Purchase Price for Flips

[Cyrus Sidhwa]

The standard formula for max purchase price is 70% of ARV minus Repairs. However, this doesn't seem to account for closing costs or holding costs which can easily reach tens of thousands of dollars when using a HML. My initial thought is to make the formula: 70% of ARV minus (Repairs + Holding Costs + Closing Costs When Buying + Closing Costs When Selling). However, I imagine deals that meet that criteria are extremely rare.

I am wondering if the following makes sense, or if there are flaws and/or things I'm missing / not accounting for. Here's my formula: ARV minus (Minimum Acceptable Profit + Repairs + Holding Costs + Closing Costs When Buying + Closing Costs When Selling). Does anyone use anything like this?

I would appreciate any experienced flippers explaining how you build the additional costs into your max purchase price formula. Thank you!

[Michael Woodward]

@Cyrus Sidhwa , I think you're doing exactly the right thing by questioning the numbers. That shows that you understand the bottom line and you'll go into your project with your eyes open. Like Jacob said, the 70% rule is used as a benchmark for various purposes. Some investors use it to filter prospects, some private lenders use it as a threshold for their terms, etc but other than that, it's just an indicator.

When I analyse a project, I always work backward from the minimum profit I want to make....next is ARV.....from there, I calculate all other expenses (including closing costs on the purchase and sale) and work down to the bottom line.

I use a private lender that doesn't know or care about the 70% rule so I don't use the rule. Even though I don't need to use the rule, I have a calculation that tells me the percentage on every project I analyse . Interestingly, it seems to always be very close to 70% (68% to 72%). My guess is that history has shown that 70% is a good threshold.