How to analyze a fix and flip deal

What is a fix and flip?

A fix and flip is a short-term investment: you buy a property that needs work, renovate it and sell it, usually within a few months to a year. Your profit is the sale price minus everything you spent getting there. The purchase price is only the biggest of six cost groups, and most flips that lose money do so because one of the smaller groups was left out.

What costs go into a flip?

Pick a county in the calculator and the property tax and insurance estimates fill in from official Census and NAIC figures. Replace them with real quotes once you have them.

A worked example

Here is a cash purchase run through the FlipMetric engine with its default assumptions and a six-month project.

A $46,200 profit looks good, yet the verdict is Pass. The purchase price is about 9% above the $165,000 maximum offer, which leaves little room if the rehab runs over or the sale comes in low. The break-even sale price shows how much room you have: the property can sell for about $49,700 less than the ARV before you lose money.

How does financing change the numbers?

Run the same deal with a typical hard money loan (85% of the purchase and all of the rehab, 11% interest, 2 points and $1,500 in fees) and the picture shifts:

• Financing costs add $16,350, so net profit falls to $29,850.
• Your own cash in the deal drops from $232,800 to $51,150.
• Return on that cash rises to 58.4%, because you put in far less of it.

Leverage raises your return on cash and lowers your profit in dollars. Both numbers matter: the return tells you how hard your money worked, and the dollar profit tells you whether the deal covers your time and risk.

How do you set a maximum offer?

The most common starting point is the 70% rule: maximum offer = ARV × 70% − rehab. At $300,000 ARV and $45,000 of rehab, that is $165,000. It is a screen, not a law. In expensive markets or with cheap financing some investors use a higher percentage, and in slow markets a lower one. Whatever percentage you use, confirm it against the full cost stack above. See the MAO calculator to try your own percentage.

How does FlipMetric decide Buy, Negotiate or Pass?

• Buy: estimated profit meets your target (default $30,000) and the price is at or below your maximum offer.
• Negotiate: the deal makes money but falls short of your target, or the price is up to 5% above your maximum offer.
• Pass: the deal loses money, or the price is more than 5% above your maximum offer.

You can change the profit target and MAO percentage, so the verdict follows your own rules.

What are the most common flip mistakes?

1. Using an ARV that comps don't support. Base ARV on closed sales of renovated homes nearby, not listings. See ARV and deal analysis.
2. No rehab contingency. Hidden damage is common in older houses. Many investors add 10% to 20% on top of the scope.
3. Underestimating time. Every extra month adds tax, insurance, utilities and interest.
4. Forgetting selling costs. Commission and closing costs on a $300,000 sale were $21,000 in the example.
5. Optimizing the offer alone. A low price doesn't help if the rehab or timeline is wrong.

What should you check before you make an offer?

• Closed comps for the finished house, within a tight distance and date range
• A written rehab scope with a contingency
• Property tax after the sale, since a purchase can trigger a reassessment
• Insurance quotes for a vacant property under renovation
• Permit timelines in that city or county
• Your exit: who buys this house, at what price, and how quickly

Run your own numbers in the house flipping calculator, or use the fix and flip calculator if you're borrowing from a hard money lender.