How to Buy a Flip House Using the 70% Rule
Shopping for your next flip house? Here’s a simple metric that I use to tell you what to pay.
There’s a lot of things to calculate before going in on a flip… construction costs, holding costs, closing costs, agent commissions, and even utility costs during the construction. Despite all of these, I’ve found a simple formula to help me shoot out lots of offers to help me find out where the motivated sellers are!
It’s called the 70% rule: ARV– 30% - Repair Costs = My Offer
In flipping, you make money when you buy not when you sell. Because of this, you need analyze properties quickly and make offers frequently. That is where the 70% rule comes in.
Let’s break down each part of the formula and then analyze a property I went under contract on last week.
What is ARV? ARV stands for “after repair value” this is how much the property will be worth when the repairs are done. The best way to calculate ARV is to pull comparable sales, look at sold listings (not for sale or under contract) that are like the subject property, and adjusting for any differences. Keep in mind interest rates are roughly double what they were earlier this year, so the more recent the sale the better.
Why 30%? Your 30% deduction from ARV can be broken down by 10/10/10
10% holding costs and sales commissions
10% funding costs (interest, closing costs and points)
10% your profit
What about Repairs? This can be the biggest hang up for newer investors, I like to estimate on the high side then refine my numbers during the inspection process. If you shoot high on the repairs, your profit will simply be higher. Keep in mind, the more projects you do, the more accurate your repair cost estimates will be. Calling different trades for pricing and finding mentors that do similar projects in your market can be the most helpful initially. Eventually you may be able to build your own repair calculator from past projects and calculate by square foot.
Now let’s look at the 70% principle in action, here’s a 2/2 bungalow in Cocoa Beach we just went under contract on.
ARV: 575
Profit, funding, holding + sales: -172,500 (-30%)
Repairs: 55,000
Offer: 347,500
In this case, a deep dive of the financing and cost breakdown allowed us to accept a 362k counter and still project a profit north of 50k. But we always like to start with the 70% rule to see if the deal is CLOSE, and then dig deeper to come up with a final number. Also, in full transparency, self-representing as an agent (collecting commissions on buy and sale) allowed me to go slightly above my typical criteria to make this deal happen.
How many offers have you made this week? I challenge everyone reading this to start using the 70% rule and start making offers in your market. I am available to help if you are interested in taking on a project in Brevard.
Sometimes not finding a deal is as simple as being too afraid to ask.
“You do not have because you do not ask…” James 4:2
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Want to work with me and my team? Here are some ways we can partner together:
Short Term Rental Property Management: Ocean Blou Properties
Long Term Rental Property Management: IGC Rents
Sales Associate with IGC Realty: Levi@IGCrents.com or 7194521225
