House flipping is considered one of the most popular and in several cases the most profitable types of real estate investment available for several reasons. House flipping is basically buying a house or a property and quickly reselling it for a profit. If done with the right timing, a huge amount of profit is up for grabs. In addition, there are certain rules investors should remember in order to become a successful house flipper. One of them is the 70% rule in house flipping.
The 70% rule is an important rule in house flipping. It is the way to determine the maximum price the house flipper should consider paying in property, including the after repair value minus the total repair cost. G. Brian Davis of Lending Home explained in-depth the 70% rule in house flipping.
What is the 70% Rule in House Flipping?
Image Source: Lending Home
As a new real estate investor, how do you know how much you should offer on a property?
The “70% Rule” in real estate offers an easy guideline for new investors. After all, the last position you want to find yourself in is overbidding for a property! Your profits as a real estate investor are overwhelmingly made (or lost) when you buy a property, based on what you pay.
What is the 70% Rule in house flipping?
When determining the maximum price you should consider paying for a property, the 70% Rule of real estate investing dictates that you should pay no more than 70% of the after repair value (ARV), minus repair costs.
To use simple math, if a property’s ARV is $100,000, and it needs $25,000 in repairs, then the 70% Rule suggests that the most an investor should pay for it is $45,000: $100,000 times 70% = $70,000, minus $25,000 = $45,000. The idea is that chopping out that 30% will leave room for both your profits and miscellaneous expenses like soft costs.
But the 70% Rule in house flipping is far from written in stone. In fact, the word “rule” is a misnomer–it’s a loose guideline that is meant to offer a quick shorthand for a frame of reference.
Uses of the 70% Rule in real estate
The 70% Rule is useful in house flipping to help you instantly evaluate whether a potential deal is in the right ballpark. While you shouldn’t make offers only based on the 70% Rule, it serves as a simple framework when evaluating prospective deals. Read more here…
In any investment, the investor must focus on minimizing the repair cost in order to fully maximize the profitability of house flipping. The 70% rule is crucial in evaluating whether a potential deal is worth it or not, making it also a simple framework in finding prospective deals.
Chris Feltus of The BiggerPockets also gave us a detailed analysis of the 70% rule and how it becomes a crucial formula house flippers and real estate investors must know.
The 70% Rule: One Critical Formula Investors Need to Know
Image Courtesy of BiggerPockets
The 70% of ARV (after repair value) “rule” is a formula commonly referred to by real estate investors, and used as a barometer when purchasing distressed real estate for a profit. The formula will calculate the maximum you can pay for a given property once you input two key factors, namely the ARV and estimated repair costs.
For this formula to work correctly it is critical the numbers you have selected for both the ARV and ERC are accurate and conservative. The problem with this “rule” is how many interpret it literally. There is quite a bit of misinformation and myths surrounding this rule, and the goal of this blog post is to dispel false information and educate individuals how to be more competitive in their local market place. In fact it is not really a rule at all, but rather a guideline. It is critical to realize the 70% “rule” is not a one size fits all model that can be applied universally to all situations, markets or exit strategies. As a result investors who try to uniformly apply this 70% rule will consequently get less offers accepted. If you treat it with such regard, you will miss out on deals because your offers will be less competitive. Being in tune with your market is key and allows you to make more competitive, fair offers that have a higher chance of being accepted.
Why is This “Rule” Critical?
This “rule” (read guideline) is critical, because as we all know, you make money in real estate when you buy. If you come in at the wrong price your profit margins can quickly diminish or be wiped out completely. The ARV and rehab are then used in conjunction to calculate the formula. If either of these numbers are inaccurate, you have the potential to get in over your head, or operate on less than desirable margins.
ARV and rehab should always be fixed numbers based on your exit strategy; however, the % ARV you buy at less repairs should be variable. Furthermore, this rule may be completely disregarded as you become more creative in your real estate dealings. For instance if you are intending to make a buy and make a long term hold play, betting on appreciation, you may very well be able to afford to pay more. If you are purchasing subject 2 , you may be able to buy at 101% ARV if the financing is favorable and the area is desirable. The point is exit strategy matters. Click here to read the rest of this post…
As mentioned above, this rule is very critical to prevent you, the investor from buying the wrong price. This will prevent your profit margins from diminishing quickly, or worse, from being wiped out completely. Also, it is suggested to always follow the tips associated with the rule itself.
Kevin Davis added more explanation to the importance of 70% rule in house flipping, which adds to the credibility of the rule according to the experts themselves. Check out his article written in Linkedin.
Why Is The 70% Rule So Important When Flipping Houses?
Image Source: Redfin
The 70 percent rule is a common term used among many real estate investors when flipping houses. The 70 percent rule is a way to determine what price to pay for a fix and flip to make money.
What is the 70 percent rule when applied to fix and flipping houses?
The 70 percent rule state that an investor should pay 70 percent of the ARV (After Repair Value) of a property minus the repairs needed. The ARV is the after repaired value and is what a home is worth after it is fully repaired.
Do I use the 70 percent rule when flipping houses?
I rarely use the 70 percent rule when deciding on a fix and flip. I like to write out all the numbers and decide on a deal after seeing my profit potential. On the above deal I would write all my costs and see if the profit potential was worth the risk. Occasionally I will use the 70% rule to see how my numbers match up and I am usually very close to what the 70% rule estimates.
How close would my purchase price be compared to the 70 percent rule?
$150,000 is the value of the home after the repairs and $25,000 in repairs are needed. I always add at least $5,000 in unknown costs to my known costs on a fix and flip. Selling the house would cost me a 3% commission plus title insurance and other closing fees; approximately $6,500. I will have insurance, utilities, and lawn maintenance while owning the house; I estimate those costs at $2,500. My financing costs will be about $3,500 with my financing terms and loan costs. My selling costs are going to be lower than most people, because I am a real estate agent and do not have to pay a listing agent. Learn more about its importance here…
Over time, the 70% rule to house flipping has been proven to be a successful rule and formula for minimizing the repair cost while completely maximizing the profit margins. Though the rule is far from perfect, beginner investors can use it as the ultimate guide before agreeing to any deal. It is also recommended to do some due diligence when applying the formula.
If you’re first-time house flipper and needing some help in selling the house fast, we at Dependable Homebuyers can help you sell your house fast minus the hassle. Want to know more about us, visit us on https://www.dependablehomebuyers.com to get started.
Dependable Homebuyers
1402 Belt St, Baltimore, MD 21230
(443) 266-6247
