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Written by Dennis Shirshikov
Published · Substantively updated
In this guide, you will learn:
- what the 70% rule means in practice;
- which inputs, costs, and assumptions change the answer;
- a step-by-step screening process;
- which primary sources to check; and
- when to stop and ask a qualified professional.
The short answer
The 70% rule is a screening heuristic used by some real estate investors. It starts with a property's estimated value after repairs, applies a 70% factor, and subtracts estimated repair costs:
Screening price = (after-repair value × 0.70) − estimated repairs
The result is not an appraisal, a market value, a required offer, or a guarantee of profit. The 70% factor is an assumption—not a law or universal underwriting standard. Financing, holding time, transaction costs, resale conditions, taxes, insurance, and the investor's required return can all change the price that works.
Who this applies to
This calculation is most relevant to someone performing an initial screen for a purchase-renovate-resell project. It can help decide whether a property deserves deeper review before money is spent on inspections, bids, title work, financing, or valuation.
It is not enough for a homeowner deciding what a property is worth, a rental investor evaluating cash flow, or a buyer choosing a final offer. Those decisions require different facts and a fuller analysis.
Inputs and definitions
- After-repair value (ARV)
- An estimate of what the property could sell for after the planned work is complete. It should be based on relevant comparable sales and explicit assumptions—not the highest nearby asking price.
- Estimated repairs
- A line-item estimate for the defined scope of work, including labor, materials, permits when applicable, and a documented contingency.
- 70% factor
- A chosen screening assumption intended to leave room between resale value and the purchase-plus-repair budget. It does not establish how much room a specific project needs.
- Screening price
- The output of the formula. Some investors call it a maximum allowable offer, but the formula alone cannot establish a safe final offer.
Comparable sales should be selected for similarity and then analyzed for meaningful differences. Fannie Mae's appraisal guidance describes factors appraisers consider when selecting and adjusting comparable sales; it is useful context, but it does not validate an investor's ARV or the 70% factor. See Fannie Mae: Comparable Sales.
Step-by-step process
- Define the project. Write down the planned exit, renovation scope, target completion date, and facts still unknown.
- Estimate ARV. Review relevant closed sales, document adjustments, and use a range when the evidence is uncertain.
- Build a repair estimate. Use line items and qualified trades where the condition or scope requires them.
- Run the screen. Apply the formula with the chosen ARV and repair estimate.
- Test the assumptions. Recalculate with a lower resale value, higher repairs, and a longer timeline.
- Complete full due diligence. Verify title, condition, financing, insurance, taxes, permits, transaction costs, resale assumptions, and local requirements before acting.
Worked example with assumptions
This hypothetical example illustrates the arithmetic; it is not a market forecast or a recommended offer.
Assumed ARV: $300,000
Assumed repair budget: $40,000
Calculation: ($300,000 × 0.70) − $40,000 = $170,000
Screening result: $170,000
If the ARV assumption falls to $285,000 while repairs remain $40,000, the screening result becomes $159,500. If repairs instead rise to $55,000 while ARV remains $300,000, it becomes $155,000. The output changes directly with the assumptions, which is why sensitivity testing matters.
Costs, risks, and common mistakes
- Treating ARV as certain. A future resale price is an estimate, not a known outcome.
- Using mismatched comparables. Location, condition, size, features, sale date, and transaction terms can make a nearby sale less useful.
- Using a rough repair allowance. Hidden conditions, code requirements, scope changes, and delays can move the budget.
- Calling the 30% spread profit. The spread may also need to cover financing, holding, sale, transaction, and contingency costs.
- Skipping the exit analysis. A project can pass this screen and still fail the investor's financing, rental, resale, or return requirements.
Rules or facts to verify now
Before relying on the screen, verify the property's condition, title, comparable sales, planned scope, contractor availability, financing terms, insurance, taxes, permits, transaction costs, and realistic timeline. Use current documents and professionals qualified for the property and jurisdiction.
An appraisal is an independent opinion of a home's value prepared by a licensed or certified appraiser. The Consumer Financial Protection Bureau explains the role of an appraisal in mortgage lending at What is an appraisal? A formula-generated screen is not a substitute.
Primary sources
- Fannie Mae Selling Guide: Comparable Sales — selection, similarity, adjustments, and analysis of comparable sales.
- Consumer Financial Protection Bureau: What is an appraisal? — the role of an independent appraisal in mortgage lending.
How we prepared this guide: We reviewed the primary sources linked above and separated the investor heuristic from appraisal and final underwriting. This content is educational and does not replace advice from a qualified professional who understands your facts and jurisdiction.
Frequently asked questions
Is the 70% rule a law?
No. It is an investor screening heuristic. It does not set market value, require a particular offer, or replace due diligence.
What does the remaining 30% cover?
The formula does not assign the spread to specific costs. Depending on the project, it may need to absorb financing, holding, transaction, resale, contingency, and return requirements.
How accurate is the result?
It is only as reliable as the ARV and repair assumptions, and it omits many project-specific costs. Use it as a screen, then complete a full analysis.
Can someone use a different percentage?
Yes. The factor is an assumption. A person evaluating a project should choose assumptions from current costs, risks, timeline, financing, and required return rather than treating 70% as universal.
REITs versus direct property investment
A publicly traded, private, or non-traded real estate investment trust is not the same as owning a Houston property directly. Compare liquidity, fees, leverage, distributions, sector and geographic concentration, valuation, sponsor conflicts, redemption limits, tax treatment, and public filings. The 70% renovation rule is an acquisition-screening shortcut and should not be used to value REIT shares.