The 70 percent rule is a common term used among many real estate investors when flipping houses. Don’t feel bad if you don’t know what it means, because I had never heard of it up until two years ago and I have flipped almost 100 houses. The 70 percent rule is a way to determine what price to pay for a fix and flip to make money. Even though I did not know what the 70 percent rule was; what I pay for fix and flips comes very close to the 70 percent rule.
What is the 70 percent rule?
The 70 percent rule states that an investor should pay 70 percent of the ARV of a property minus the repairs needed. The ARV is the after repaired value and is what a home is worth after it is fully repaired.
If a home’s ARV is $150,000 and it needs $25,000 in repairs, then the 70 percent rule states an investor should pay $80,000 for the home. $150,000 x 70% = 105,000 – $25,000 = $80,000. Buying a house for $80,000 that will be worth $150,000 may seem like an awesome deal, but you have to remember all the costs involved in a fix and flip. Here is a great article that describes the costs involved when fix and flipping.
Do I use the rule?
I rarely use the 70 percent rule when deciding on a fix and flip. I like to write out all the numbers and decide on a deal after seeing my profit potential. On the above deal, I would write all my costs and see if the profit potential was worth the risk. Occasionally I will use the 70 percent rule to see how my numbers match up and I am usually very close to what the 70 percent rule estimates.
$150,000 is the value of the home after the repairs and $25,000 in repairs are needed. I always add at least $5,000 in unknown costs to my known costs on a fix and flip. Selling the house would cost me a 3% commission plus title insurance and other closing fees; approximately $6,500. I will have insurance, utilities, and lawn maintenance while owning the house; I estimate those costs at $2,500. My financing costs will be about $3,500 with my financing terms and loan costs. My selling costs are going to be lower than most people because I am a real estate agent and do not have to pay a listing agent.
– 3,500 = $107,500
As you can see when I subtract all my costs, I have a break even point of $107,500. I usually want at least a $25,000 profit on my low-end fix and flips (under $125,000 purchase price). If I figure in a $25,000 profit, I should buy the property for $82,500. An investor who is not a real estate agent would be right at that $80,000 number or even a little under it because they would have to pay another 3 percent commission on the sales price.
How accurate is the 70 percent rule?
As you can see, the 70 percent rule was extremely close to what I would pay based on my own calculations. When I buy more expensive houses I usually am willing to pay more than 70 percent and when I buy cheap houses I pay less than 70 percent. I also factor in how big the repair job is going to be and how much cash I will have into a deal. If I can get houses cheaper that is great but difficult in this market. For beginner investors, I think the 70 percent rule is a great way to get an idea of what to pay for a flip. I would never rely only on the rule. You have to make sure your repair estimates are accurate for the rule to work.
What do you need to know to use the rule?
In order to use the rule, you need to know many things. The rule is useless if you do not know the repairs, the market value, and other factors.
The ARV is the after repaired value and you must know this to use the rule. You cannot guess on the value or have a huge value range. Not knowing the ARV is a great way to get yourself in trouble.
You must know what the repairs will cost as well to use the rule. The repairs always seem to cost more than you think they will and take longer than you think as well.
These are the only two things you need to know to use this rule, which is one reason I do not think it is completely accurate. The rule does not consider taxes, insurance, financing, utilities, maintenance, selling costs, or buying costs. These costs can vary greatly in different markets and on each deal. That is why I like to write out all the costs on each deal.
Should you pay more in a competitive market?
Many investors try to stretch the 70 percent rule or whatever rule they use when the market is appreciating and it is tougher to find deals. I think this is a huge mistake because no one knows if the markets will continue to increase, stay stable or even decrease. Most flippers got into trouble during the housing crisis because they assumed the markets would always go up and they didn’t have to get as good of a deal. Even in an increasing market, you should stick to your rules and guidelines, because it is better to have less deals that make money than a lot of deals that lose money.
I always buy deals based on what the current market prices are with room for a correction. That does not mean I always stick to the 70 percent rule, but I do not change my investing style because it is tougher to find deals. You should be able to find deals in most any market if you know what you are doing.
Can wholesalers use the rule?
Real estate wholesalers try to flip properties right away without doing any repairs. Most wholesalers are selling properties to other investors for cash. A wholesaler needs to know what another investor will pay for a home and the 70 percent rule is a great guideline to know what you can wholesale a house for. For more information on wholesaling here is a great article.
Wholesalers will need to know what investors are paying in their market for flips or rentals. The rule can be a great tool if investors are paying 70 percent for flips, but if investors are only paying 65 percent the wholesalers will need to adjust. The wholesaler will also need to leave room for their fee to be added into the deal.
For more information on how to fix and flips homes including how to find properties, how to finance them, how to repair them and how to make the most money fix and flipping, check out my new book Fix and Flip Your Way to Financial Freedom. You can get a paperback, audiobook, or kindle venison on Amazon.
The 70 percent rule is one of the real estate investing rules that I think is a great tool for investors. The rule gives a pretty accurate price for investors to pay for house flips provided that the repairs and ARV are accurate.