What's the maximum I should pay for a house flip? - Question on Quora.com
There are 2 essential formulas you need to calculate the Maximum Purchase Price that you should offer for a rehab property:
- 70% Rule Formula (quick analysis)
- Maximum Purchase Price Formula (detailed analysis)
70% Rule Formula
The 70% Rule is a formula you should use to initially quickly analyze a deal to make a “go/no-go decision’ to perform more due diligence on the property.
Over the years, flippers developed a quick rule of thumb called the 70% Rule to help them quickly and roughly analyze the Maximum Purchase Price they should offer for a property.
The 70% Rule states that you should buy a property at 70% of the After Repair Value minus the repair costs.
The 30% reduction theoretically accounts for all of the project's Fixed Costs (Buying Costs, Holding Costs, Selling Costs & Financing Costs) and your desired profit.
Generally speaking, the 30% reduction is broken down as roughly 15% for Fixed Costs & 15% for profit.
Purchase Price = (After Repair Value * 70%) - Repair Costs
Note: The 70% will vary from investor-to-investor and market-to-market. An investor in California may need to buy at 80% of ARV, where an investor in KC may need to buy at 65%. You need to figure out what % of ARV works for you and your market.
Once you determine if the property is a “go”, then you will want to perform a more detailed analysis of the numbers using the Maximum Purchase Price formula.
Maximum Purchase Price Formula
The Maximum Purchase Price formula is a detailed analysis used to calculate the Maximum Purchase Price you should offer for a property. The formula uses a detailed analysis of all of the project costs including your Repair Costs, Buying Costs, Holding Costs, Selling Costs, & Financing Costs.
The Maximum Purchase Price formula is the most accurate calculation because it requires you to think about, consider & calculate every single project cost on the project.
Maximum Purchase Price = After Repair Value - Repair Costs - Buying Costs - Holding Costs - Selling Costs - Financing Costs - Desired Profit
Learn more about House Flipping Formulas