How to Underwrite a Fix and Flip Deal

Underwriting a fix and flip means estimating seven things before you make an offer: what the property can realistically sell for after renovation (the after-repair value), what it costs to acquire, what the repairs will cost, how long the project will take, what the financing and carrying costs run while you hold it, what the sale itself costs, and the profit — and margin — left after all of it.

The central principle: a flip is not profitable because the purchase price looks cheap. It is profitable only if the realistic exit value exceeds the full cost of buying, renovating, carrying, financing and selling the property by enough to justify the risk. Every step in this guide exists to test that one sentence with numbers.

What Is Fix-and-Flip Underwriting?

Fix-and-flip underwriting is the analysis that decides whether buying a property, renovating it and reselling it will produce a profit worth the risk — and at what purchase price. It is a short-duration, value-add resale model, which makes it structurally different from the other ways the same house gets analyzed: a buy-and-hold is judged on rental cash flow year after year, a wholesale on the spread between a contract and what an end buyer will pay, and a stabilized-property underwrite on operating income that already exists. A flip has no operating income at all — its entire return is one event, the sale, and everything before that event is cost.

That structure dictates the analysis. Because the return is a single future sale, the exit assumption dominates; because every month before the sale costs money, time is an expense; and because the renovation is the value creation, the rehab budget is not a detail — it is half the deal.

The Fix-and-Flip Underwriting Equation

The whole model reduces to one subtraction:

Projected Profit = Net Sale Proceeds − Total Project Cost

Each side expands once:

Total Project Cost = Purchase Price + Acquisition Costs + Rehab + Contingency + Financing Costs + Holding Costs

Net Sale Proceeds = Sale Price − Selling Costs

One convention, used consistently through this article so nothing is counted twice: selling costs live on the proceeds side, never inside total project cost; loan interest lives in financing costs, and holding costs exclude it. Whatever convention you adopt, adopt it once — most spreadsheet errors in flip analysis are a cost counted twice or a cost counted never.

Step 1: Estimate the ARV

After-repair value (ARV) is the estimated market value of the property after the planned renovation is complete. It is an underwriting assumption built from comparable-sales analysis — not an appraisal, and not the price you would like to get. The same discipline that governs market and comparable analysis generally applies here at the scale of one house.

A defensible estimated ARV comes from recently sold comparables that genuinely match the finished product: similar size, bed and bath count, lot and micro-location, and — critically — a similar condition and level of renovation, sold recently enough to describe the current market, close enough to share the same buyers, with adjustments where a comp differs on something that matters. The comparison is against what your renovation will produce, not against the house as it sits today.

Why ARV Is the Most Dangerous Assumption

An optimistic ARV makes a bad flip look profitable, and it fails silently — the model runs, the numbers look fine, and the error only surfaces at the sale, when it is too late to unbuy the house. The recurring ways it goes wrong:

• Cherry-picking the single highest comp instead of the pattern of closed sales
• Using active listings as evidence of value — asking prices are hopes; closed sales are data. Listings are context for competition, not proof of price
• Ignoring renovation quality: a comp renovated to a higher spec than your budget supports is not your comp
• Ignoring micro-location — the same floor plan two streets over can be a different market
• Assuming appreciation during the project. Modeling market growth is a choice some investors make consciously; relying on it to make the deal pencil means the flip only works if the market bails you out, which is a speculation stacked on a renovation

Step 2: Determine the Acquisition Cost

Purchase price is not the full acquisition cost. Getting to the closing table may also include buyer closing costs, title and escrow charges, inspections, due-diligence costs, and transfer or recording charges where applicable. Individually small, they are real project dollars — and because they are paid on day one, they carry for the entire hold. The due diligence itself is also where the rehab budget gets its evidence, which makes it the cheapest insurance in the model.

