**Lesson 1: House Flipping Formulas**

**Lesson 1: House Flipping Formulas**

**House Flipping Formulas**

One of the most important things you should learn before you purchase your first house flip is how to analyze the maximum purchase price that you should offer for a property. In this lesson plan, we are going to learn the math behind analyzing the Maximum Purchase Price you should offer for a property.

- Maximum Purchase Price Formula (detailed analysis)
- 70% Rule Formula (quick analysis)

**Maximum Purchase Price Formula**

****The Maximum Purchase Price formula is 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.

A flipper finds a distressed property that the seller is asking $85,000 in a neighborhood with $200,000 resale values. After performing a detailed analysis of all of the project costs the flipper calculates the following costs:

Repair Costs = $65,000

Buying Costs = $2,000

Holding Costs ($750 / month * 5 months) = $3,750

Selling Costs (8% of Sales Price) = $16,000

Financing Costs = $7,500

Desired Profit (15% of ARV) = $30,000

How much should the flipper offer using the MPP Formula?

**Answer:**

Maximum Purchase Price = After Repair Value - Repair Costs - Buying Costs - Holding Costs - Selling Costs - Financing Costs - Profit

Maximum Purchase Price = $200,000 - $65,000 - $2,000 - $3,750 - $16,000 - $7,500 - $30,000

Maximum Purchase Price = $200,000 - $94,250 - $30,000

Maximum Purchase Price = $75,750

In this scenario, the seller is asking for $85,000 which is $10,000 more than the recommended purchase price of MPP Formula.

**70% Rule Formula**

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.

A flipper finds a distressed property that a seller is asking $85,000 in a neighborhood with $200,000 resale values. Based upon their estimates they feel the property needs $65,000 in repairs.

What should the flipper offer based upon the 70% Rule?

**Answer:**

Maximum Purchase Price = (After Repair Value * 70%) - Repair Costs

Maximum Purchase Price = ($200,000 * 70%) - $65,000

Maximum Purchase Price = $140,000 - $65,000

Maximum Purchase Price = $75,000

In this scenario, the seller is asking for $85,000 which is $10,000 more than the recommended purchase price of the 70% Rule

Can you offer more or less than the 70% Rule?

**Yes!**It's important to remember that the 70% Rule is just a rule of thumb to help you quickly gauge whether a property is a good deal or not.

In today's hot and competitive market and especially on the East and West Coasts, the 70% Rule can be very difficult to achieve. In order to get deals, many investors are offering more aggressively at 75 to 80% of the After Repair Value

The 70% Rule will vary from investor-to-investor, so it's important for you to figure out

**YOUR OWN PERSONAL %**that you will use for acquiring your deals.

**Calculating Your Own Rule**

When you are first starting to analyze deals you should use the more detailed Maximum Purchase Price approach to calculate all of the project costs on your projects. Calculating all of the projects will require you to calculate all of the the Buying, Holding, Selling & Financing Costs on your projects and help you determine an accurate % that you can use for your '70% Rule'.

To calculate your own % you can use the following formula:

**Purchase Percentage**= 1 - ((Buying Costs + Holding Costs + Selling Costs + Financing Costs + Profit) / After Repair Value)

Let's use the Detailed Maximum Purchase Price Example above:

A flipper finds a distressed property that the seller is asking $85,000 in a neighborhood with $200,000 resale values. After performing a detailed analysis of all of the project costs the flipper calculates the following costs:

Repair Costs = $65,000

Buying Costs = $2,000

Holding Costs = $3,750

Selling Costs = $16,000

Financing Costs = $7,500

Desired Profit = $30,000

What is the flippers purchase % of the ARV?

**Answer:**

Purchase Percentage = 1 - ((Buying Costs + Holding Costs + Selling Costs + Financing Costs + Profit) / After Repair Value)

Purchase % = 1 - (($2,000 - $3,750 - $16,000 - $7,500 - $30,000) / $200,000)

Purchase % = 1 - ($59,250 / $200,000)

Purchase % = 1 - .29625

Purchase % = 70.375%

In this scenario, our purchase % is right at 70% of the After Repair Value.

__Tools to Calculate the MPP__

__Tools to Calculate the MPP__

**Notepad/Used Napkin**- If you are the old fashioned pen-and-paper type, a pen and notepad or a used napkin will work just fine...**Good 'ole Trusty Calculator**- Listen, there's no crazy calculus involved in calculating your purchase price, so you don't need a fancy 'Scientific Calculator'....you should be able to use any ordinary calculator or phone app to calculate the MPP.**Spreadsheets**- Building your own analysis spreadsheet can help you get a better understanding of the numbers & costs that go into analyzing a deal, but check your formulas twice!**House Flipping Software (shameless plug alert)**- Or of course you can use our Flipper Force software which is pre-built with a step-by-step process for analyzing all of the project costs you need to determine the MPP.

Sign-Up for a Free Software Trial to Analyze Deals for Free