then multiply that amount by 70% and subtract it from the estimated cost of renovating the property.
The resulting figure is the highest price that flippers should consider paying for that property.
The 70% rule is just a general rule of thumb, however. Before buying any home, you’ll want to study market conditions, work with real estate professionals to get a more accurate resale estimate, and meet with contractors to determine how much repairs will cost and which renovations are needed.
If you’re getting a mortgage to finance the investment property, you’ll also want to consider the loan amount and term when evaluating your overall expenses and the ARV of the property. Make sure to apply for mortgage approval so you can understand how much property you can afford before you go house hunting.
Securing mortgage approval can also help you prepare to pay back the mortgage once the property is ready for resale, because you’ll know how much you owe your lender.
How Does The 70% Rule Work?
The 70% rule relies on a simple calculation:
After-repair value (ARV) ✕ .70 − Estimated repair costs = Maximum buying price
That maximum buying price will give you an idea of how much you should spend on a home that you plan on renovating and reselling. Going above that price could jeopardize your profits.
What If The Offers I Make Using The 70% Rule Are Rejected?
The 70% rule doesn’t work in every market. If you’re buying a home in a seller’s market where home prices are soaring and buyers are snatching up homes quickly, an owner might not accept your offer even if you arrived at it by using the 70% rule.
If market conditions are hot, you might have to tweak your calculations to offer a price that could be as high as 85% of a home’s ARV minus renovation costs. Whether you want to take this approach depends on the competitiveness of the market. You could be making it more likely that you won’t be able to sell your property for a high enough value to earn a profit after you buy and renovate.
But if you’re selling the property in a hot market, you might be able to sell the home quickly and for a bigger price tag.
This is why the 70% rule, useful as it is, is no substitute for researching market conditions. You might even find yourself in a buyer’s market, a time when homes aren’t selling quickly and prices aren’t rising. In that case, you might offer a lower price for a home even if the 70% rule tells you to offer a higher one.