The 70% Rule: How Flippers determine their purchase price
Receiving low offers on your property from investors and confused by how they came up with their number? No matter if they are flippers or buy and hold, investors will determine their Maximum Purchase Price (or BPO for Best Possible Offer) and then try to negotiate a sales price lower than that.
Flippers are investors who buy a house in need of work, fix it up, then sell it for a higher price. Below is the 70% formula that most flippers will use.
(Future Sales Price * 70%) - Cost of Repairs = Maximum Purchase Price
Future Sales Price: This is the price that the investor believes they will sell the house for after they renovate it. Typically, investors are looking to sell at the top of the market or even pushing the market to sell slightly higher than other comps.
70%: Why do they use 70%? That is because the 30% is the profit margin the investor is looking for. This 30% will usually cover any closing expenses they will incur when they sell (like the Realtor commissions).
*For higher priced homes or during strong seller markets (like now) when deals are difficult to come by, they might reduce that number from 30% down to 25% or 20%.
Cost of Repairs: This number represents the cost to renovate the house. This number will vary among investors. Before you sell your property to an investor, I strongly suggest you have an idea of how much work needs to be done and how much that will cost. Investors will throw lots of inflated numbers and worst case scenarios (pain points) your way to increase their profit margin. You want to be armed with information so you can skillfully negotiate a deal that keeps as much money as possible with your family.