Rehab Analyzer - 70% Rule
There are a few different models and formulas that real estate investors and rehabbers use to evaluate deals and determine the maximum purchase price they should offer for the property.
The Maximum Purchase Price Formula
The Rehab Analyzer uses the most detailed and accurate method for calculating the maximum purchase price.
The rehab analyzer takes the estimated ARV and subtracts the total fixed costs, repair costs & rehab profit to determine the maximum purchase price.
The 70% Rule Formula
Another widely accepted method is the 70% Rule.
So What is the 70% Rule?
The 70% Rule is a formula commonly referred to by real estate investors and rehabbers that is used as a barometer to determine the maximum purchase price they should offer for a property.
Let’s first talk about the formula behind the 70% Rule, and then we’ll discuss how the Rehab Analyzer uses this formula as a barometer when analyzing your maximum purchase price.
The 70% Rule formula takes the Estimated After Repair Value & Multiplies it by 70% and then subtracts Estimated Repair Costs to determine the Maximum Purchase Price you should offer for a property.
Maximum Purchase Price = (After Repair Value * 70%) - Estimated Repairs
The logic behind the rule is that if you purchase a property at a 30% discount of ARV, there should be enough meat on the bone for roughly a 15% rehab profit and any fixed costs for buying, holding and selling the property.
So how does the Rehab Analyzer use the 70% Rule?
The Rehab Analyzer uses the 70% ticker as a barometer to check and see how your detailed analysis of the maximum purchase price stands against the 70% rule.
If your % is quite a bit higher than 70% it may mean you are being too aggressive with, and if it’s much lower than it may mean you are being too greedy.
70% Rule is more of a guideline than a hard-set rule...
But one thing to understand is, the 70% rule is not really a rule at all, it’s more of a guideline.
The 70% Rule is not a one size fits all model that can be applied to all situations, markets or exit strategies.
There are many factors that go into whether your investment properties will meet the 70% rule criteria and can vary widely depending on your project financing, your local market, your profit goals or your exit strategy.
For Example, An all cash buyer may be able to offer 80+% on a property because they won’t be paying any financing costs or fees which will allow them to make a more competitive offer.
A property in California may go for as high as 80 to 85% compared to a more affordable market like Kansas City, where a property could go for 70 to 75% of ARV.
The point is, The 70% rule is more of a guide line and not a hard and fast rule. The % of ARV you can pay, minus repairs, will vary greatly depending on your local markets and investment criteria.
The rehab analyzer still utilizes the most detailed and accurate method for calculating the maximum purchase price you should offer for a property.
If you perform a detailed analysis using the rehab analyzer your offers will be more competitive and in line your local market and investment criteria instead of trying to apply the 70% formula as a blanket rule.