Applying the 70% rule to a specific market

[Louis Van Der Westhuizen]

Hello BP 

I'm new to REI and curious about the application of the 70% Rule. From what I've read, the model cannot be applied universally to all situations, markets or exit strategies. So what circumstances should I consider when using the rule? Is it more suitable to sellers market, expensive markets, certain price points! Using LA vs Memphis for example, which market would be closer to the 70% rule?

[Michael Ealy]

The 70% rule applies for ARV (After Repair Values) between $70K to $200K. It also works well in a normal market - not too hot or not too cold, say with 90 days DOM.

Why? You have to understand the basis of the 70% rule. Here it is:

20% for profit

10% for sales costs like holding cost (2-3%), real estate commissions (5-6%) and closing costs (1-2%)

total: 30%

Deduct from 100% and viola - there's the basis of your 70% rule.

For houses below $70K, your expenses like closing costs specially in expensive states like IL, can eat up a higher percentage of the ARV/ sales price. Also, your profit will likely be higher than 20%.

For houses above $200K, some flippers are OK with less than 20% profit - say $30K profit which is 15% and also, the percentage of your closing costs will be less.

The holding costs is generally about 1% of the sales price per month. So, for hot markets where you have less than 30 DOM, 70% rule is too conservative. For slow markets, 70% rule is too aggressive.

As always, you got to do the numbers and not just rely on these rules.