What Is the 70% Rule in House-Flipping?
What is the 70% rule in house-flipping? | Is it accurate? | Using the 70% rule | When to break it | Additional costs of house-flipping | Summary
The 70% rule in house-flipping is a simple formula that helps house-flippers decide the maximum offer they should make on an investment property. The formula can help give you a rough idea of what you should pay for a property in order for it to remain profitable. Below we’ll break down the 70% rule — and some of its limitations.
What is the 70% rule in house-flipping?
The 70% is a guideline that recommends paying no more than 70% of the after-repair value (ARV) of a property, minus all rehabbing costs. It’s a two-step formula: you take 70% of the ARV first; then you subtract all costs to repair and resell the house. The resulting number gives you the highest price you would theoretically pay.
Highest price = (70% of ARV) – rehabbing costs
For example, let’s say you’re looking at a property that needs about $45,000 worth of repairs. After comparing it with recently sold properties in the same area, you decide the property could sell for $250,000 after rehabbing (the ARV).
Highest price = (70% of $250,000 = $175,000) – $45,000
Highest price = $130,000
According to the 70% rule, you should pay no more than $130,000 for this property.
Is the 70% rule accurate?
Because it’s unlikely you’ll get every calculation right, you should treat the 70% as a guiding principle, rather than an ironclad rule. It’s a good place to start, but it shouldn’t dictate every property buying decision you make, nor replace a more detailed cost analysis.
The rule is most accurate when you’re buying in a neighborhood that has multiple comparable home sales. This will give you a clear idea of a property’s after-repair value (ARV). If you know three comparable properties are selling between $240,000 and $260,000, then yours will likely sell in that range, too.
Likewise, you also need an accurate estimate of what it will cost to flip and resell a property. The 70% rule advises you to factor in repair costs, but you might also want to consider what it will cost to buy the property, hold it, then finally sell it.
That said, even with an accurate ARV and repair costs, numerous factors outside your control could skew the rule. The real estate market could cool off before you sell, resulting in a lower ARV. Or the price of raw materials or appliances could rise, requiring you to spend more on repairs than you were expecting.
How to use the 70% rule: A step-by-step breakdown
Even if the 70% rule in house-flipping isn’t fixed, it can be an excellent way to analyze property deals and spitball a good offer. Below are more detailed steps to help you get the most accurate results.
Step 1: Find the after-repair value (ARV)
⚡ The after-repair value (ARV) is the market value of a property after it’s been repaired and upgraded.
The quickest way to estimate a property’s ARV is to do a comparable market analysis (CMA). This involves finding three properties that are similar to yours (called “comps” or “comparables”) that have sold recently nearby. Though they can be painstaking, CMAs basically boil down to three steps:
You probably know how many bedrooms or bathrooms it has. But for features that aren’t easy to detect, like square footage and the year it was built, use an app like DealMachine or HomeSnap to dig deeper.
⚡ A comp (or “comparable”) is a property that has similar features to the home you’re evaluating.
Not every home near your property will qualify as a comp. What you’re looking for are properties that:
- Have sold in the past three months
- Are in the same neighborhood or area as yours
- Are roughly the same age, size, and style
- Have similar features to yours
Key features that should be identical (or close) among comps:
You can use free listing sites, such as Zillow or Trulia, to find comps — though they’re not always accurate. For better accuracy, ask a real estate agent to pull recently sold properties from an MLS.
Finding exact comps will likely be the hardest part of a CMA. If you can’t find properties that are identical to yours, the next best thing is to find homes that are close enough, then adjust the comp’s sale price.
For instance, you might find a home that’s nearly identical to yours but has three bedrooms instead of two. That extra bedroom will likely make the comp slightly more valuable than the property you’re evaluating. My suggestion is to find the value of that extra bedroom, then subtract it from the comp’s sale price. In this way you adjust downward for every additional feature your comps have, or upward for every feature your property has but they’re missing.
Even when adjusted, your comps will likely have sale prices that are slightly different from each other. That’s okay — it gives you a price range for your property’s ARV.
Taking the median of this range might seem like a sensible idea, but using the lower end of the spectrum will build some buffer into your overall calculation. It’s a nice surprise when your property sells higher than what you planned, but it can throw off your profit expectations when it sells for less.
Sound like a lot of work? Save time with a real estate agent! Since realtors have access to an MLS, they can pull recently sold listings for you. They’ll know what properties constitute a comp and what doesn’t. And they can help you come up with an accurate ARV based on their findings.
Step 2: Estimate repair costs
Now comes the hard part: figuring out how much you’ll spend to renovate and repair your property. When you’re just starting out, you’ll likely want to do a detailed analysis. Here’s what that might look like.
