The 70 percent rule says 192k while flippers here are paying 240k

Question

I mostly do land so treat me as an outsider on this. I ran a house near me as an exercise. ARV I'd defend is 325,000. Cosmetic scope, paint, floors, fixtures, kitchen refresh, call it 35,000 with a little padding.

70 percent rule gives me 227,500 minus 35,000, so 192,500 as a maximum offer. The trouble is I can see resales in that pocket and the buy side is clearing somewhere near 240,000. Either the rule is now a fiction, everyone paying 240 is losing money, or my ARV is 40k light. Which failure is it, and what do operators use in place of the rule when the market won't sell at 70?

Rena Expert · Accepted Answer

Your arithmetic on the strict rule is right. Maximum offer equals 0.70 times ARV, minus repairs, so 227,500 minus 35,000 gives 192,500. The loose usage you'll see on forums drops the repair subtraction and treats 70 percent of ARV as the purchase ceiling on its own, which produces 227,500 and a much thinner deal wearing the same label. Same words, very different number.

What the 30 percent is actually buying you: on a 325,000 resale, selling costs at 7 to 8 percent are roughly 23,000 to 26,000, buy-side closing and title maybe 4,000, and five months of carry on a short-term loan plus taxes, insurance and utilities lands somewhere around 10,000 to 14,000 depending on rate and points. Add the 35,000 of work and you've consumed most of the spread at 192,500. At a 240,000 purchase the same house is a break-even exercise unless the repair number is really 20,000, or the true ARV is 350,000 and you're pricing off stale comps.

The part I'd question first is the 240,000 itself. Unless you're watching deeds directly you may be reading owner-occupant purchases as investor buys, and roughly a dozen states don't make sale prices public at all, so "what flippers paid here" can be a guess dressed up as data. Confirm what those buyers actually were before you conclude the market has repriced.

Operators who've dropped the rule generally replace the percentage with a dollar floor, something like a minimum projected net after all costs at a resale price 5 percent below their ARV, and a hard limit on days from close to list. The percentage is a screening shortcut. It stops working exactly where you found it, so at 240,000 you'd need the full cost stack written out before you'd know whether anyone is making money.

devon_pierce · Answer

I've started writing my offers as a discount to ARV instead, because the 70 number stops meaning anything once repairs are small. On a truly light cosmetic job with 15k of work, 70 percent of ARV minus repairs leaves you a fortune on paper and you'll never win the house. On a 60k job it leaves you nothing and you shouldn't want it.

Rena Guide · Answer

For anyone reading this cold, two terms are doing all the work here. ARV means after-repair value, the price the house should sell for once the work is finished, and it's an estimate you build from recently sold comparable homes in the same condition you're aiming for. Not asking prices. Sold prices.

The reason the 70 percent rule behaves so differently at different price points is that it reserves a percentage while most of your costs are either fixed dollars or a different percentage. On a 600,000 ARV, 30 percent is 180,000, which is far more cushion than the selling and carrying costs need, so the rule tells you to walk away from deals that work. On a 120,000 ARV, 30 percent is 36,000, and selling costs plus a few months of carry can eat nearly all of it before you've paid for paint.

That's why you'll see people talk about a minimum dollar profit instead, a number they won't go below no matter how good the percentage looks. Where the percentage rule still earns its keep is speed. If you're looking at twenty addresses a week it kills the obvious losers in ten seconds, and you save the full cost stack for the two that survive.

hannah_west29 · Answer

@parcel run the 240,000 version with your own numbers and see what it implies. 325,000 out, minus 24,000 to sell, minus 240,000, minus 35,000 of work, minus say 12,000 of carry and closing, and you're at 14,000 negative. So either their repair scope is half yours or they know something about the ARV you don't. My guess is they're a builder using their own crew and calling labor free, which is the most common way a bad deal looks fine on a spreadsheet.

The 70 percent rule says 192k while flippers here are paying 240k

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