Right now the markets are very tight for buyers in most parts of the country.
Most areas have very few REOs and short sales compared to a few years ago. Good deals to fix and flip are much harder to find for investors. With the tight market I see people ask all the time on the BiggerPockets forum if it’s okay to pay more than 70% of the after repaired value (ARV) minus repairs on fix and flips. My answer is yes; under certain circumstances.
What is the 70% rule?
The 70% rule states you should not pay more than 70% of the after repaired value minus the repairs needed. If a house is $150,000 and needed $20,000 in repairs the 70% rule states you should not pay more than $85,000. $150,000 x .70 = $105,000 – $20,000 = $85,000. This is a guideline commonly used by many investors to decide how much to pay on a fix and flip.
I pay more than 70% of ARV all the time
I don’t always follow the rules and I pay more than 70% of ARV on a lot of our fix and flips. We have six in the pipeline right now and here are my calculated ARVs on each one.
You can see we have one great fix and flip at 62% of ARV and the rest are slightly over the 70% rule.
History of my experience with the 70% rule
Before I found BiggerPockets I had never heard of the 70% rule. To calculate how much we paid for flips we would write out the estimated costs and projected ARV (new term to me as well) and hope to have at least a $20,000 profit on houses …read more