The 70% rule and max allowable offer

What it says

Pay no more than 70% of the after-repair value (ARV), minus the cost of repairs. The idea is that the other 30% covers your costs and your profit.

Wholesalers usually take their fee out of the same number. The calculator also lets you subtract the fee, holding costs and closing costs, so you see a tighter figure. These come off on top of the 30%, for extra margin:

Where the 30% goes

The 30% is not all profit. It has to pay for many things:

• Closing costs when you buy and when you sell.
• Agent fees and other selling costs.
• Loan interest and points, if you borrow.
• Taxes, insurance and utilities while you hold the house.
• A cushion for repairs that run over.
• Your profit.

That is why the rule leaves a big gap. If the gap is too thin, one surprise can erase your profit.

Worked example

Made-up round numbers: ARV $240,000, repairs $30,000, wholesale fee $8,000, holding $4,000, closing $3,000.

• 70% of ARV: $168,000.
• Basic MAO: $168,000 - $30,000 = $138,000.
• With fee, holding and closing taken out: $138,000 - $8,000 - $4,000 - $3,000 = $123,000.

If the seller will sign at $120,000, the contract price is $3,000 under the MAO. An asking price of $130,000 is $7,000 over it.

Check the end buyer

A wholesaler also needs a buyer who can make money. Take the same deal. The buyer pays $120,000 plus the $8,000 fee, so $128,000.

• Repairs with a 10% cushion: $33,000.
• Buyer closing at 2%: $2,560.
• Four months of holding at $1,000: $4,000.
• Selling costs at 6% of ARV: $14,400.
• Total cost: $181,960.
• Profit: $240,000 - $181,960 = $58,040, about 32% of cost.

Whether that is enough is your call. The calculator runs this check for you.

What if repairs run over?

The rule is sensitive to the repair number. In the same example, if repairs come in at $40,000 instead of $30,000, the MAO falls from $123,000 to $113,000. Every extra repair dollar comes straight off what you can pay. Change the 70% to 75% and the MAO rises to $135,000. Small changes in the inputs move the answer a lot.

Who uses it

Flippers use the rule to decide what to bid. Wholesalers use it to find the price at which an end buyer will still want the deal. Both groups need the same two inputs: a believable ARV and a believable repair bill.

Some investors use a higher share, such as 75% to 80%, for high-value homes in competitive markets, where the 30% gap is a large number of dollars. Some use 65% or less for low-value houses, where fixed closing and holding costs eat much of the 30%. Those are rules of thumb and choices, not facts. Test the share you pick against your own costs.

How to use it in practice

• Find the ARV from recent sales of similar homes nearby, not from the seller.
• Get a repair estimate from a contractor, or at least a line-by-line list.
• Run the rule to get the MAO, then compare it with the asking price.
• If the asking price is above the MAO, make a lower offer or move on.
• Run the full numbers on any deal that passes, with your real loan and timeline.

The rule saves time. It lets you throw out weak deals in a minute and spend your attention on the few that pass. It does not replace a careful look at the numbers. A deal that passes the rule can still lose money.

When the rule misleads

• The 70% is a fixed share. It ignores your real costs, your loan, and how long the project takes.
• In a market with high prices and thin margins, almost no deal fits. In a cheap market, 70% may leave too much room.
• It depends on a good ARV and a good repair estimate. A bad guess on either breaks the answer.
• You can change the percent. Some investors use a different share. The calculator lets you set it.

Treat the result as a first filter, then work through the full numbers. For a hold-and-rent plan, see The BRRRR method explained. To compare with the return on a rental, see What is a good cap rate?.

FAQ

Is the 70% rule a law?

No. It is only a rule of thumb that investors use to screen deals fast.

What counts as repairs?

All work needed to reach the ARV. Add a cushion, because repair costs tend to run over.

What is a max allowable offer?

The highest price that still leaves the profit the rule is built to protect.

Can I use a different percent?

Yes. Some investors use a higher or lower share depending on the market and the risk.