Fix & Flip Analysis: How to Underwrite a Flip
5 min read · Updated
The short answer
Underwriting a flip means solving for the maximum price you can pay and still hit your target profit. Start from a defensible after-repair value, subtract the repair budget, subtract every transaction and holding cost, then subtract the profit you require. What remains is your maximum offer. The 70% rule is a screening shortcut, not the analysis.
Key takeaways
- The after-repair value is the single largest input and the one most often wrong. Anchor it to closed comparable sales, not listings.
- The 70% rule is a first-pass filter. It bakes in assumptions about cost and profit that may not match your market.
- Holding costs scale with time, and timelines slip. Underwrite the schedule you will actually achieve, not the one you hope for.
- Selling costs routinely total 7%-9% of the sale price once commission, concessions and transfer taxes are counted.
- Run the deal at a lower ARV and a longer timeline before you commit. If it only works at the optimistic case, it does not work.
Start with the exit, not the entry
A flip is a manufacturing operation with one customer and one sale. Everything depends on what the finished product sells for, so the after-repair value is where the analysis starts and where most of the risk lives.
A defensible ARV comes from closed sales, not active listings. Listings tell you what sellers hope for; closed sales tell you what buyers paid. Look for properties that sold within the last three to six months, in the same submarket, of similar size, age and configuration, and ideally finished to a similar standard to what you intend to deliver.
Be honest about what your finish level will actually support. A renovation that is better than every comparable sale does not automatically sell above them - a neighbourhood has a ceiling, and exceeding it is one of the most reliable ways to lose money on an otherwise sound purchase.
The maximum allowable offer
Work backwards from the sale to the purchase. Each step subtracts a cost you will certainly incur.
- Establish the after-repair valueUse closed comparable sales in the same submarket, adjusted for size, condition and configuration. This is the price you expect to achieve, not the price you would like.
- Subtract selling costsAgent commission, seller-paid closing costs, transfer taxes and likely buyer concessions. Budget 7%-9% of the sale price in most markets unless you have specific reason to use a different figure.
- Subtract the repair budgetBuild this from a scope of work priced by contractors, not from a per-square-foot rule of thumb. Add a contingency of at least 10%-20% for what the walls hide.
- Subtract holding costsFinancing interest and points, property taxes, insurance, utilities, and any HOA dues, multiplied by the number of months you will realistically own it - including the marketing and closing period at the end.
- Subtract purchase costsClosing costs on the way in, title work, inspection and any lender fees on acquisition.
- Subtract your required profitDecide this before you fall in love with the property. Whatever remains after all six subtractions is your maximum allowable offer.
Costs people leave out
| Cost | Why it gets missed | How to handle it |
|---|---|---|
| Holding period overrun | Schedules slip; permits and inspections take longer than planned | Underwrite a longer timeline than your contractor promises |
| Buyer concessions | Not visible in the list price of comparable sales | Include an allowance in selling costs |
| Loan points and draw fees | Quoted separately from the interest rate | Add to financing cost, not to closing costs |
| Utilities during renovation | Small monthly, meaningful over six months | Include in monthly holding cost |
| Second round of transfer tax | Paid on the way in and again on the way out in some jurisdictions | Check local rules before offering |
| Scope creep | Discovered conditions and mid-project upgrades | Contingency, and a written change-order process |
What the 70% rule is actually for
The familiar shorthand says to pay no more than 70% of ARV minus repairs. It is a screening tool - a way to reject obviously bad deals quickly without building a full model for each one.
It is not the analysis. That 30% spread is a bundled assumption covering selling costs, holding costs, financing and profit all at once. Where holding costs are low and the turnaround is fast, it may be conservative. Where the renovation is long, financing is expensive, or transaction costs are high, it can be dangerously optimistic.
Use it to sort a list. Use the full calculation to make an offer.
Stress-test before you commit
Every flip model is a set of guesses. The question is not whether the guesses are exactly right - they will not be - but whether the deal survives them being wrong in the ordinary ways.
- Cut the ARV by 5%-10% and see whether the deal still clears your profit threshold.
- Extend the timeline by two or three months and recalculate holding costs.
- Increase the repair budget by 20% and check the result.
- Ask what happens if it does not sell: can you carry it, refinance it, or rent it at a payment the market supports?
- If the deal only works in the optimistic case, that is the answer.
Frequently asked questions
- What is the 70% rule in house flipping?
- The 70% rule suggests paying no more than 70% of a property’s after-repair value minus the estimated repair cost. It is a quick screening filter rather than a complete analysis: the 30% margin is a bundled allowance for selling costs, holding costs, financing and profit, and whether that allowance is adequate depends entirely on the market and the project.
- How do you calculate after-repair value?
- Take closed sales of comparable properties in the same submarket from roughly the last three to six months, matched as closely as possible on size, age, configuration and finish level, and adjust for meaningful differences. Use sold prices rather than asking prices, and use at least three comparables.
- How much should you budget for unexpected repairs on a flip?
- A contingency of 10%-20% above the priced scope of work is common, weighted toward the higher end for older properties, anything involving structural or systems work, and any project where you could not fully inspect before purchase.
- What are holding costs on a flip?
- Holding costs are the recurring expenses of owning the property during the project: loan interest and points, property taxes, insurance, utilities and any HOA dues. They accumulate monthly, so they scale directly with how long the renovation and sale actually take.
- Can you use owner financing to buy a fix and flip?
- Sometimes. Seller financing can suit properties in condition a conventional lender will not fund, and it can close quickly. The terms matter more than usual for a flip: confirm there is no prepayment penalty, since the plan is to repay in months rather than years, and confirm the note permits the renovation work you intend.
