What Is the 70 Percent Rule in House Flipping

The post-repair value is your estimate of the future selling price of your distressed property after making repairs and upgrades. Beginners hire a real estate agent to sell the house. Professionals rely on “owner-sell” efforts to minimize costs and maximize profits. Beginners expect to rush into the process, put on a coat of paint and make a fortune. Professionals understand that buying and selling homes takes time and profit margins are sometimes low. If you attend real estate meetings and seminars, ask anyone who repairs and returns what percentage is typical of the area. If you`re a wholesaler looking for deals, ask all bar buyers what percentage of the ARV they want to buy. The 70% rule says I should buy the flip for $250,000 if it needs $30,000 for repairs. Not only is it really hard to find a $250,000 home that`s worth $400,000 after $30,000 in repairs, but I may not need this bargain to make it a good deal for me. When I write down all my costs, I come up with this winning figure: To make the 70% rule as effective as possible, it`s important to be realistic with your post-repair value and your estimate of the cost of repairs.

If you estimate that you can sell your home for $220,000 after repairs, but the market says that most properties in the neighborhood sell for as little as $190,000, you can`t make the profit you expect. Or maybe you estimate that the repairs will cost $40,000, but if it`s time for a renovation, you`ll spend $60,000. That extra $20,000 you`ve spent will affect your profits again. However, at Real Estate Skills, we believe that the 70% rule is just the beginning. If you can make an offer by sticking to the rule, so much the better. If the offer is not competitive – which is usually not the case – you need to refine your trading table and model a detailed analysis taking into account all the variables. To illustrate, let`s take a look at a home with an ARV of $200,000. With the 70% rule, you initially multiply $200,000 by 70%, or $0.70. Then you would deduct all your repair and renovation costs, from removing the old carpet in the bedrooms to adding new appliances in the kitchen.

Assuming you were able to do a home inspection and confirm that you were not at risk of buying a silver pit, let`s say your rehabilitation expenses are about $34,000. With these numbers in mind, you could potentially spend up to $110,000 on your offer. Here is the formula with our numbers: As you can see, the formula contains the percentage value to be multiplied by the ARV, which assumes that there is 30% left. The 70% rule states that an investor must aim to pay no more than 70% of the value of a property after repair or ARV. This includes the price you pay for the property itself, as well as the estimated repair costs. But how to determine when the selling price of a house is correct? The 70% rule can help. For example, if you buy to keep, it will probably mean that you can buy at a lower discount than someone who will do a traditional flip with high rehabilitation costs and a brokerage commission for sale. They also keep an eye on the increase in value and adjust the percentage to account for potential revenue generation. Depending on your goals, the 70% rule may not work for you. This rule usually only works for investors who want to quickly renovate a home and transform it.

These investors often buy in neighborhoods where there are many comparable home sales that can help them determine a more accurate value after repair. However, the 70% rule is designed to ensure that you leave some leeway in your budget to account for unexpected costs as well as expenses such as billing fees, lender fees, etc. In short, the 70% rule is by no means a guarantee that you`ll make money by returning home, so it`s always important to make sure you manage expenses and have a clear exit strategy. So how do you transform a building or a house? Simply put, you want to buy low and sell high (like most other investments). But instead of pursuing a buy and hold strategy, complete the transaction as soon as possible to limit the amount of time your capital is at risk. In general, the focus should be on speed rather than maximum profit. That`s because every day that passes will cost you more money (mortgage, utilities, property taxes, insurance, and other costs associated with homeownership). This is the general plan, although it has several pitfalls. Of course, this requires a lot of estimation. When applying the 70% rule, it is important to use a realistic estimate of the value of the property after the completion of repairs, as well as a conservative estimate of the cost of repairs. The 70% rule and its formula provide experienced and new investors with an excellent guideline for calculating possible correction and reversal offers.

In this article, I showed you how to break down the formula, how to calculate your offer, what percentage you should use for your market, and “violation” scenarios of the rule. While the 70% rule is widely used in the real estate world, it`s a quick start guide and shouldn`t be used as a final word on what you should pay for a property. The rule is useful for giving a quick and rough estimate of what your most asking price should be for a fixed and reverse property, but you also need to be sure and do a more thorough cost analysis. The advantages of the 70% rule and its formula are that you can calculate your offer on a fix and return it quickly, because the equation of the 70% rule has a profit margin and costs that are already “burned”, so to speak. .