The 70% Rule Explained (And When You Should Break It)
It is the most famous formula in real estate investing. The 70% Rule protects you from overpaying. Here is how it works, and why strict adherence isn't always the best strategy.
If you have spent more than ten minutes researching how to flip houses, you have heard of the 70% Rule. It is a quick back-of-the-napkin formula used to determine your Maximum Allowable Offer (MAO). The formula is simple:
Why 70%?
The 30% discount isn't purely profit. It is designed to act as a comprehensive buffer. That 30% must cover your holding costs (taxes, insurance, loan interest), your closing costs on both the buy and sell sides, realtor commissions, and finally, your expected profit margin (usually 10-15%).
When You Should Break the 70% Rule
While the 70% Rule is a great starting point for beginners, professional flippers know that it is not a rigid law. In highly competitive markets or high-price-point areas, sticking strictly to 70% means you will never win a bid.
1. High-Value Markets
In a market where the ARV is $1,000,000, a 30% margin is $300,000. Even after subtracting $50,000 in repairs and $80,000 in closing/holding costs, leaving $170,000 in profit is highly unrealistic in a competitive market. In these markets, investors often use an 80% or 85% rule, because a 10% profit margin on $1M ($100,000) is still an incredible return on time and equity.
2. The Lipstick Flip (Low Risk)
If a house only needs $10,000 in cosmetic updates (paint and carpet) and you can turn it around in 4 weeks, your risk and holding costs plummet. You can often push your offer to 75% or 80% and still walk away with a fast, safe profit.
3. Lower-Value Markets
Conversely, in a market where the ARV is $100,000, a 30% margin is $30,000. If repairs are $20,000, you are left with $10,000 to cover holding costs, commissions, and profit. You will lose money. In low-value markets, you might need to drop to a 60% or 65% rule to ensure sufficient absolute dollar profits.
Moving Beyond the Rule of Thumb
Rules of thumb generate quick estimates; they do not construct business plans. You should never write a non-refundable earnest money check based solely on the 70% Rule. You must itemize every single expense.
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