The 70% Rule in House Flipping: Complete Guide with Examples
The 70% rule is the most widely used shortcut in fix and flip investing — and one of the most misunderstood. Used correctly, it's a powerful deal screening filter. Used blindly, it can lead you to overpay or walk away from great deals.
This guide explains exactly how the 70% rule works, when to use it, when to adjust it, and how to move beyond it to a complete deal analysis.
The 70% Rule Formula
The formula calculates your Maximum Allowable Offer (MAO) — the highest price you should pay for a property given your renovation estimate and target ARV:
If a seller wants $175,000 for that property, the 70% rule says walk away — you're being asked to pay $15,000 above your maximum. If they'll accept $155,000, the rule says you have a deal worth analyzing further.
Why 70%? Where Does the Number Come From?
The 30% buffer between your purchase price and ARV needs to cover three things:
- Your profit target (typically 15–20% of ARV) — on a $300K ARV deal, that's $45,000–$60,000
- Transaction costs on both sides (typically 7–10% of ARV) — agent commissions (5–6%), plus buy and sell closing costs (2–4%)
- A buffer for the unexpected — market softening, renovation surprises, extended hold time
Add those up: 15–20% profit + 7–10% transaction costs = 22–30%. The 70% rule assumes you need the remaining 30% to cover all of this, with minimal room for error at the tight end.
Worked Example: Step by Step
Let's walk through a real deal analysis using the 70% rule:
- Property asking price: $145,000
- Estimated ARV (based on comps): $260,000
- Estimated renovation cost: $42,000
Step 1: Apply the 70% rule. MAO = ($260,000 × 0.70) − $42,000 = $182,000 − $42,000 = $140,000
Step 2: Compare to asking price. Seller wants $145,000. Your max is $140,000. The 70% rule says this deal needs negotiation — you need to get the seller to $140,000 or below.
Step 3: Run a full deal analysis. Even if the 70% rule passes, always verify with a complete calculator. At $140,000, accounting for all costs: $140K purchase + $2,800 buy closing + $46,200 reno (with 10% contingency) + $3,900 holding + $14,300 agent + $2,600 sell closing = $209,800 total cost. Net profit: $260,000 − $209,800 = $50,200. ROI: 24%. This is a solid deal.
When to Adjust the 70% Rule
The 70% figure isn't sacred. Experienced investors adjust it based on specific circumstances:
When the 70% Rule Fails
The 70% rule is a filter, not a complete analysis. It can mislead you in these common situations:
- It ignores holding costs. A 12-month renovation adds $8,000–$15,000 in carrying costs that the 70% buffer may not cover.
- It ignores financing costs. Hard money at 12% for 8 months on a $130K loan adds $10,400 in interest alone.
- It doesn't account for your ARV accuracy. If your $260K ARV is actually $240K, you've lost $14,000 in assumed profit. Always run a sensitivity analysis.
- It can reject good deals. A deal at 73% with a rock-solid ARV and fast 4-month flip might be better than a deal at 68% with an uncertain ARV and 10-month renovation.
70% Rule vs. Maximum Allowable Offer (MAO)
Some investors calculate their MAO more precisely by working backwards from their target profit:
On a $260K ARV deal with $40K reno, $50K target profit, and $22K transaction costs: MAO = $260K − $40K − $50K − $22K = $148,000. Compare to 70% rule: ($260K × 0.70) − $40K = $142,000. The precise MAO gives you $6,000 more to work with in negotiation — use it when you're confident in your cost estimates.
How to Use This Information to Negotiate
When a seller's asking price exceeds your MAO, don't walk away immediately. Use the numbers to drive the negotiation:
- Share your renovation estimate — show the seller why their asking price doesn't work
- Offer at your MAO with a clear explanation of your math
- Ask if they'll accept your price with a fast close (cash, 7-10 days) — many sellers value certainty over price
- Consider creative structures: seller financing, subject-to, or deferred payment for part of the purchase price