The 70 percent rule, and when to break it
The 70 percent rule is the first piece of math most flippers learn and the first one they misuse. It is a screen, not a law, and knowing the difference is what separates a disciplined operator from someone using arithmetic as a security blanket.
From The REbuild — see all 456 pages →
A $400,000 after-repair value with $60,000 of rehab gives $220,000 as your ceiling. The thirty percent you held back is not profit; it is profit plus closing costs, holding costs, agent fees, and the mistakes you have not found yet.
The rule is only as good as the ARV
Everything hinges on the after-repair value, and that is where deals die. Use three to five closed sales, not active listings; listings tell you what sellers hope for, closings tell you what buyers paid. Keep the comps tight in radius, recent in date, and honest in condition. A house two streets over that sold six months ago after a full renovation is a comp. A larger house in a better school boundary is a fantasy.
Then get a real contractor bid before you fall in love. Your rehab number is the second input, and optimism there does more damage than a bad purchase price, because it compounds through the holding period.
When 75 or 80 percent is still disciplined
Experienced operators do work above 70, and it is not always recklessness. It can be defensible when the comps are dense and unambiguous, the contractor bid is firm with a contingency, the capital is cheap and patient, the timeline is short, and you have done that exact scope in that exact market before. Each of those conditions removes a specific risk that the thirty percent was covering.
What is never defensible is moving to 80 percent because you want the deal. That is not underwriting, that is bidding, and the market will happily let you win.
The version I actually use
I write the walk-away number down before the conversation and I do not move it during the conversation. Then I check the deal a second way, because one formula is never enough: what does it appraise at as a rental, what does it cash flow if it does not sell, and can I hold it if the market cools two more points. A flip with a rental exit is a plan. A flip with only one exit is a bet.
That second question is also how the BRRRR strategy earns its keep. If the numbers work as a hold, a slow market becomes an inconvenience instead of a catastrophe.
Where the rule came from
Pay no more than seventy percent of the after-repair value, minus the cost of the repairs. Flippers adopted it because it is fast: two numbers and you have an offer. The thirty percent it leaves behind is meant to cover holding costs, selling costs, financing, and the profit. It works as a first screen and fails as underwriting, because it assumes those four things add up to thirty percent on every deal, and they never do.
Seventy percent is a screen, not a spreadsheet. It tells you whether to spend the hour, not what to offer.
When it breaks
It breaks on cheap properties, where seventy percent of a low ARV minus real repair costs leaves no room. It breaks on expensive ones, where thirty percent is far more margin than the deal needs and you lose to a buyer who underwrote properly. It breaks in a high-rate environment, because holding costs are no longer a rounding error. And it breaks whenever the repair estimate is soft, which is most of the time, because the rule subtracts repairs at face value and repairs always run over.
What to use instead
Work backward from the profit you require. ARV, minus selling costs, minus holding costs at your real timeline and rate, minus financing costs, minus repairs with a contingency, minus the profit that justifies the risk. Whatever is left is the most you can pay. On some deals that is sixty percent of ARV. On some it is seventy-eight. The rule was never the math; it was a shortcut for people who did not want to do the math, and the math takes ten minutes.
Where I land
I still use the seventy percent rule, for about thirty seconds, to decide whether a listing deserves attention. Then I do the ten minutes. The deals that cleared the rule and failed the math are the ones I am glad I did not buy; the deals that failed the rule and passed the math are some of the best I have done.
Two deals, same rule, opposite outcomes
A house with a two hundred thousand dollar ARV and forty thousand in repairs passes the rule at a hundred-thousand-dollar offer. Run the real math at today’s hard-money rates over a seven-month timeline: fourteen thousand in selling costs, roughly eleven thousand in holding and financing, forty-six thousand in repairs with a contingency, and the thirty percent margin has shrunk to a profit under thirty thousand, before anything goes wrong. On a cheap house, the rule leaves you thin.
A house with a six hundred thousand dollar ARV and sixty in repairs passes the rule at three-sixty. Real math: forty-two in selling costs, about twenty-five in holding and financing, sixty-nine in repairs with contingency. Profit north of a hundred thousand. On an expensive house, the rule leaves so much on the table that a buyer who did the math outbids you by forty thousand and still makes a healthy return. Same rule, and it was wrong in both directions.
The rate environment changed the rule
The seventy percent rule was tuned for a world where hard money ran ten percent and a flip took four months. At twelve or thirteen percent over six or seven months, holding and financing alone can consume a third of the margin the rule assumes. Anyone still applying it unadjusted in this cycle is systematically overpaying on every project, and the results show up as flips that were supposed to net forty and netted twelve.
What I actually do
Thirty seconds with the rule to decide whether to open the file. Then the ten-minute version, with my real timeline and my real cost of money, and a profit floor I have written down before I look at the asking price. If the deal clears that floor, I make the offer. If it clears the rule and fails the floor, I pass and log it in the follow-up file, because a seller who wants seventy percent today sometimes wants sixty-two in six months.
The contingency nobody budgets
Repair estimates are wrong in one direction. Contractors bid what they can see, and the wall they open in week two has something in it. The rule subtracts repairs at face value, which is the quiet reason so many flips finish over budget: the math was optimistic before anyone swung a hammer. I add fifteen percent to every repair bid, twenty on anything built before 1970, and treat the number as a floor rather than an estimate. When the contingency is not used, it becomes profit. When it is, the deal survives.
On buying from wholesalers
A wholesaler’s MAO is often the seventy percent rule with their fee added on top, which means the number they hand you already has a thin margin baked in before you have checked a single comp. Do your own ARV from your own comps, run your own repair walk, and run the ten-minute math with your own cost of money. Half the time their number is fine. The other half, it is a deal for them and not for you, and the only way to know is to refuse to inherit anyone else’s arithmetic.
Where the rule does not apply at all
On small multifamily and commercial, there is no ARV in the flipper’s sense. The finished value is not what a comparable sold for; it is the stabilized NOI divided by a cap rate, and both of those are estimates you have to defend. Applying seventy percent to a number you derived from a cap rate is stacking one shortcut on another. For anything with more than four units I do not use the rule even as a screen. I use the thirty-second underwrite: NOI, cap rate, DSCR, and the walk-away number, which is the same ten minutes with the right inputs.
The five inputs to write down before you look at the ask
Your ARV from your own comps. Your repair number from your own walk, plus contingency. Your real timeline in months. Your real cost of money, points included. And the profit floor you will not go below. Write all five on one page before you open the listing price, because the moment you see the ask, every one of those numbers starts drifting toward it. The rule is fast because it lets you skip that discipline. The math is honest because it does not.
One last note on speed. People defend the rule because it lets them make offers fast, and speed does matter in acquisitions. But the ten-minute version is also fast once you have run it fifty times, and it produces offers you can defend to a partner, a lender, and yourself. Fast and wrong is not a strategy. Fast and right is a habit, and it is built the same way every habit is, by doing the longer version until it becomes the short one.
