Before you ever talk financing or contractors, a flip lives or dies on one calculation: what you can pay for a property and still walk away with a profit after rehab and selling costs. That calculation is often called the fix-and-flip formula, and while investors phrase it differently, it comes down to the same core relationship between after-repair value, rehab cost, and purchase price.
The Core Formula
The most common version investors use is the "70% rule":
Maximum Allowable Offer (MAO) = (After-Repair Value × 70%) − Estimated Rehab Costs
The 70% is a rule of thumb, not a law of physics — it's meant to leave room for buying costs, holding costs, selling costs, financing costs, and profit, all in one number. Some investors use a tighter or looser percentage depending on the market, the deal size, and how they finance the purchase. Treat it as a starting filter, not a guarantee of profitability on any single deal.
The Three Inputs You Actually Need to Get Right
1. After-Repair Value (ARV)
ARV is what the property will realistically sell for once renovated, based on comparable recent sales of similarly renovated homes nearby — not the asking price, not an appraisal on the current condition, and not a hopeful guess. Pull comps that are genuinely similar in size, condition, and location, and lean conservative rather than optimistic.
2. Rehab Cost
This needs to come from an actual scope of work, ideally with contractor input, not a rough per-square-foot guess. Underestimating rehab cost is the single most common reason the formula produces a deal that looks good on paper and loses money in reality.
3. Holding, Buying, and Selling Costs
These are easy to forget: loan interest or hard money points, insurance, utilities, property taxes during the hold, real estate commissions, closing costs on both ends, and any staging or marketing costs. The 70% cushion is meant to absorb these, but if your numbers are tight, itemize them separately rather than assuming the rule of thumb has you fully covered.
A Worked Example (Illustrative — Round Numbers)
This is a simplified, illustrative example using round numbers to show how the pieces connect — not a claim about any real property or market.
- ARV (comps-based estimate): $300,000
- 70% of ARV: $210,000
- Estimated rehab cost: $40,000
- Maximum Allowable Offer: $210,000 − $40,000 = $170,000
In this illustrative scenario, paying more than roughly $170,000 for the property would leave less margin for the buying, holding, and selling costs the 70% cushion is meant to cover — and less room for the rehab budget to run over, which it often does.
Where the Formula Breaks Down
- Inflated or stale comps. An ARV based on comps from a different submarket, an older sale, or a higher-end renovation than you plan will overstate what you can pay.
- Rehab scope creep. Hidden issues behind walls — old wiring, plumbing, structural surprises — routinely push real rehab cost above the initial estimate.
- Ignoring your actual financing cost. Hard money points and interest add up fast on a project that runs long; build your real holding-cost timeline into the math, not a best-case one.
- Using the 70% rule as a fixed law rather than a starting filter. In some markets or on some deal types, investors work with tighter or looser margins — the formula is a screening tool, not a substitute for a full itemized budget before you commit.
Frequently Asked Questions
Q: Is the 70% rule the same everywhere?
A: No — it's a common rule of thumb, but the right percentage depends on your market, financing costs, and risk tolerance. Use it to screen deals quickly, then verify with a full itemized budget before making an offer.
Q: What's the biggest input mistake investors make?
A: Underestimating rehab cost, usually from skipping a real contractor walkthrough and instead using a rough per-square-foot guess.
Q: Should I include my own labor in the rehab cost estimate?
A: If you're doing work yourself, it's still worth pricing it at what you'd pay a contractor, so the formula reflects the deal's real economics rather than hiding your labor as free.
Q: Does the formula account for taxes and selling commissions?
A: The 70% cushion is intended to leave room for these, but on tighter deals it's safer to itemize buying, holding, and selling costs separately rather than assume the rule of thumb has fully covered them.