Question about the 70% rule

[Brian Garrett]

So I know the "standard" way to calculate the 70% rule of thumb is to take the ARV x 0.70% and then subtract the rehab costs to come up with your MAO.

My question is why wouldn't you take the ARV and subtract the rehab costs from that and then multiply by 0.70% to get your MAO?

For example let's say the ARV on a property is $100k for arguments sake. Let's also assume that it requires $20k in rehab to reach the ARV of $100k.

The "standard" way would give you an MAO of $50k.

The "other" way would give you an MAO of $56k.

If a property is worth $100k AFTER it has had $20k in work done that essentially means the property is only worth $80k as it sits TODAY.  Why wouldn't you base the 70% off the $80k value?

I know it results in a higher number this way ($6k in the given example) but I'm just curious on the logic behind this and why it works out differently.  Hopefully someone can help clarify.  Thank you!