When you overspend on the front end of your home purchase, it can be much more difficult to earn the the big bucks. The 70% rule can help you figure out of the price is right for you. Using this great rule as a general guideline can help keep your front-end spending on the right track when you want to put more money into a flip.
What is the 70% Rule?
The goal for flippers is usually to buy a home cheap, then improve it, and sell it for much more after increasing its value. The 70% Rule says that investors should pay no more than 70% of the after-repair value of a property minus the cost of the repairs necessary to renovate the home. What is the after-repair value?
The after-repair value, or ARV, of a property is the potential new selling value of a home once the flippers make updates and repairs to it. When buying a home to flip, investors need to estimate how much they think the property could sell for after it’s been renovated. They can then multiply that amount by 70% and subtract it from the estimated cost of renovating the property. The results give the flippers the highest price they should even consider paying for the property.
An important factor though is to only use this as a rule of thumb. Aside from this guideline, you’ll need to study current market conditions and work with professionals in the industry to make sure you have an accurate resale estimate. You can also factor in how much renovations and updates will cost by meeting with contractors and that will help determine your final costs.
Use the 70% rule to get a general idea of how much you should spend on a home you plan on flipping and know that going above that price can eat into your profits.
The Final Thought
The 70% rule is a perfect starting price for what is generally going to be your spending range. However, in a hot market sometimes you will need to adjust up to 85% with the rule to be able to score the house you’re looking for. Working with professionals who are aware of industry ups and downs as well as have personal connections can help you stay on track with your budget so you are earning a sufficient profit, and being aggressive enough with your offer.