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New real estate investors can lose money fast by overpaying for a house that still needs a roof, HVAC work, flooring, paint, permits, and months of carrying costs. The 70% rule gives them a quick ceiling before they write an offer.
The rule is simple: start with the after-repair value, multiply by 70%, then subtract the repairs. The answer is the maximum allowable offer, often called MAO.
Use it as a first screen, not a final underwriting model. A property that fails this test usually needs a lower purchase price, cheaper repairs, a higher resale value, or a different exit plan.
Define the 70% Offer Ceiling
The 70% rule is a real estate investment guideline stating that an investor should pay no more than 70% of a property's after-repair value (ARV) minus estimated repair costs.
ARV means the likely resale price after the renovation is complete. MAO means the highest price the investor can pay under this rule. The gap between ARV and MAO is meant to cover selling costs, holding costs, financing costs, overruns, and profit.
For a distressed property or an owner trying to sell a house as-is in Houston, this math helps explain why an investor's offer may be lower than the price of a finished retail home nearby.
Formula Inputs for the Offer Ceiling
The formula is:
MAO = (ARV × 0.70) − Estimated Repairs
If a renovated house should sell for $300,000 and the repairs are $40,000, the formula is $300,000 × 0.70 − $40,000. That produces a $170,000 maximum allowable offer.
ARV: Choose Comparable Sales Carefully
ARV is the expected sale price after the property is renovated to the same condition as recent comparable sales. Good comps should be close in location, similar in square footage, close in bedroom and bathroom count, and recent enough to reflect the current market.
A strong comp set might include three renovated single-family homes within the same subdivision that sold in the last 90 days. A weak comp set might include a larger house across a major road, a sale from last year, or a property with a pool when the subject house has none.
ARV mistakes are expensive. If the true resale price is $285,000 instead of $300,000, the 70% calculation drops by $10,500 before any repair estimate changes.
The 30% Spread Is Not All Profit
The 70% multiplier leaves a 30% spread between ARV and the combined purchase-and-repair budget. That spread is not pure profit.
Part of it usually goes to agent commissions, title fees, transfer taxes, lender fees, utilities, insurance, property taxes, HOA dues, cleanup, staging, price reductions, and buyer repair credits. The Consumer Financial Protection Bureau explains that a Closing Disclosure itemizes closing costs, which is one reason investors model resale costs before buying.
What remains is the investor's compensation for risk and work. On a small cosmetic project, the needed spread is often lower. On a house with foundation movement, fire damage, or a long permit timeline, 30% can be too thin.
Repair Costs Need Line Items
Repair estimates are the easiest input to understate. Paint and flooring are visible. Electrical panels, cast-iron drain lines, roof decking, termites, sewer issues, and moisture behind walls can be missed during a quick walkthrough.
A practical repair budget separates the work into line items: roof, HVAC, plumbing, electrical, kitchen, baths, flooring, drywall, paint, exterior, landscaping, permits, dumpster fees, and contingency. Many investors add 10% to 20% for surprises after contractor bids come in.
For homes with extensive damage, sellers sometimes prefer a buyer who purchases as-is because the buyer takes on the repair scope after closing.
Worked Example: $300,000 ARV and $40,000 Repairs
Scenario: You find a vacant three-bedroom house in a neighborhood where renovated homes sell quickly. The house needs a kitchen, two bathrooms, flooring, interior paint, exterior touch-up, and several mechanical repairs.
Step 1: Estimate ARV. Three renovated comps sold for $292,000, $305,000, and $302,000. After adjusting for size and condition, you choose a $300,000 ARV.
Step 2: Apply the 70% multiplier. $300,000 × 0.70 = $210,000.
Step 3: Estimate repairs. A contractor walkthrough produces a $40,000 repair budget: $12,000 for kitchen work, $10,000 for bathrooms, $7,500 for flooring and paint, $6,000 for mechanical repairs, and $4,500 for cleanup and contingency.
Step 4: Calculate MAO. $210,000 − $40,000 = $170,000.
