In real estate, there are a ton of purported “rules” to follow. But which ones are actually worth your time?
In this post, we’ll look at the 70 rule for flipping houses— what it is, how to follow it, and what benefits you can expect.
So if you’re looking to get into the world of house flipping or simply want to better understand this popular strategy, read on!
What is the 70 Rule for House Flipping?
The 70 rule (or 70 percent rule in real estate) is a formula for flipping a house that stands as a tried and true guideline in real estate investing. The 70 percent rule allows a real estate investor to carefully calculate the numbers on a property to insure there’s profit after the purchase, renovation, and resale.
Smart real estate investors make use of some form of the 70% formula to maximize their profits on every real estate deal.
Start with the Deal
To follow the 70% rule, you first need to find a good fix and flip deal. This is where many people go so wrong—they either don’t know how to find deals or they get caught up in the emotion of house flipping and don’t take the time to do their due diligence.
The house flip 70 percent rule is so important because it allows you to understand what your max allowable offer should be on a property.
Investors know they need to get the property at the lowest purchase price possible. They need to know what the repair costs will be and comps in the neighborhood to make a profitable deal.
Know The Comps (Comparables)
What is a Comp?
Comps are simply comparable properties in the same area and with the same specs as the investment property. Real estate investors use comps to understand the market value of similar homes in the neighborhood.
Investors want to discover what has sold to understand a possible sale price they could get on an investment property.
How to Find Comps
There are a number of ways you can pull comps together.
One of the best (and most accurate) methods is making friends with a real estate agent that has access to the Multiple Listing Service (MLS). The MLS is the most up-to-date information on home sales.
A real estate agent can use this information to generate a Comparative Market Analysis (CMA) report that gives you information about the neighborhood and the home values in the area of the investment property.
There are a number of real estate websites that provide recent home sale information as well. Redfin and Zillow are examples of sources to find comparables in the market.
When using these websites, search for your target area using the home’s address or zip code and look for a link or button for recently sold. This is one way of understanding values in the area. That being said, nothing beats having direct access to MLS data.
Stay Historically Relevant
When running comps, don’t look too far back in an area’s home sale history. The real estate market changes quickly in terms of home values. What sold three months ago at a particular price might not accurately reflect today’s current home values.
Know the Neighborhood
Don’t run your comps analysis on the other side of town. As a real estate investor you should know the home values in the target neighborhood. Home values can vary wildly depending on the neighborhood or subdivision, so exercise care when doing your analysis.
Match the Specs
Match the specs on your target property with the comps in the neighborhood. Things you want to look at to make this comparison include:
- Square footage of home
- Type of home—house, condo or multi-family
- Number of bedrooms
- Number of bathrooms
- Lot size
- Year built
- Any HOA fees?
There is always some risk involved with a fix and flip, so don’t forget to do your homework before diving in. Make sure you know what the current market conditions are in your area, and be prepared to adjust your budget and timeline accordingly.
Why Follow the 70% Rule for Flipping Houses
There are a few key reasons why following the 70% rule to flip houses is a good idea:
- It helps you stay in control of your finances. One of the biggest risks when flipping houses is spending too much on renovations. This can kill any profitability on a fix and flip. The 70% rule helps you stay within budget and avoid over-spending.
- It gives you a good chance of making a profit. As we’ve seen, following the 70% rule usually means that you will make a profit on your real estate investing. This is important, as it allows you to make money while flipping and reduces your risk.
- It’s easy to follow. No serious long math or complex calculations are involved. No software is needed. Just a simple formula that makes this method simple to use as a gauge on potential profits.
How to Find Fix and Flip Deals that Fit the 70 Percent Rule
Now that you know a little bit about the 70 rule for flipping a house, let’s take a look at how you can use it to find deals.
- Look for properties that are priced below market value. In order to make a good profit margin, you need to find a property that is priced well below market purchase price. This will give you room to make renovations and still sell the property at a profit.
- Check out foreclosure and short sale listings. Many times, these properties will be priced well below market value, making them perfect candidates for flipping.
- Network with other investors. These people may be able to tip you off to a good deal that is going to meet the 70% rule.
- Keep an eye on local newspapers. These can be a great source for finding fix and flip deals as long as you don’t let yourself become distracted by the headlines!
- Use online resources. There are many national and local websites that can provide a source of properties that meet the house flip 70 percent rule.
- Run Craigslist ads. This is a cheap and efficient way of meeting potential sellers with off-market properties. Don’t try to run free ads as these will get flagged by Craigslist or one of your competitors.
