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.
Maximum Purchase Price = (After Repair Value * 70%) - Repair Costs
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 & 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.
Generally speaking, the 30% reduction is broken down as roughly 15% for your Profit and 15% for the Fixed Costs.
70% Rule Formula Example
A flipper finds a distressed property that a seller is asking $85,000 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?
In this scenario, the seller is asking for $85,000 which is $10,000 more than the recommended purchase price of the 70% Rule.
Maximum Purchase Price = (After Repair Value * 70%) - Repair Costs
Maximum Purchase Price = ($200,000 * 70%) - $65,000
Maximum Purchase Price = $140,000 - $65,000Maximum Purchase Price = $75,000
Can You Offer More Than 70% For A Property?
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 that 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 that is using a Hard Money Lender and Real Estate Agent to sell their property, may need to buy the property at 65 to 75% of ARV to account for their higher 'Fixed Costs'.
Your real estate market will also affect the profit margins that 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.
For this reason, it's important for you to customize YOUR OWN PERSONAL % that you will use for acquiring your deals in your real estate market.