The 70 percent rule, and when to ignore it in Columbus

The rule

Pay no more than 70 percent of the after repair value, minus the cost of repairs. On a house with a 200,000 ARV needing 40,000 of work, the maximum purchase price is 100,000. The 30 percent gap is meant to cover your buying costs, holding costs, selling costs, and profit.

What the 30 percent actually covers

Selling costs in Columbus run six to eight percent of the sale price once you include commissions, title, and the concessions buyers ask for. Holding costs on a six month flip, including hard money interest, taxes, insurance, and utilities, typically run five to eight percent of the purchase price. Buying costs are one to two percent. That leaves roughly 12 to 18 percent of ARV as profit if everything goes to plan. Repairs rarely go to plan, which is why the rule is conservative.

Where it breaks in Columbus

On cheap houses the rule gets too tight. A 120,000 ARV house needing 45,000 of work gives a maximum price of 39,000, and there are almost no houses in that condition selling that cheaply inside the outerbelt. Experienced buyers in the Hilltop and Linden work closer to 75 or 80 percent because the dollar profit still works and the holding costs are small.

On expensive houses the rule gets too loose. A 400,000 ARV house in Hilliard or Pickerington leaves a 120,000 gap, which is more cushion than the deal needs. Buyers there often work at 75 to 80 percent and still clear a good profit because the fixed costs are a smaller share.

The rule also ignores time. A house that sells in a week in Grove City carries less holding cost than one that sits for three months on the far South Side. Use the calculator on each property page and put in your own months.

How we price against it

Most of our deals price below the 70 percent line, and the calculator on every property page shows the 70 percent maximum next to our price so you can see the gap. When a deal prices above the line we say why, usually because it is a light cosmetic job at a higher price point, and we let you decide.

Written by Solomon Sparks, Closing Columbus. General information for investors, not legal or financial advice. Talk to an Ohio attorney or your lender about your own situation.