The 70 percent rule is a proven real estate flipping formula suggesting the maximum amount that you, as the investor, pay for a home to flip is 70 percent of the after repair value, or AVR, less the essential repairs. As a reminder, ARV is the value of the flipped home once all repairs are completed.
For example, if a potential flipped home’s ARV is $175,000 and it requires $40,000 in repairs, the 70% rule would suggest the maximum you should pay for this property is $82,500 ($175,000 x 70%=122,500 – $40,000 = $82,500). Another way of looking at the 70% AVR rule is this: If the flipped home asking price (pre-flip) is $90,000, and the house needs $15,000 of repairs and/or improvements, the minimum you should sell the finished house for is $132,000. That is going to sound like a massive profit, but remember there are known and unknown costs in the real estate flipping business.
The 70 percent rule is the first step to costing your flip out. The second is to determine your anticipated profit from resale by using an After Repair Value spreadsheet that figures out 70 percent rule costs for you.
Does Everyone Use the 70 Percent Rule to Flip Houses?
Seasoned veterans of the house flipping business will often tell you they hardly ever use the 70 % rule when deciding which homes to flip; often citing their skill and experience as the key factors to deciding the potential ARV of a flipped property. However, when they sit down and compare their estimates to the 70% ARV rule, the profit margins are typically very close to one another.
In other words, seasoned real estate flipping professionals are really telling you that they use the After Repair Value 70% rule when purchasing homes – but prefer to do the math in their head or with a paper and pencil. Save yourself the time and aggravation, use a ARV 70% spreadsheet to cost out and organize your potential real estate flip.
Should I Pay More Than 70% ARV for a Property I Really Like?
In short, the answer is no. Remember, to find success flipping houses is to stay disciplined and organized – set your numbers, know your limits, and stay within your means. House flipping, and specifically, purchasing property using the After Repair Value rule, is about developing and executing a house flipping strategy – it has nothing to do with what you like or do not like (or any other feeling for that matter).
The housing market is a fluid, volatile market – there will be times when you are purchasing investment properties at below market prices, and there will be times when you just can’t find a deal that fits your home flipping budget strategy. Stay the Course, Execute the Real Estate Flipping Plan you created – remember, consistent and intentional growth wins in the house flipping game. Even when prices in the housing market start to increase, remain calm – use your ARV House Flipping Spreadsheets and Resources to ensure you are always making money and never losing it!