The Rule of 70% is a built-in process that helps you determine the most you should purchase a fixer for without a big risk of taking a loss.
House Flippers occasionally waver from this depending on market conditions. However, it’s a good guideline to use.
The Rule of 70% = ARV (After Repair Value) * 70% – Renovations = Highest Offer
Determine your ARV
Your ARV (After Repair Value) is the estimated selling price when the property has been completely updated and renovated.
You come up with this number by finding similar types of properties. Generally you use recently sold ones with similar square footage, bedrooms, and bathrooms within the same area.
Breaking things down, the Rule of 70% actually has to do with 30%. 15% is estimated profit. The other 15% is closing costs and realtor commissions. You’ll find it’s much easier to multiply the ARV by 70% than to try and do the math from the other direction to determine your 30%.
|30% of the Project is derived from –|
|Closing and Holding Costs, Realtor Fees||15%|
What the Rule of 70% is For
The Rule of 70% works best for what I call your bread and butter homes. Bread and butter homes are everyday single-family homes, townhomes, and condos that you see in many developments.
Additionally, the rule of 70% is even easier to apply to townhomes and condos. These types of properties are generally clustered together and easy to estimate their ARV. At the same time, single-family homes may require a little bit more studying if the immediate neighborhood doesn’t have good comparable sales.
What the Rule of 70% isn’t For
The rule of 70% is less applicable to luxury homes and small rental properties. A little bit more due diligence is required to determine the ARV and it’s best to work your way backward to determine the highest possible price you’re willing to pay before the deal no longer makes sense.