At a $170,000 purchase price, the investor has $130,000 between purchase price and expected resale value. From that spread, the investor still has to pay the $40,000 renovation budget, selling expenses, holding costs, financing costs, and any surprise repairs.
If the contractor later raises the repair budget to $55,000, the MAO drops to $155,000. If comps support only a $285,000 ARV, the MAO drops to $144,500. Small input changes can move the offer by tens of thousands of dollars.
Condition issues can also affect resale. A buyer may negotiate harder after inspection, especially when prior problems, including disclosing water damage when selling are part of the transaction history.
Where the Rule Fits
The 70% rule fits fix-and-flip deals where the investor plans to renovate, resell, and recover capital quickly. It is most useful on distressed houses with enough discount to absorb renovation risk.
It also helps wholesalers evaluate whether a deal may leave room for an end buyer. If the assignment price pushes the buyer above MAO, the deal may fail unless the buyer has cheaper labor, a higher ARV, or a lower required profit.
The rule is less useful for a clean rental property with stable tenants. A buy-and-hold investor may focus on rent, vacancy, taxes, insurance, repairs, debt service, and cash-on-cash return rather than immediate resale value.
Practical Strengths and Failure Points
Strengths
Fast screening: An investor can reject weak deals in minutes before ordering inspections or negotiating contractor bids.
Price discipline: The formula keeps the offer tied to resale value and repair cost instead of excitement, fear of missing out, or a seller's asking price.
Risk visibility: A low MAO forces the buyer to explain the discount. The discount is tied to roof age, outdated electrical, foundation movement, long holding time, or uncertain comps before the offer is sent.
Failure Points
Input sensitivity: Bad ARV and repair numbers produce a bad offer. The formula cannot fix weak comps or a rushed scope of work.
Market pressure: In a competitive market, a strict 70% offer may lose to buyers willing to accept lower profit or use cheaper crews.
Strategy mismatch: The rule was built for resale math. Rental buyers, owner-occupants, and developers may use different return targets.
Property differences: A $40,000 cosmetic rehab and a $40,000 foundation repair do not carry the same resale risk. The formula treats them the same unless the investor adjusts the percentage.
How Cash Buyers Price As-Is Homes
The 70% rule shows the basic math many investors use before making an offer. GetHomeCash also reviews property condition, nearby sales, title timing, repair scope, and the seller's preferred closing date when preparing a cash offer.
A cash buyer may price the home as-is, take over repairs after closing, and avoid listing preparation. That matters when the seller does not want to clean out the property, manage showings, negotiate inspection repairs, or wait for a financed buyer.
GetHomeCash can close in 7 days when title is ready, pays cash, and covers standard closing costs. The tradeoff is price: an as-is cash offer is usually under the possible retail price of a renovated house.
If speed and certainty matter more than renovating for a retail sale, request a free, no-obligation cash offer and compare it with the listing route.
Use the Rule as a Screen
Yes. The 70% rule remains useful as a conservative first screen for flip projects. It gives beginners a fast way to reject deals with too little margin and gives experienced buyers a common starting point for negotiation.
The rule is only a screening shortcut. Accurate comps, a realistic repair budget, carrying-cost assumptions, and a local resale plan still drive the final decision.
Use the formula early, then verify every input before closing. If the numbers survive comps, contractor bids, title review, financing costs, and resale assumptions, the deal deserves deeper attention.
Common Questions
What does the 30% spread cover?
It covers the spread for profit, holding costs, financing costs, selling costs, and surprises. It is not a fixed profit margin.
How accurate is the rule?
It is only as accurate as the ARV and repair estimate. If those inputs are wrong, the MAO will also be wrong.
Can investors use 80% or 65% instead?
Yes. Some investors use 80% for lower-risk projects or competitive markets. Others use 65% for heavy repairs, uncertain resale value, or expensive financing.
Does it work for BRRRR?
It belongs in the buy phase, but BRRRR investors also need rent, appraisal, refinance, vacancy, taxes, insurance, and debt-service numbers. A property can pass the 70% rule and still fail as a rental.
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