70% Rule

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.

1. 71%

2. 71%

3. 73%

4. 62%

5. 75%

6. 71%

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