Step 3: Build the Rehab Budget

A rehab budget is a list of specific line items, not one lump sum. Typical categories: demolition, structural work, roof, HVAC, electrical, plumbing, kitchen, bathrooms, flooring, paint, windows and doors, exterior, landscaping, permits, and contractor or general-conditions costs where applicable. A single unsupported number labeled “rehab” is not a budget — it is a wish with a dollar sign.

Scope before budget

The budget should follow a defined scope of work, not the other way around. Before pricing anything, decide what is being repaired versus replaced, what is cosmetic versus structural, and — the connection most flippers miss — what level of finish the ARV actually requires. The scope and the ARV are the same decision seen from two sides: a budget that finishes below the comps’ standard does not deliver the comps’ price.

Step 4: Add Contingency

Renovation is discovery. Hidden damage behind walls, permit surprises, material price moves, labor availability, a mechanical system that fails inspection, scope changes mid-project — some portion of the budget cannot be itemized in advance because it has not been found yet. Contingency is the line that admits this.

How much depends on the project: an older house, structural work, or a thin inspection all argue for more; a recent, cosmetic-only scope argues for less. There is no correct universal percentage. Two rules hold regardless: contingency is part of total project cost from the start — it changes the maximum purchase price — and an unspent contingency is a pleasant ending, not a number to spend in the model before the project begins.

Step 5: Estimate Financing Costs

Flips are commonly financed with short-term debt — hard-money or private lending, bridge loans, sometimes an acquisition loan with rehab funds advanced in draws as work completes. The structures vary, but the cost drivers are always the same five: how much is borrowed, the interest rate, how long the project runs, when rehab funds are actually drawn (interest accrues on funds advanced, not merely committed), and the fees — origination points, lender charges, draw costs.

The modeling consequence is that financing is time-sensitive: every additional month adds interest, and the interest usually accrues on the largest balance precisely at the end of the project, when the rehab is fully funded and the house is waiting for a buyer. The timeline sensitivity later in this guide puts numbers on that.

Step 6: Estimate Holding Costs

Holding costs are what the property costs to own while you renovate and sell it, separate from the loan: property taxes, insurance, utilities, HOA dues where applicable, lawn or snow and general upkeep, security, and any temporary services the project needs. They run every month regardless of construction progress — a stalled project holds just as expensively as a productive one.

One bookkeeping rule: if loan interest is already counted in financing costs, it does not belong here too. Interest is the single most double-counted number in flip models, usually because it plausibly fits both lines. Pick the line — this article keeps it in financing — and keep it there.

Step 7: Estimate Selling Costs

ARV is a gross sale price, not cash received. The disposition may include brokerage commission, seller-side closing costs, transfer taxes where applicable, title and settlement fees, buyer concessions negotiated during the sale, and staging, cleaning and sale preparation. Commission structures and closing customs vary by market and by negotiation, so model your market’s reality rather than a assumed universal rate — and remember concessions, the line first-time flippers most often meet for the first time inside an offer they want to accept.

Step 8: Calculate Total Project Cost

Total Project Cost = Acquisition Cost + Rehab + Contingency + Financing Costs + Holding Costs

Acquisition cost here means purchase price plus the acquisition-side closing costs from Step 2. Selling costs are deliberately absent — under this article’s convention they reduce net sale proceeds instead, and they must not appear in both places. Total project cost is the number every return in the model is measured against, which is why an incomplete version of it quietly flatters everything downstream.

Step 9: Calculate Projected Profit

Projected Profit = (ARV − Selling Costs) − Total Project Cost

The distinction that matters: ARV minus total project cost is a gross number that ignores the cost of selling; projected profit nets the disposition out. The gap between the two is real money — on the worked example below it is $28,000 — and quoting the gross figure as “profit” is how a mediocre flip gets pitched as a good one. Projected is also the operative word: this is a forecast built from assumptions, not a guarantee, and a large dollar profit can still be a weak deal if it required outsized capital, time or risk to earn.