- Go “old school” by sending mailers through USPS. Identify some target properties and try a handwritten note.
- Post signs. Chances are you’ve seen others doing this. Look for a busy street corner that affords maximum visibility and exposure.
- Run Facebook or Google Search ads. Digital advertising can be a great way of catching people’s attention as they browse the web. But a word of caution: no what you’re doing. It is very easy to burn through cash if your ad campaigns are not set up properly. If you don’t have the time or skillset to run an ad campaign, find a freelancer or agency that specializes in lead generation.
How to Calculate the 70% rule
To calculate the 70% rule, you need to know the After Repair Value (ARV) of the house.
Let’s unpack the concept of the After Repair Value or ARV. Understanding ARV begins with a knowledge of the local market, property, and neighborhood. You will need a solid understanding of comps in the neighborhood and the purchase price for those properties.
You need to understand the comps in order to understand what the property would sell for when put on the market following renovations.
Find an Inspector
Once you have this information in hand, you’ll need to understand the repair costs. An attention to detail and being very thorough on this point will play to your favor. Unforeseen damages or repairs can kill a good deal. Don’t gloss over anything, big or small, when it comes to understanding your costs.
Bring in an inspector or a very thorough contractor to evaluate the home and bring to light any hidden damages.
Protect the Bottom Line
Have you seen any HGTV programs where the property buyer tears into a wall only to discover knob-and-tube electrical wiring or leaded pipes. These can trigger local code enforcement officers that might require you to replace older home infrastructure to get the property up to code. The end results is an incredible expense to your bottom line.
Use a Checklist
Practice due diligence and use checklists if necessary to insure you don’t overlook anything. Walk the property, examining the exterior, interior spaces, plumbing, electrical, and more. Use a checklist to track things that might need repair. Work with an inspector to go over your results and make sure that nothing is overlooked on the evaluation.
The 70% Rule Formula
The formula for calculating your maximum offer for the property to insure you make a profit looks like the following:
After-repair value (ARV) ✕ 70% − Estimated repair costs = Maximum buying price
Before you get to this stage, you should already have your estimated renovation costs and know the after repair value of the property. Without these, you cannot run the formula.
Cogo Capital Case Study
Location: Farmersville, TX
Property Type: Single family home
The ARV for the property is $193,000 and the investors renovation costs are estimated at $80,000.
Using these numbers, we can now calculate the Maximum Allowable Offer.
Crunch the Numbers
Our Formula: Max Allowable Offer = (ARV x 0.70) – estimate repair costs
- Max Allowable Offer = ($193,000 x 0.70) – estimated repair costs
- Max Allowable Offer = $135,000 – estimated repair costs
- Max Allowable Offer = $135,000 – $80,000
- Max Allowable Offer = $55,100
Fortunately, this investor was able to get it at an even better price of $50,000, resulting in $40,000 profit!
Adjustments to the 70% Rule in Different Markets
While the 70% rule is a good guideline to follow with house flipping, it’s important to remember that it is not set in stone. Depending on the market conditions, you may need to adjust your budget and timeline accordingly.
For example, if the market is hot and properties are selling quickly, you may be able to spend more on renovations without sacrificing your profits. However, if the market is slow, you may need to spend less on renovations and/or wait longer for the property to sell.
For example, you could calculate your max offer based on a 75% or 80% rule in the formula. If the market is tight and the margins are low, you can adjust accordingly. The point is to understand your numbers forward and backwards.
The 70% rule is a flexible guideline that can be adjusted to fit the current market conditions. So don’t be afraid to experiment a little and see what works best for your area!
Get to Know the Numbers with the 70% Rule
One of the benefits of using the 70% rule when flipping houses is that it helps protect your investment. By following this guideline, you are ensuring that you don’t overspend on renovations and that your estimated costs are accurate. This protects you from unexpected expenses that can eat into your profits.
Additionally, by keeping your budget tight, you are less likely to get in over your head with a fix and flip. This can help minimize your risk when flipping houses.
So if you’re looking to flip houses without taking on too much risk, using the 70% rule is a good way to do it!
Action Items When Using the 70 Rule for Flipping Houses
- Start with a great deal
- Understand the comps for resale potential
- Know your total reno costs
- Determine your ARV
- Calculate your profit margin with the 70% rule
- Make money
Cogo Capital has been helping house flippers finance their deals for over a decade. Offering educational and financing resources, Cogo looks at the potential deal over things like the borrowers credit score.