There are two different formulas used for calculating the Maximum Purchase Price that you should offer for a property:
Maximum Purchase Price Formula (detailed analysis)
70% Rule Formula (quick analysis)
Maximum Purchase Price Formula
The Maximum Purchase Price formula is used to calculate the Maximum Purchase Price you should offer for a property. The formula uses a detailed analysis of all of the project costs including your Repair Costs, Buying Costs, Holding Costs, Selling Costs, & Financing Costs.
The Maximum Purchase Price formula is the most accurate calculation, because it requires you to think about, consider & calculate every single project cost on the project.
Maximum Purchase Price = After Repair Value - Buying Costs - Holding Costs - Selling Costs - Financing Costs - Repair Costs - Desired Profit Amount
70% Rule Formula
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 30% reduction theoretically accounts for all of the project's Fixed Costs (Buying Costs, Holding Costs, Selling Costs & Financing Costs) and your desired profit.
Generally speaking, the 30% reduction is broken down as roughly 15% for Fixed Costs & 15% for profit.
Maximum Purchase Price = (After Repair Value * 70%) - Repair Costs