Kory Habiger On Understanding the 70% Rule in House Flipping: When to Follow and When to Bend It

House flipping is an enticing investment strategy that has gained traction over the years, thanks to its potential for substantial returns. Whether you're a seasoned investor or a first-time flipper, the "70% Rule" is a commonly cited guideline that serves as a benchmark for making profitable property purchases. But like any rule in real estate investing, there are situations where strict adherence may not always be necessary—or even advisable.

Kory Habiger breaks down what the 70% Rule is, why it’s used, and when it makes sense to bend or deviate from it based on market conditions and unique property factors.

What Is the 70% Rule?

The 70% Rule is a formula that helps house flippers determine the maximum price they should pay for a property to ensure profitability. Kory Habiger explains that the calculation is simple:

Maximum Purchase Price=(After Repair Value×70%)−Repair Costs\text{Maximum Purchase Price} = (\text{After Repair Value} \times 70\%) - \text{Repair Costs}

After Repair Value (ARV): The estimated market value of the home after renovations are completed.
70% Factor: Represents a buffer to cover acquisition costs, repair expenses, carrying costs, and profit.
Repair Costs: The estimated total cost of bringing the property up to its ARV.

For example, if a home's ARV is $200,000 and it requires $40,000 in repairs, the maximum purchase price should be:

(200,000×0.7)−40,000=140,000−40,000=100,000(200,000 \times 0.7) - 40,000 = 140,000 - 40,000 = 100,000

Kory Habiger explains that this means an investor should not pay more than $100,000 for the property to leave enough room for profit.

Why Is the 70% Rule Important?

The 70% Rule is a safeguard against common financial pitfalls in house flipping. Here’s why investors rely on it:

Ensures Profitability: By keeping acquisition costs low, investors can secure a comfortable margin even if unforeseen expenses arise.
Minimizes Risk: The real estate market is unpredictable, and this rule helps investors hedge against fluctuations.
Prevents Overpaying: Many new investors overestimate a property's profitability. The 70% Rule creates a disciplined approach to buying.
Accounts for Costs Beyond Repairs: Holding costs, agent commissions, closing fees, and unexpected issues can eat into profits, and the 70% Rule builds in a cushion.

When Should You Follow the 70% Rule?

The 70% Rule is particularly useful in the following scenarios:

In a Buyer’s Market: When inventory is high and competition among buyers is low, sticking to the rule ensures that you’re getting the best possible deal.
For High-Risk Projects: If a property requires extensive repairs or has uncertain resale potential, maintaining a strict 70% purchase cap mitigates risk.
When You Have Limited Experience: New investors benefit from following conservative guidelines, as they may underestimate renovation costs or resale timelines.
If Traditional Financing Is Used: Lenders and hard money financiers often use formulas similar to the 70% Rule to assess risk.

When to Bend or Adjust the 70% Rule

While the 70% Rule is a useful guide, there are situations where bending or modifying it can be beneficial. Kory Habiger shares some exceptions:

1. Hot Seller’s Markets

In markets where housing demand exceeds supply, properties often sell above asking price. In such cases, adhering strictly to 70% may cause investors to miss out on opportunities. Some investors adjust to 75-80% of ARV in highly competitive areas where appreciation trends are strong.

2. Lower-Priced Homes with Smaller Margins

For properties with lower ARVs (e.g., homes under $100,000), a strict 70% guideline might not be necessary. If repairs are minor and turnaround time is short, stretching the purchase price slightly above 70% may still yield acceptable profits.

3. High-Value Luxury Homes

On the opposite end, for high-end flips where the ARV exceeds $500,000, investors often aim for 65% of ARV or lower because the stakes and carrying costs are significantly higher.

4. Strategic Buy-and-Hold Investments

If a property has long-term rental potential or is in an up-and-coming neighborhood, investors might pay more than 70% of ARV with the expectation of rising home values and rental income offsetting the initial margin squeeze.

5. Faster Turnaround and Low Repair Costs

If a property requires minimal repairs and can be quickly resold (often referred to as a "wholetail" flip), the investor may justify stretching to 75-80% of ARV since holding costs and rehab risks are lower.

How to Evaluate Whether to Stick to or Adjust the Rule

Rather than blindly following or abandoning the 70% Rule, smart investors analyze market data and property-specific factors before making a decision. Kory Habiger provides key considerations:

Local Market Conditions: Check comparable home sales (comps) and recent trends in appreciation and demand.
Rehab Complexity: Are repairs straightforward (cosmetic fixes) or extensive (structural, foundation, electrical)?
Financing Terms: If using cash, investors may justify slightly higher purchase prices since they avoid interest costs.
Exit Strategy Options: If flipping isn't feasible, can the property be rented profitably?

A Guide, Not a Hard Rule

The 70% Rule remains a valuable rule of thumb for real estate investors, particularly beginners looking to minimize risk. However, savvy investors understand when and how to adjust it based on specific circumstances. The key to successful house flipping is not just following a formula, but combining it with market research, financial prudence, and strategic flexibility. Kory Habiger emphasizes that by analyzing deals beyond a strict percentage and considering market conditions, investors can position themselves for more opportunities and greater long-term success.