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By Savannah Sher | Updated Sep 2, 2022 9:33 AM
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This article is part of Bob Vila’s Guide to House Flipping in 2022, a month-long series dedicated to showing you the best places for house flipping, crucial steps for selecting a property, must-do upgrades and repairs, and surprising ways to reduce your costs to get the most from your house flipping sales. Each week, we’ll bring you fresh insights mixed with Bob’s tried-and-true advice, our vetted shopping guides, and the inside track to the right professionals to get your flip to the finish line.
In the world of house flipping, there is a common adage that many in the business live by when it comes to determining their potential profit margins. Known as the 70 percent rule, this guideline can play an important role in the success or failure of your flip. Many real estate investors use the 70 percent rule to determine if a house is worth the time and money it would take to flip. The basic principle is that a flipper should never buy a home for more than 70 percent of its after-repair value (ARV) while also factoring in the cost of renovations.
In this article, we’ll explain how the 70 percent rule works, offer tips for determining a home’s ARV, and outline exceptions to this popular guideline.
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How does the 70 percent rule work in practice? In order to use it, you’ll have to do some simple calculations. The equation is: “After-repair value (ARV) ✕ .70 − Estimated repair costs = Maximum buying price.
So, for example, if you estimate that a home’s ARV is $500,000, you would multiply that amount by .70, resulting in a price of $350,000. You would then subtract the estimated price of renovations. If you predict that the house requires $50,000 in renovations, then your maximum purchase price would be $300,000. While this isn’t a hard and fast rule, it does provide an easy way to estimate your potential profit on a flip.
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The most important factor when using the 70 percent rule is to determine the home’s ARV accurately. Overestimating a home’s ARV could result in a reduction in profits. In order to establish a realistic ARV, there are a few steps you can take.
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There are a number of additional costs to take into consideration when buying a home that are not factored in as part of the 70 percent rule. Some of the most significant costs are:
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While the 70 percent rule is a useful way to estimate potential profits, it isn’t the only factor to consider when investing in a house to flip. Sticking to this guideline may be impossible in certain hot markets, where flippers may be forced to offer up to 85 percent of a home’s ARV in order to have their offer accepted. Always be sure to do market research before investing in a home to flip.
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