The 70% rule says a flip is worth doing if the price you pay plus the rehab comes to no more than 70% of what the house will sell for after the work. That sale price is the ARV, short for after-repair value.
For a house that will sell for $275,000 after a $45,000 rehab, the most the rule lets you pay is:
$275,000 × 70% − $45,000 = $147,500
Is the 30% in the 70% rule your profit?
No. The rule leaves 30% of the sale price, $82,500 here, as a cushion. Most of the cushion goes to costs the rule never names.
Say you buy the house at exactly $147,500. The loan covers 85% of the purchase and all of the rehab, at 10% interest plus 2 points, meaning 2% of the loan paid up front. The work and the sale take six months, holding costs run $900 a month, and selling costs are 8% of the price.
| This flip | |
|---|---|
| The 30% cushion | $82,500 |
| Closing costs when you buy (2%) | −$2,950 |
| Holding costs, 6 months at $900 | −$5,400 |
| Loan points and interest | −$11,926 |
| Selling costs (8% of the sale) | −$22,000 |
| Profit | +$40,224 |
$42,276 of the cushion goes to costs. What’s left is a profit of about 15% of the sale price, which isn’t much room for anything to go wrong.
What happens to the profit when things go wrong?
Now give the same flip three surprises: the project takes nine months instead of six, the rehab runs 20% over budget, and the house sells for 5% less than the ARV you planned on.
| As planned | With surprises | |
|---|---|---|
| Sale price | $275,000 | $261,250 |
| Purchase | −$147,500 | −$147,500 |
| Rehab | −$45,000 | −$54,000 |
| Closing costs when you buy | −$2,950 | −$2,950 |
| Holding costs | −$5,400 | −$8,100 |
| Loan points and interest | −$11,926 | −$17,041 |
| Selling costs (8%) | −$22,000 | −$20,900 |
| Profit | +$40,224 | +$10,759 |
The profit falls from $40,224 to $10,759, a 73% drop, on a flip that passed the 70% rule the day you bought it. The cash you have tied up grows too, from $42,401 to $50,216, so you risk more to make less.
Each surprise on its own costs between about $7,000 and $12,650. Together they cost $29,465.
How should you use the 70% rule?
- Use it for your first offer, not your last one. It tells you where to start, not whether the flip works.
- Price the costs inside the 30% for this house: your loan’s rate and points, your local selling costs, and a realistic number of months.
- Test the surprises before you buy. Add three months, add 20% to the rehab, and take 5% off the ARV. If the profit that’s left isn’t worth the work, the price is too high.
- Get the ARV from sales, not listings. Look at what similar renovated homes nearby actually sold for.
So, does the 70% rule work?
It works as a ceiling. A flip that fails it needs a very good reason. A flip that passes it still has to survive its own costs and its own surprises.