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Methodology · Fix-and-Flip

Fix-and-flip methodology

Reviewed by · Last reviewed .

How we model fix-and-flip economics on the Fix-and-Flip ROI Calculator: the math that separates a defensible flip underwrite from the kind of YouTube spreadsheet that omits half the costs.

Net profit composition

Net Profit = ARV
              − Purchase Price
              − Acquisition Closing Costs (~2–3% of purchase)
              − Rehab Cost (with contingency)
              − Holding Costs (taxes + insurance + utilities + interest)
              − Sale-side Closing Costs (~7–9% of ARV)

Operator-grade target: 12–18% net-profit-to-ARV ratio, 25–40% ROI on cash invested, on a 4–6 month timeline. Below 20% ROI on a flip is generally not worth the active execution risk vs passive rental returns; above 50% usually means an underwriting input is too optimistic.

ARV derivation

After-Repair Value is estimated by 3–5 closed comparable sales within 0.25–0.5 miles, in the last 3–6 months, similar finishes / square footage / bed-bath count. Adjust for differences (lot size, garage, condition). The single biggest error in fix-and-flip math is over-stating ARV by 5–10%; that error compounds because ARV is the top line of the entire deal.

Validation: pull the comp set against an appraiser-grade standard, not a Zillow Zestimate. Fannie Mae Selling Guide §B4-1 (appraisal requirements) defines the framework most lenders use, and most cash buyers underwrite to a similar standard.

Hard-money cost structure

Hard-money loan all-in cost has three components:

  1. Interest: 9–14% APR depending on lender, LTC, and borrower experience.
  2. Origination points: 1–4% of loan amount paid at closing — PERMANENT cost, not refundable on early payoff.
  3. Other fees: doc prep, processing, third-party reports — typically $1,000–$3,000.

Effective annualized cost on a 6-month deal can be 20–30% APR all-in once points are amortized over the actual hold period. When timeline slips, the points-as-cost stays fixed in dollars but the annualized rate drops — which sounds good but masks the actual dollars-out-of-profit hit. Always model the all-in dollar cost, not just the APR.

Holding costs by phase

  • Pre-close: property taxes (per-diem), insurance binder, due-diligence period costs.
  • Active rehab (1–6 months depending on scope): hard-money interest carry, taxes, vacant-property insurance, utilities, dumpster fees, security/monitoring.
  • Market time (1–3 months): all of the above continues. This is the line investors most often under-estimate.
  • Under contract (30–60 days): still carrying everything until close.

The 70% rule

Maximum Allowable Offer (MAO) = (ARV × 0.70) − Rehab Cost

The 30% buffer covers acquisition costs + holding costs + sale costs + profit. The rule breaks down at the extremes — too thin a buffer on low-ARV deals (where fixed costs eat too much) and too fat a buffer on high-ARV / luxury deals. Replace the rule with a deal-specific underwrite once you're past the screening stage.

Sale-side closing costs

Total sale-side cost typically 7–9% of ARV:

  • Listing-side agent commission: 2.5–3%
  • Buyer-side agent commission: 2.5–3% (post-2024 NAR settlement may shift in some markets, but most flips still pay both)
  • Transfer taxes: $0–4% of sale price (varies wildly by state and locality)
  • Title insurance + closing fees: $1,500–$4,000
  • Home warranty offered to buyer: $500–$1,000
  • Concessions / repair credits: variable, often 0.5–2% of price

Sources

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