Applying the 70% rule to ARVs

[Brian Price]

How do I determine what percentage (65, 70, 75 or 80) to apply to the 70% rule when figuring out offer amounts? 

[Jeff S.]

The formula @Jaysen Medhurst provided above is completely correct, @Brian Price. The 70% rule of thumb is not arbitrary. It's based on the anticipated expenses with a flip. If you run the math and calculate these, you see that for properties with an ARV less than about $250k, you'll earn a profit of roughly 10 to 12% of the ARV.

For properties with an ARV greater than about $250k you can use 75% and still earn the same 10 to 12% of the ARV. The reason for this is that the fixed or semi-fixed expenses have proportionally less impact on higher value homes than lower value. For example, the cost of property insurance doesn't double if you double the ARV of the home.

This rule of thumb is good for quick screening and it works, but it should never be relied upon. Once you identify a property, you should always run the numbers in detail. 

Good luck, Brian.