The 70% Rule Explained (and When It Fails)

The 70% rule is the most repeated sentence in flipping: pay no more than 70% of the after-repair value, minus the rehab. It is useful, and it is also widely misused. This guide explains what the rule actually calculates, what the missing 30% is supposed to pay for, and the situations in which it produces a bad offer.

The formula and the missing 30%

Maximum allowable offer = ARV × 70% − Rehab budget

The rule is not a valuation method. It is a shortcut for a cost-and-profit calculation. The 30% of ARV that is not offered is meant to cover three things:

1. Selling costs. Commissions and seller closing costs at the exit, usually a percentage of the sale price.
2. Holding and financing costs. Taxes, insurance, utilities and loan costs while the project runs.
3. Profit. What is left when the first two are paid.

When those three are smaller than 30% of ARV, the rule leaves profit on the table; when they are larger, the rule produces an offer that cannot work.

A worked example

Take a property with a $240,000 after-repair value and a $30,000 rehab budget.

Line	Amount
ARV	$240,000
Rehab budget	−$30,000
70% rule offer	$138,000
30% allowance (ARV − offer)	$72,000
Selling costs at 7%	−$16,800
Holding and financing	−$8,000
Implied profit at the rule offer	$47,200

The rule offer of $138,000 is not arbitrary. It leaves $72,000 to cover the exit and the carry, and after those it leaves $47,200. Whether $47,200 is the right profit for this project is a separate question — the rule does not answer it. It simply assumes the 30% allowance is enough.

Why the rule is useful anyway

Speed is the point. Before spending an hour building a cost model, an investor can apply the rule to a listing and see whether the asking price is in the same universe as a workable offer. On the example above, a $210,000 asking price is obviously too high for the rule; the conversation is over quickly.

The rule is also conservative by construction. Because it assumes costs take a large share of value, it filters out deals that only work on optimistic assumptions. That is a feature for a screening tool, even when it costs an investor a marginal deal.

Where the rule breaks

The rule has four structural weaknesses, and each shows up when the actual costs are written out.

Thin-margin markets. In markets where the spread between distressed and repaired values is small, 70% may leave too little to cover costs and profit — or the resulting offer may simply be below anything a seller will accept. The rule is a percentage of value, and values do not move in step with costs.

Light rehabs. A cosmetic project with a small rehab budget produces a high rule offer, because the subtraction is small. That is not automatically wrong, but the rule cannot tell the difference between a $30,000 rehab that takes six weeks and one that takes six months.

Expensive holding periods. The rule has no holding-cost input. An eighteen-month project and a six-month project with the same ARV and rehab produce the same offer under the rule, even though the longer project consumes far more cash.

ARV optimism. The rule multiplies your ARV estimate by 70%, so any error is amplified into the offer. A $10,000 overstatement of ARV becomes $7,000 of extra offer, spent on an assumption. That is why the ARV should come from closed sales of comparable, already-renovated properties — not from a listing price, and not from the seller’s estimate of what the work will be worth.

Replacing the shortcut with the calculation

The rule can be replaced by writing the costs out:

Target-profit offer = ARV − Rehab − Target profit − Selling costs − Holding costs

On the same $240,000 ARV and $30,000 rehab, with selling costs at 7% ($16,800) and holding and financing of $8,000, a $50,000 target profit gives:

$240,000 − $30,000 − $50,000 − $16,800 − $8,000 = $135,200

That is $2,800 below the rule offer, because the target profit of $50,000 is higher than the $47,200 the rule implies. A $40,000 target would produce a higher offer than the rule. The point is not which number is right; it is that the target-profit version makes the trade-off explicit, and the rule cannot.

The MAO calculator runs both calculations side by side, so the difference is visible before an offer is made.

Adjusting the percentage

Investors adjust the rule when the local cost structure differs from the assumption behind 70%. Lower percentages (60–65%) are used where costs are higher or margins thinner; higher percentages (75–80%) where the rehab is light and holding costs are low. None of those adjustments is a standard — they are estimates of the same two numbers the target-profit formula states directly.

A useful check is to ask what profit the chosen percentage leaves. On a $240,000 ARV with $16,800 of selling costs and $8,000 of holding costs, a 70% rule leaves $47,200; an 80% rule leaves $23,200. If a contractor overrun of $20,000 would erase the profit at 80%, the percentage is too aggressive for that project.

What the rule leaves out

Even at a sensible percentage, the rule ignores several real costs:

• Purchase closing costs. The rule subtracts the rehab but not the cost of buying. On a $138,000 purchase at 2%, that is another $2,760.
• Contingency. A rehab budget without a contingency is an estimate, not a plan.
• The cost of your own time. It is not cash, but it is real.
• Tax. Income tax on the gain is outside the calculation entirely.

The fix-and-flip calculator includes the costs the rule leaves out and shows the break-even ARV, which is the price at which profit reaches zero.

The takeaway

The 70% rule is a fast filter, not an offer. It is worth knowing because it is the language the market uses, and worth calculating the target-profit version because it is the language the deal actually speaks. Use the rule to decide which deals deserve an hour of analysis; use the calculation to decide what to write on the purchase agreement.

Sources

• Appraisal Institute — professional standards and the income approach to value
• Consumer Financial Protection Bureau — Closing disclosure explainer