Everyone talks about the 70 percent rule, nobody talks about what happens at the exit table

Question

Trades background, so I've been on plenty of flips as the guy doing the work and never as the guy signing anything. Now I'm reading the other side of it and something bugs me.

The 70 percent rule takes 70 percent of ARV, subtracts repairs, and calls that your max offer. Fine. But the 30 percent haircut is supposed to cover buy-side closing, holding, sell-side commission, and profit, all in one number. On a 325k ARV that's a 97.5k cushion. Then take 6 percent of 325k for commissions plus title and transfer costs on the sale, call it 25k conservatively, plus a couple of points and origination on hard money, plus insurance and utilities for eight to ten weeks.

I make it that the rule is really giving you something like 55k to 60k of actual profit at best, which lines up with what people report, but only if repairs were estimated honestly. My question for people who actually underwrite: do you keep using 70 as a single number, or have you split it out into real line items and stopped pretending one multiplier covers a 200k market and a 500k market the same way?

sonia_alvarez · Answer

The multiplier breaks worst at the price extremes and that's the part your post already half-identifies. On a 120k ARV, 30 percent is 36k and your fixed costs (title, insurance, a lender's minimum origination) eat most of it before you've made a dollar. On a 700k ARV, 30 percent is 210k and you're leaving money on the table against anyone who underwrites line by line.

On the lending side I look at total cost basis against ARV rather than the offer formula, and I want the finished loan-to-value low enough that a 5 percent price slip doesn't touch my position. Note that origination and points vary by lender and by borrower experience, so confirm what you'd actually be quoted rather than assuming two points.

wendy_park48 · Answer

The line item that people leave out of the 30 percent isn't holding cost, it's the buyer's repair credit at the back end. You did a cosmetic flip, the inspection still finds a 30 year old water heater and a panel with double-tapped breakers, and the buyer's agent asks for 4k. That comes straight off your 55k.

Also read the seller disclosure requirements for your state before you plan the scope. Some states require disclosure of known defects on a form with specific line items, and a few are closer to caveat emptor with narrow carve-outs, so what you're obligated to say about the things you chose not to fix genuinely differs depending on where the property sits. Worth asking a local attorney once, not per deal.

I'd keep 70 as a screening filter and never as an underwriting model. It tells you which listings to open.

Everyone talks about the 70 percent rule, nobody talks about what happens at the exit table

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