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Using 70% Rule To Calculate Max Allowable Offer

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If you’re a house flipper or have spent a lot of time at BiggerPockets.com, you’re probably aware of the 70% rule and understand how it relates to house flippers. However, the 70% rule is also very useful for wholesalers, especially those who may be wholesale to the flippers of the house.

Keep in mind that this is a rule of thumb and is one of several methods used to estimate what to offer for a property. The 70% rule stipulates that you must pay 70% or less of the ARV of the property after deducting repairs.

How the 70% rule works in the real world

Wholesalers also need to deduct fees from that number. Therefore, the 70% rule that applies to wholesalers is:

Maximum permissible offer = (ARV x .70) – Repair – Fee

Let’s do a very simple calculation. Here’s how this works in the real world.

Beth, a wholesaler, was considering an offer at 123 Main Street, a property owned by Clarence that I saw earlier. please remember. The ARV of the house was determined to be about $ 147,333 when compared to 875 Elm Street, 413 Oak Street and 77 First Street.

Related: Case study: My latest trading proves that the 70% rule doesn’t always work

To determine the offer price, Beth multiplies $ 147,333 by .70 to get $ 103,133. Then she deducts the cost of the necessary repairs. This is what she estimates at $ 20,000, minus her desired wholesale fee of $ 10,000, to reach her maximum offer price of $ 73,133.

$ 147,333 (ARV)

x.70 (70%)

= $ 103,133

-$ 20,000 (repair)

-$ 10,000 (wholesale fee)

= $ 73,133 Maximum permissible offer

These numbers are fairly easy to calculate, but if you want to calculate quickly online, Bigger Pockets has a free 70% rule calculator that anyone can use. Just plug in the numbers and you’ll see the Maximum Allowable Offer. To use the calculator, go to BiggerPockets.com/calc and click on 70% Rule Calculator.

70% rule problem

The 70% rule assumes that 30% of ARV is spent on holding costs, closing costs (both buyer and seller such as fees, taxes, lawyer fees, title company fees, etc.) and flipper profits. Other charges incurred during the transaction. This works well in many markets, but with some strict limitations.

For example, the 70% rule does not work well for properties with low ARV, such as $ 50,000. As mentioned earlier, the 30% deducted from ARV includes holding and closing costs, as well as the profits that the investor or flipper wants to earn. However, 30% of $ 50,000 is $ 15,000, so if you follow the 70% rule, all charges, costs, and profits add up to $ 15,000. If the commission and holding cost total $ 10,000, the house flipper’s profit is only $ 5,000. And no one knows a house flipper who runs the risk of flipping for just $ 5,000. Therefore, if you follow the 70% rule, in this case the flipper or wholesaler will pay a lot of money for the property.

Related: Test: Are the 2%, 50% and 70% rules really useful for investors?

Similar issues with the 70% rule exist for more expensive properties. Under the 70% rule, a home with an ARV of $ 700,000 and a home worth $ 50,000 worth of work should generate a maximum permissible offer of $ 440,000. However, in most markets it is not possible to find a $ 700,000 property for $ 440,000. Those who stick to the 70% rule alone will probably not find enough deals to wholesale or flip a single property.

In addition, some investors may spend more or less on fees and expenses for specific living conditions and locations. For example, in some states a home purchase may require a $ 3,000 closure fee, while in others it can be $ 6,000. Some investors may have a real estate license, which saves tens of thousands of dollars in commissions, while others have to pay commissions at the time of sale.

[This article is an excerpt from Brandon Turner’s The Book on Investing With No (or Low) Money Down.]

What method do you use to estimate the post-repair value and maximum permissible offer of rehab?

Let us know in the comments!

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