What the 70% rule is, and what it is really reserving
The 70% rule is a screening heuristic: never pay more than 70% of a property's after-repair value, minus the cost of the repairs. On a house that will sell for $300,000 after $45,000 of work, the rule allows $300,000 × 0.70 − $45,000 = $165,000. It exists so an investor can triage twenty listings in an evening without building twenty pro formas.
What makes it work is a small piece of algebra that most descriptions of the rule skip. Put the offer and the repairs together and they always come to exactly 70% of ARV — that is what the rule constrains. So the reserve the rule holds back is exactly 30% of ARV, and it does not change when repairs change. Bigger repair estimate, smaller offer, same reserve. The 30% is not your profit. It has to pay the sales commission, the transfer tax, the title work, the settlement fee, the property tax and insurance for however long you own the house, the loan points and interest, and then whatever is left over is what you earn.
That is the useful way to hold the rule in your head: 70% is an assumption that all your non-repair costs plus a satisfactory profit come to 30% of the sale price. On a $500,000 house with a 5% commission and a four-month hold, that assumption is generous. On a $90,000 house where the title work, permits and transaction fees are nearly the same dollars but the price is a fifth of the size, it is not. This calculator makes the assumption explicit by subtracting your actual sell-side percentage and carrying dollars from the reserve and showing what survives.
The formula and how each term behaves
ARV comes from closed sales of renovated houses comparable to yours. Use sold prices, not asking prices, and adjust for differences in size, condition and location. Because the whole rule scales off ARV, an optimistic ARV inflates the offer twice: once through the 70% multiplication and again by encouraging a lower repair estimate to match.
Repairs should be your full scope-of-work number including contingency. The rule has no separate allowance for overruns. If your scope is $45,000 and you would normally carry 10%, enter $49,500, because the extra $4,500 will otherwise come out of your profit and nothing in the formula noticed.
The rule percentage is the lever people forget is adjustable. In a competitive market with cheap money and fast sales, buyers routinely stretch to 75% or even 80%; in a slow market with expensive financing they pull back to 65%. Every point you add raises the maximum offer by 1% of ARV and takes exactly that much out of the reserve. On a $300,000 ARV, moving from 70% to 75% raises your offer by $15,000 and cuts your protection by the same $15,000.
The assignment fee applies only when you are wholesaling — putting the property under contract and assigning that contract to an end buyer. The fee comes out of your offer to the seller so that the end buyer still receives the full 70% deal. A wholesaler who adds the fee on top of a 70% offer has quietly handed their buyer a 73% or 75% deal and should expect it to sit.
Worked example: a $300,000 ARV with $45,000 of work
You find a three-bedroom ranch. Renovated comparables in the same school zone have closed between $295,000 and $308,000, so you set ARV at $300,000. Your contractor scopes the work at roughly $41,000 and you add 10% contingency, giving $45,000.
- Allowance. 70% × $300,000 = $210,000.
- Subtract repairs. $210,000 − $45,000 = $165,000. That is the maximum allowable offer.
- Offer as a share of ARV. $165,000 ÷ $300,000 = 55%.
- Gross spread reserved. $300,000 − $165,000 − $45,000 = $90,000, which is exactly (1 − 0.70) × $300,000.
Now test the assumption. You expect a 6% commission plus about 2% in transfer tax, title and settlement, so sell-side costs are 8% × $300,000 = $24,000. You budget six months of carry at $500 plus $9,000 of points and interest, so holding and financing come to $12,000.
- Profit left. $90,000 − $24,000 − $12,000 = $54,000.
- Profit as a share of ARV. $54,000 ÷ $300,000 = 18%.
Eighteen percent is a healthy margin, so on this deal 70% is doing its job. Run the same arithmetic at a 75% rule and the offer becomes $180,000, the spread falls to $75,000, and profit drops to $39,000 or 13% of ARV — still workable, but with $15,000 less room for the rehab to run over.
How to read the result and when to move off 70
Treat the maximum allowable offer as a ceiling, not a target. It is the price at which the deal is exactly as good as your rule says it must be; paying less is what actually makes money. Many buyers open below the MAO precisely so that a negotiated increase still lands inside the rule.
The number to watch is profit left after real costs. If the calculator shows a comfortable figure there, your rule percentage is calibrated for this market. If it shows something thin, the 30% reserve is not covering what your market actually charges, and the honest response is to lower the rule percentage rather than to hope.
