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The 70% Rule in House Flipping
The 70% rule is a widely accepted real estate guideline used to determine the maximum price an investor should pay for a fixer-upper. It states that the purchase price should not exceed 70% of the After Repair Value (ARV) minus estimated renovation costs.
For example, if a home's ARV is $300,000 and the repair budget is $50,000, the Maximum Allowable Offer (MAO) is calculated as:
$$\text{MAO} = (\text{ARV} \times 0.70) - \text{Renovation Budget}$$
$$\text{MAO} = (300,000 \times 0.70) - 50,000 = $160,000$$
Paying more than the MAO reduces your margin of safety, increasing the risk of losing capital if market prices decline or repairs exceed estimates.