The more properties you flip, the more you’ll realize every flipping project requires
a minimum amount of upgrades. To be sure, these aren’t major repairs, like fixing the roof or structural damage, which vary from project to project. This is cosmetic work that will make your property on par with other houses nearby.
As a preliminary step, then, make a list of things you know you’ll need to fix or replace. This list will include:
While a general contractor (GC) could help you make this list, you should get in the habit of identifying minimal upgrades on your own. A GC might not know what’s needed to rehab a property in your specific area.
Some contractors might be used to rehabbing high-end homes, and they’ll quote you for renovations or upgrades you don’t really need. But if you’ve studied your comps well enough, you’ll have a good idea of which features can stay, which need to be upgraded, and what kind of upgrade is needed.
Even if you have a working list of renovations, the expertise of a GC will only make that list more accurate. Not only can they quote you for rehabbing jobs you’ve already identified, they’ll likely spot things your eyes aren’t accustomed to.
Plus, GCs often charge around $100 an hour, and you can expect them to spend between an hour and an hour and a half inspecting your property. For a low price, you can walk around the property with an expert, identify roofing or structural damages, then get a rough estimate for all the repair costs.
Where can you find GCs?
Ideally you want a GC who has worked on investment properties before. First get recommendations from other real estate investors in your network. Alternatively you can search for professionals on Thumbtack, Homeadvisor, and Craigslist, or you can go to a local hardware store and ask for recommendations there.
From the upgrades that you’ve identified, as well as the repairs your GC has recommended, you can now bring together your quotes to get a good repair estimate. At this point, I would also add another 10–15%, just to give yourself some buffer. This will cover you in case something else goes wrong, or your GC discovers more repairs later on.
Step 3: Put it all together
Let's say you come across a potentially distressed property. After skip-tracing the address, you find a way to contact the owners — and they’re interested in selling the property.
You ask your real estate agent to look for three comps near the property in question. Together, you find properties that recently sold for $234,000, $237,000, and $242,000. Your ARV range is between $234,000 to $242,000, so you use the lower end of that spectrum as your ARV.
Next, you inspect the property. Compared with your three comps, you notice the property’s features — especially the flooring, style of windows, appliances, kitchen, paint — are outdated.
Your GC gives you a quote for the updates, plus another quote for fixing the structural damage they noticed (the walls are bowing in the main bedroom). All in, you’re looking at a conservative $35,000.
Now you can use the 70% rule to start estimating your offer:
Highest price = (70% of ARV) – rehabbing costs
Highest price = (70% of $234,000 = $163,800) – $35,000
Highest price = $128,8000
» JUMP: Breaking the 70% rule
What costs does the 70% rule leave out?
The 70% rule factors in repair costs, but it doesn’t account for the costs of buying, holding, and selling a property. Still, that doesn't mean you always need to factor these costs into your offer.
It’s assumed you’ll be able to cover them with the remaining 30%, while also making profit. That said, for certain house-flips, you might want to factor these costs into your offer — especially if the flipping project will take a long time to complete.
This is what you pay to actually buy the property, such as inspections, title insurance, closing costs, and financing fees. In general, you should expect to pay around 3–7% of the final purchase price in buying costs.
What you’ll buy from the moment you buy the property to the moment you sell it. Common holding costs include:
- Homeowners insurance
- Property taxes
- Homeowners association (HOA) fees
Estimate to spend 3–7% of the final purchase price to sell the house, such as for agent fees, marketing, and closing costs.
When should you break the 70% rule?
It’s okay to break the 70% rule, especially when you have a good deal on your hands. Generally speaking, you’ll find yourself breaking this rule in two scenarios.
One major limitation of the 70% rule is that it doesn’t factor in time. Typically, the faster you flip a property, the less you’ll pay in holding costs (mortgage, utilities, taxes, insurance, HOA).
So if you flip a property in three weeks, but it costs you 80% of the ARV, you might make as much money (or more) as a flip that costs 70% but takes four to six months.
Another limitation in the 70% rule is that it assumes the buyer will take the 70% offer. But what if you’re trying to buy in a sellers' market, where 70% of the property’s ARV looks puny compared with other buyers' offers? As long as you’re confident the market will stay hot and you can resell for a profit, you might have to bid higher than 70% to make your offer attractive.
Summary of the 70% rule
- The 70% rule in house-flipping recommends paying no more than 70% of a property’s after-repair value (ARV), minus rehabbing costs — but NOT buying, holding, or selling costs.
- To estimate a property’s ARV, find three similar properties that have recently sold. The sale prices of these three properties will give you a good idea of what yours might sell for.
- For repair costs, identify the minimum rehabbing work that needs to be done, then hire a general contractor to inspect the property with you. The GC will help you come up with a conservative estimate.
- For quick fix-and-flips and sellers' markets, you may have to offer higher than 70%.