Three situations reliably call for a lower percentage. Lower-priced houses, because a $2,500 title-and-recording bill is 2.8% of a $90,000 sale and 0.5% of a $500,000 one. Longer holds, because carry and interest scale with time while the reserve does not. And expensive money — the reserve on a $300,000 ARV is $90,000, and twelve months of interest-only borrowing at 13% on a $180,000 loan is $23,400 of it.
Two situations support a higher percentage. Genuinely cosmetic work on a fast-moving house, where you may be in and out in three months. And a market where you already know the exit — a build-to-rent buyer, an institutional purchaser, or your own refinance, as modelled by the BRRRR calculator — because the commission line largely disappears.
If the calculator returns a negative maximum offer, the repair estimate has exceeded the whole allowance. That is not a bug; it is the rule telling you the scope of work is too large for what the finished house is worth. Verify the ARV against renovated comparables before you conclude the deal is dead, but do not solve it by raising the rule percentage.
Maximum offer at different rule percentages
| Rule | Maximum offer | Offer as % of ARV | Gross spread | Profit after costs | Profit as % of ARV |
|---|---|---|---|---|---|
| 60% | $135,000 | 45.0% | $120,000 | $84,000 | 28.0% |
| 65% | $150,000 | 50.0% | $105,000 | $69,000 | 23.0% |
| 70% | $165,000 | 55.0% | $90,000 | $54,000 | 18.0% |
| 72% | $171,000 | 57.0% | $84,000 | $48,000 | 16.0% |
| 75% | $180,000 | 60.0% | $75,000 | $39,000 | 13.0% |
| 80% | $195,000 | 65.0% | $60,000 | $24,000 | 8.0% |
Each point of rule percentage is worth $3,000 on this deal — 1% of the $300,000 ARV — moving one-for-one from your protection to the seller's price.
The rule is a filter, not an underwriting method
Nothing in the 70% rule knows how long you will hold the property, what your lender charges, what commission you have negotiated, or what property taxes run in that township. It compresses all of it into one constant. That is exactly what makes it useful for sorting a list of addresses and exactly what makes it unsafe as the last calculation before you sign.
Once a property passes this screen, move it to the fix and flip profit calculator, which charges every line individually and reports the annualized return on the cash you actually commit.
Ways the rule gets misapplied
- Using a repair estimate without contingency. The reserve does not grow when the rehab does. A $10,000 overrun is $10,000 straight off the profit line.
- Setting ARV from active listings. Asking prices reflect hope. Use closed sales of renovated houses, and prefer the conservative end of the range.
- Adding a wholesale fee on top of the offer. The fee belongs inside the MAO. Layered on top, it hands your end buyer a deal that no longer satisfies their own rule.
- Applying 70% to a low-priced house. Fixed transaction costs are a much larger share of a $90,000 sale, so the same 30% reserve buys far less protection.
- Ignoring the hold period. Two extra months of carry and interest can be several points of ARV, and the rule percentage never notices.
- Treating the reserve as profit. The single most common error. On the worked example, the $90,000 reserve delivers $54,000 of profit after costs — and less than that if anything goes wrong.
- Raising the percentage to make a deal work. The rule does not become friendlier when you need it to; you have simply chosen to accept less protection.
Alternatives and where to go next
The 70% rule belongs to a family of investor rules of thumb that trade accuracy for speed. The 1% rule screens rentals by asking whether monthly rent reaches 1% of price; the 50% rule assumes operating expenses consume half of gross rent. All three exist to answer one question quickly — is this worth a second look? — and all three are wrong in predictable directions once you leave the market they were coined in.
For a flip, the natural progression is: screen with this page, price the work with the rehab cost calculator, establish ARV properly with the after repair value calculator, and then underwrite the whole deal with the fix and flip profit calculator. If you would rather work backwards from a required profit than from a fixed percentage, the maximum allowable offer calculator does exactly that — you state the dollars you need to earn and it solves for the price.
One last framing worth keeping. The rule percentage is a statement about your own cost structure, not about the property. Two buyers looking at the same house can honestly hold different rules: the one who pays cash, does their own general contracting and lists it themselves genuinely has a smaller cost base than the one borrowing at 13% and paying full commission, and can pay more for the same house without taking more risk. When you lose a deal to a higher offer, that is often what happened.