A flip is a short project with a long list of bills, and almost all of them are known before you make an offer. That is the useful part. You can price a first flip on paper and find out whether it works before you risk anything.
Here is one deal from offer to sale, with every cost in it.
What does a first flip cost?
The example house lists at $150,000 and needs $45,000 of work. Comparable renovated houses nearby have sold around $275,000, so that is the resale price. The plan is six months from keys to closing, paid for with a short-term loan at 10 percent with 2 points, 15 percent down, rehab included in the loan.
| Amount | |
|---|---|
| Sale price | $275,000 |
| Purchase price | −$150,000 |
| Rehab budget | −$45,000 |
| Closing costs to buy (2%) | −$3,000 |
| Holding costs ($900 a month for 6 months) | −$5,400 |
| Loan points and interest | −$12,075 |
| Selling costs (8%) | −$22,000 |
| Net profit | $37,525 |
These are example figures, not a forecast for any market.
Four of those seven lines are not the house. Closing costs, holding costs, the loan and the sale come to $42,475 between them, more than the rehab. First-time flippers tend to budget carefully for the rehab and guess at the rest.
Where does your own cash go?
The loan covers the purchase and the rehab, so the $195,000 you spend on the house and the work is mostly borrowed. What you write checks for is smaller and more specific:
- Down payment, 15 percent of the price: $22,500
- Closing costs to buy: $3,000
- Loan points, 2 percent of the $172,500 borrowed: $3,450
- Interest over six months: $8,625
- Holding costs: $5,400
That is $42,975 of your own money, and it goes out before any of it comes back. The $37,525 profit is an 87.3 percent return on that cash, which is what draws people to flipping and also why a wrong number hurts so much. Borrowed money magnifies a loss the same way it magnifies a gain.
How do you set the offer?
Backwards, from the sale price. The 70% rule is the usual first pass: take 70 percent of the resale price and subtract the rehab budget.
On this house that is 70 percent of $275,000, or $192,500, minus the $45,000 rehab, giving a ceiling of $147,500. The calculator prints that as the 70% rule ceiling, and this deal is $2,500 over it.
That does not make the deal bad. The rule bundles every cost and your profit into one 30 percent slice, so it is deliberately blunt. It does mean the deal has no room to absorb a surprise, which is exactly what the next section shows. The 70% rule, worked through covers when the rule is too generous and when it is too tight.
The resale price is the number every other number hangs off, so it deserves more work than anything else in the deal. How to calculate ARV walks through picking sold comps rather than asking prices.
Which three numbers decide whether it works?
The resale price, the rehab budget and the months. Hold the rest of the deal steady and move one at a time:
| What changes | Net profit | |
|---|---|---|
| Sells for $290,000 instead of $275,000 | $51,325 | |
| Sells for $260,000 | $23,725 | |
| Sells for $250,000 | $14,525 | |
| Rehab runs 20% over, $54,000 | $27,895 | |
| Rehab runs to $60,000 | $21,475 | |
| Takes 9 months instead of 6 | $30,513 | |
| Takes 12 months | $23,500 |
A $25,000 miss on the resale price costs $23,000 of profit, almost dollar for dollar, because the sale price and the selling costs both move. A rehab $9,000 over budget costs $9,630, slightly more than the overrun, because you borrowed it. Each extra month costs about $2,340 in holding and interest.
Two of those three can happen at once, and they usually do: work that runs over also runs long. A flip that sells for $260,000 after nine months and a $54,000 rehab is not a disaster scenario, and it leaves $6,858.
What if the buyer uses an FHA loan?
The months matter for a reason beyond interest. FHA will not insure a loan on a house being resold too soon after the seller acquired it, and a first-time flipper selling a renovated starter home is selling into exactly the market where FHA buyers shop.
The clock runs from your purchase to the day your buyer signs the contract, not to closing, so a fast flip can hit it. What the FHA 90-day flip rule costs works through the timing.
What should you line up before making an offer?
Five things, and none of them are optional on a first deal:
- Sold comps for the resale price. Three renovated houses, same street pattern, sold in the last six months.
- A written scope of work with a contractor’s prices. Not a square-foot estimate. The table above is what a 20 percent overrun does.
- A lender quote with the points in it. Points and interest were $12,075 here, a third of the profit.
- A realistic month count. Permits, inspections and the listing period all belong in it. How long a flip takes has the pieces.
- The cash to carry it. $42,975 in this deal, plus whatever cushion covers a rehab that runs over.
Then put your own numbers into the fix and flip calculator and move the resale price down by 5 percent before you decide. If the deal still works there, it is an offer. If it only works at the price you hope for, it is a wish.