The 70 Percent Rule and When It Stops Working
You've got a property in front of you, a calculator open, and a decision to make by tomorrow. Someone told you to run the 70 percent rule. You did. Now you're not sure if the number it spit out is actually telling you what to do, or just giving you false confidence.
Here's the answer first. The 70 percent rule says you shouldn't pay more for a flip than 70 percent of the after-repair value (ARV), minus the cost of repairs. The formula:
Maximum offer = (ARV x 0.70) - Repair costs
If a house will be worth $250,000 after renovation and needs $30,000 in work, your ceiling is $145,000 ($250,000 x 0.70 = $175,000, minus $30,000). That's it. That's the whole rule. It's a fast filter to kill bad deals before you waste time on inspections and offers, not a substitute for a real budget.
Now the part that matters more: when that 30 percent buffer is wrong for your deal, and why.
Why 70 Percent and Not 80 or 60
The 30 percent gap between ARV and your offer isn't arbitrary. It's built to cover four things at once: your selling costs, your holding costs, your financing costs, and your profit. Roughly:
- Selling costs (agent commissions, closing costs, transfer taxes): 8-10% of ARV
- Holding costs (loan interest, insurance, utilities, taxes while you own it): 3-5% of ARV, depending on how long the project takes
- Financing costs if you're using hard money (points, origination fees): 2-4% of ARV
- Profit margin: the rest, usually 10-15% of ARV
Add those up and you land somewhere around 25-30 percent. The rule rounds to 30 because it's designed as a quick gut check, not a spreadsheet. It assumes a mid-range project, a mid-range market, and a 3 to 6 month timeline. Change any of those assumptions and the 30 percent stops matching reality.
Where People Get This Wrong
The most common mistake isn't the formula. It's what goes into it.
ARV gets inflated. People pull three comps that sold high, ignore the four that sold lower, and call it ARV. If your comps aren't within a half mile, sold in the last six months, and within 20 percent of the subject property's square footage, you don't have an ARV. You have a hope.
Repair costs get underestimated. Everyone budgets for paint, flooring, and a kitchen. Fewer people budget for the sewer line that turns out to be cast iron, the electrical panel that doesn't meet code, or the permit delays that add two months of holding costs nobody priced in. A rule of thumb inside the rule of thumb: whatever your contractor bids, add 10 to 15 percent as a contingency before it goes into the formula.
Holding time gets guessed at, not calculated. The 70 percent rule assumes a normal timeline. If your city takes four months to approve permits, or the house needs foundation work that stalls everything, your holding costs blow past what the rule budgeted for. That erases your margin before you've hung a single cabinet.
A Worked Example
Let's say you're looking at a 3-bed, 2-bath house in a neighborhood where comparable renovated homes are selling for $280,000. You walk it with a contractor and get a bid of $40,000 for a full rehab: kitchen, both bathrooms, flooring, paint, roof patch.
Run the rule:
$280,000 x 0.70 = $196,000 $196,000 - $40,000 = $156,000 maximum offer
The seller wants $170,000. That's $14,000 over your number. Some investors will stretch here because they like the house or the seller feels motivated. That $14,000 doesn't disappear. It comes directly out of your profit margin, which was already the last item in the 30 percent bucket. If your original plan was to net $28,000 on this deal, paying $170,000 cuts that to $14,000, before anything goes over budget on the rehab. And rehabs almost always go over budget somewhat.
This is the actual value of the rule. It's not that $156,000 is a magic number. It's that it forces you to see, in one calculation, exactly what you're giving up by paying more.
When the 70 Percent Rule Stops Working
High-priced markets. In a market where ARVs run $700,000 and up, 30 percent of that is $210,000. That's a lot more cushion than a $700,000 renovation actually needs, because selling costs and holding costs don't scale up at the same rate as home price. A $700,000 house doesn't cost 3 times more to hold per month than a $230,000 house. Investors working in expensive markets often use 75 to 78 percent instead, because the flat-dollar costs (insurance, utilities, a chunk of the closing costs) shrink as a percentage of a bigger number.
Low-priced markets. Flip the logic for a $90,000 ARV property. Thirty percent is only $27,000. After a realistic $15,000 rehab, you're offering $48,000, and the margins get so thin that a single surprise (a bad water heater, a slow closing) can wipe out the entire profit. In sub-$150,000 markets, a lot of investors tighten to 60 or 65 percent because there's less room for error in dollar terms even though the percentage math looks the same.
Fast-appreciating or low-inventory markets. If comps are moving up 1 percent a month and you expect a 6-month project, your ARV on day one is understating what the house will actually sell for. Some investors build in a small appreciation adjustment. Others leave it alone and treat the extra appreciation as a buffer against their own cost overruns, which is the more conservative move.
Buy-and-hold and BRRRR deals. The 70 percent rule was built for flips, full stop. If you're refinancing and holding as a rental, your exit isn't a sale, it's a cash-out refinance, usually at 70-75 percent of ARV from the lender, not from you. The rule doesn't translate directly. You need a different formula built around your refinance terms and target cash flow, not the flip formula.
The Honest Limitation
The 70 percent rule tells you nothing about whether a deal is good. It only tells you the most you should pay assuming your ARV and repair numbers are correct. If either of those inputs is wrong, and they usually are wrong by some margin on the first pass, the rule gives you false precision. It feels like math. It's really a guess wearing a formula's clothes. Use it to screen deals fast, then verify the real numbers with actual comps and actual contractor bids before you write an offer, not after.
If you're running these numbers on a property right now and want to move faster than a spreadsheet allows, that's exactly what Deal Machine is built for. Pull comps, estimate repairs, and see your maximum offer on a real address before you call the seller back. You can try it at readmoneydecoded.com/deal-machine.