The internet is a wonderful place for newbies in house-flipping. But there’s a lot to sort through, and you can be led in the wrong direction. One term that no doubt comes up in new flippers’ research is the “70% rule.”
The 70% rule in house flipping is a well-known and often-utilized principle for house flippers. For numerous reasons, I personally do not rely solely on the 70% rule when I’m flipping. Let’s dive into why.
What is the 70% Rule in House Flipping?
There’s nothing wrong with the 70% rule. It’s used to help flippers determine the maximum price for an investment property. The idea is a flipper shouldn’t spend more than 70% of the home’s after-repair value.
The following is an example of how the rule works:
- You find a house that will sell when fixed up for $200,000.
- It needs $50,000 in repairs to get it to be worth $200,000.
To calculate your maximum allowable offer, you take 70% of $200,000 ($140,000), subtracting your repairs from that. You’re left with $90,000 ($140,000-$50,000= $90,000) for your offer. A great deal if you can get it. But what if the seller has the house listed and the price is $110,000?
Using the 70% rule, you’ll miss out on this house since it’s nowhere close to the offer price you came up with using the rule.
There are a couple of things you could do to improve your numbers if you were supposed to make an offer at $110,000. First, you could reconsider your renovation budget. Are there places you can bring the budget down? Alternatively, you could consider making a lower profit on the house.
If you choose to adjust your expectations with profit, it might look like this: Buying the house for $110,000 and putting in the $50,000 renovations brings you all in at $160,000. That leaves you with a potential profit of $40,000. Not too shabby, considering this house may only need 8-12 weeks of renovation.
Why People Like the 70% Rule
Before we dive into why the rule isn’t my thing, let’s talk about the two reasons some people do use the rule on every flip.
Some people thrive when given rules that must be followed, and that’s totally okay! If the 70% rule works and you have successfully flipped houses, continue doing what you find works.
The rule is so well known because it’s a simple breakdown to make a complicated decision. By using the rule, you can quickly get an idea of a property’s profit potential. I understand the draw of the rule since it can help make tough decisions.
The Problem with the 70% Rule
As I mentioned, I don’t stick to the rule. In my opinion, I see a few things wrong with it. First, the rule doesn’t work in every market. It’s used to create the most profit for a flip, but the 70% rule inflates the profit too much when you’re flipping more expensive houses. If flippers stuck to this principle at every price point, offers wouldn’t be accepted. Overall, the rule isn’t reasonable and can hold your business back.
Also, the rule interferes with flippers getting started! You know your business, goals, and budget. You can trust yourself to purchase the right homes if you know your numbers and research. I have seen the 70% rule interfere with businesses many times – Especially newbies.
Instead of allowing the 70% rule to take over and stop you from taking action and getting started in flipping, consider the other ways to budget and plan your offers. Remember, you can tweak renovation budgets and profit goals.
If you choose to follow the rule in your business, keep an open mind and recognize it’s limits. I recommend running your numbers, weighing the risk, and using the rule as a guideline, not a hard and fast rule.
Making the Offer
Whether you’re using the 70% rule or not, know your numbers. Before you write an offer, make sure you are running a detailed analysis. If you’re just getting started, find a resource to help you with your deal assessment. Be generous with your repair costs and conservative with your after-repair value. As you calculate your offer, consider extra costs like financing and unexpected costly issues.
Remember: It’s better to sell quickly than to have a higher priced house with no offers!
And finally, keep in mind there is so much value in learning when you’re just getting started. You can’t get to the larger profit projects without starting with some of the smaller profit projects. The most important part of the house flipping process is buying your first flip!
Ready to take that next step when it comes to flipping?
Perfect! I’ve got additional resources to help you get the information you need to move forward on creating your flipping life.
Make sure you have the Fixer Upper Checklist so you know which areas are key to added value in a home.
There are several videos available on finding houses, renovations, and funding on the Threshold Homes YouTube Channel. Check out your favorite flipping topics and new videos weekly.
You can’t close a successful and profitable flip unless you start. What is your biggest challenge with getting started house flipping? Let me know. It may be an area I’ve also had questions about myself. I’m here to help, so drop me a DM.
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