70% Rule-Please explain?
I understand the math to the 70% rule in house flipping. (Conservative Market value after repairs X.70 - repairs). What I don't understand is where this 30% magically disappears to. I know that there will be closing costs, some utilities during flip, some interest during flip depending on financing, and some closing costs-but does that really come close to 30%? My brother and I are currently rehabbing a house and will likely flip it vs hold it. Here is our situation:
ARV $110,000
Purchase Price ($58,000)
Projected Repairs ($15,000)
Profit before soft $37,000
Our deal appears to be a home run before considering the soft costs. How is it possible that 30% of the ARV gets eaten up by these? Here is the 70% rule math and you see a completely different picture
ARV $110,000
70% $77,000
Repairs (15,000)
Max Price $62,000 (we paid 58k)
In short I am having a hard time seeing us paying more than $8,000 in soft costs, yet this 70% guideline builds in $33,000 of soft cost (30%xARC). Why am I so far off? What am I missing?