The 70% rule is a quick way to ask one question: is this house cheap enough to flip? We use it as a first screen. A full budget still has to prove the deal.
The rule is popular because the math is short. That is also its weakness. A short formula cannot see a bad roof, a slow city permit, or a buyer who takes two months to close. In Orange County, prices are high on the way in and on the way out. The same formula that works as a screen can leave too little room once real costs are written down.
What the 70% rule actually says
The rule says this: pay no more than 70% of the after-repair value, then subtract the repairs.
After-repair value, or ARV, is the price you believe the house will sell for once the work is done. It should come from recent sold comps of similar homes in renovated condition. A list price is an asking number. A website estimate is a starting hint. Neither one is your ARV until sold comps support it.
Our market analysis guide for house flipping walks through how to build that number from comps. The profitability metrics guide covers what to measure after the screen, including margin and return.
Here is the formula in one line:
Maximum allowable offer = (ARV × 0.70) − repairs
People call that offer the MAO. If the seller wants more than the MAO, the house fails this screen. You can still study it. You should not talk yourself into it by rounding the ARV up.
The 30% you did not pay is the cushion. It has to hold purchase costs, holding costs, selling costs, surprises, and profit. The rule does not name those lines. You do.
A labeled Orange County example
These figures are round numbers so the arithmetic is easy to follow. They are an illustration. They are not a listing, a median price, or a forecast. Check current sold comps before you use any price on a real offer.
Say a renovated house in a mid-county neighborhood would sell for $1,000,000. That is the ARV for this example.
- 70% of $1,000,000 is $700,000.
- The repair bid is $150,000.
- MAO = $700,000 − $150,000 = $550,000.
If you buy at $550,000 and spend $150,000 on repairs, you have $700,000 in the house before loans, taxes, insurance, utilities, and selling costs. Sell at the $1,000,000 ARV and $300,000 is left. That $300,000 is the entire 30% cushion.
Now give the cushion a job:
- Buy-side escrow, title, and inspections.
- Loan fees and interest for every month you hold the house.
- Property taxes, insurance, utilities, and any HOA dues.
- Selling costs: a negotiated commission, buyer credits, staging, and the sell-side escrow.
- A repair miss. Older homes often hide more work than the first walk-through shows.
- Profit you are actually willing to work for.
On a million-dollar sale, selling costs alone can take a serious piece of that $300,000. We will not invent a commission rate here. Commissions are negotiated, and buyer credits change with the market. Price those lines with current local quotes. If the lines add up to more than $300,000, this example fails even though it passed the 70% screen.
If the seller wants $650,000, the house misses the MAO of $550,000. It can still look “cheap” next to a $1,000,000 finished price. The rule is there to stop that feeling from writing the offer.
If the inspector adds $40,000 of work, run it again. Repairs of $190,000 drop the MAO to $510,000. Do not plan to “make it up” on the resale. That usually means you raised the ARV to protect a number you already like.
What the cushion has to survive in this county
Orange County purchase prices are large. Holding costs scale with them. California’s basic property tax is 1% of assessed value, and voter-approved local charges can add more. Read the tax bill for that parcel. On a high price, even a few months of taxes, insurance, and loan interest are a budget line, not a rounding error.
A light cosmetic job might move fast. A kitchen, a bath, and a roof, with permits, might not. Every extra month spends part of the cushion. The 70% rule has no box for “the contractor slipped six weeks.” Your holding-cost line does.
Selling is the other leak. What a traditional Orange County sale can cost is worth reading before you assume the resale is “just the commission.” Credits, prep, and a buyer who asks for repairs after inspection all come out of the same 30%.
When we change the percentage
Some investors plug in 65%, or another number, when interest, taxes, and selling costs are high. That can be sensible. It is still a screen.
We do not treat any percentage as a local law. Pick it only after you have priced the real lines on that house. If the full budget still shows a profit you can live with, and a miss you can pay for, the deal is worth a harder look. If the budget only works when every line comes in perfect, pass.
The other calculations we want on the same page are the ones in three calculations every Orange County investor should know: what cash you put in, what you get back, and how hard that cash has to work. A pretty MAO can still be a weak return if you borrowed most of the money and the fees ate the spread.
How to use the rule on the next offer
- Set the ARV from renovated sold comps, close in size, age, and location. Throw out the outlier that sold in a bidding war unless you can explain it.
- Get a repair number you trust. A contractor bid beats a guess from the sidewalk. Add a contingency for what you cannot see.
- Run the 70% formula. Write down the MAO.
- Build the real budget beside it: buy costs, holding costs, selling costs, and the profit you want.
- If the seller’s price is above the MAO, or the cushion is thinner than the budget, do not raise the ARV to force a yes.
If you want a second set of eyes on a deal, start at our investors page. Bring the comps and the repair list. The rule is a screen. The conversation is about whether the budget survives contact with the house.
Nothing on this page is a promise of profit. A formula cannot guarantee a buyer, a bid, or a sale price.
Frequently asked questions
What is the 70% rule in real estate investing?
It is a screening formula for a flip. Multiply the after-repair value by 70%, then subtract the cost of repairs. The result is the most you would pay under that rule. It is a rule of thumb. It is not a lender requirement, a law, or a promise that the project will make money.
Does the 70% rule still work in Orange County?
It still works as a first no. It is a weak yes. High prices mean the 30% cushion can disappear into taxes, interest, and selling costs. Use the formula to throw out deals that are too expensive. Then build a full budget before you write an offer. The Orange County figures above are an illustration, not current market data.
What if every house I see fails the rule?
That is useful information. It means sellers, at today’s asking prices, are not leaving the spread this screen wants. You can look for a better buy, lower the work, change the exit, or wait. You should not “fix” the formula by inflating the ARV.