Step 10: Calculate Return on Cost and Margin

Two ratios put the profit in context, and they answer different questions:

Return on Cost = Projected Profit ÷ Total Project Cost

Profit Margin on Sale = Projected Profit ÷ Sale Price

Return on cost measures what the project earns on the money it consumed. Margin on sale measures how much cushion sits inside the exit price — how far the sale can disappoint before profit reaches zero. Investors use other conventions too (margin on cost, annualized returns, cash-on-cash where financing is modeled to the dollar) — ROI itself is a family of measures, not one formula — which is fine as long as the denominator is stated; a margin quoted without its denominator is a number wearing a disguise.

What is a good margin? There is no universal number. The margin a flip needs depends on the capital at risk, the project’s duration, the financing structure, the rehab’s complexity, how liquid the exit market is, your execution risk, and the return you require for the work. A simple cosmetic flip in a fast market can justify a thinner margin than a structural project in a slow one — the margin is compensation for risk, and the risk is project-specific.

The 70% Rule — and Its Limits

The most-quoted screen in flipping:

Maximum Offer ≈ (ARV × 70%) − Repairs

On the worked example below: $350,000 × 70% − $50,000 = $195,000. As a thirty-second filter for which deals deserve a full model, it earns its popularity. As an underwriting, it fails on contact: it ignores financing entirely, ignores how long the project runs, buries selling costs and profit inside one opaque 30% haircut, applies the same margin to every market and price point — where the arithmetic genuinely fits some and not others — and ignores project complexity completely. A simple screen cannot tell a cosmetic refresh from a foundation rebuild.

The better approach

Work backward from the full model instead: a realistic estimated ARV, complete project costs, and the profit and margin you actually require. The rule and the model can land far apart on the same house — and when they do, the model is right, because it can see the costs the rule compresses into a single percentage. Use the rule to triage; underwrite before you offer.

Maximum Purchase Price for a Flip

The full-model version of the question the 70% rule approximates:

Maximum Purchase Price = Net Sale Proceeds − Rehab − Contingency − Financing Costs − Holding Costs − Acquisition Closing Costs − Required Profit

Under this article’s convention, acquisition closing costs sit inside the subtraction, so the result is the price itself — state your own convention explicitly, because a formula that silently includes or excludes closing costs moves the answer by real money. On the worked example: $322,000 of net proceeds, less $50,000 rehab, $5,000 contingency, $12,500 financing, $6,000 holding, $6,500 closing and a required profit of $42,000, gives a maximum purchase price of exactly $200,000.

One terminology warning: wholesalers use the same term — maximum allowable offer, MAO — for a related but different calculation derived from an end buyer’s numbers minus an assignment fee. Same words, different equation; make sure which one a conversation is using — the wholesale analysis guide works that version in full.

A Worked Fix-and-Flip Example

A complete hypothetical project — every number is a fictional example assumption chosen for arithmetic clarity, not a typical value. The hold is 6 months, with interest of $1,500 per month inside financing costs and $1,000 per month of holding costs; contingency is set at 10% of rehab and selling costs at 8% of the sale price, both as example assumptions only:

1. Total project cost: $200,000 + $6,500 + $50,000 + $5,000 + $12,500 + $6,000 = $280,000.
2. Net sale proceeds: $350,000 − $28,000 of selling costs = $322,000.
3. Projected profit: $322,000 − $280,000 = $42,000.
4. Return on cost: $42,000 ÷ $280,000 = 15.00%. Margin on sale: $42,000 ÷ $350,000 = 12.00%.

ARV Sensitivity

Hold every project cost constant and let the exit disappoint — selling costs recomputed at the same 8% of the actual sale price:

A ten-percent exit miss removes about three-quarters of the profit. This is the asymmetry that makes ARV the assumption to attack hardest: nothing else in the model punishes optimism this severely.

Rehab-Overrun Sensitivity

Now hold the exit and let the budget slip — hypothetical stress cases, not probabilities, and each ignores the extra interest a costlier project would actually accrue:

Rehab overruns hurt less per percentage point than ARV misses — but they arrive more often, and they bring their companion: a project that ran over budget usually also ran over schedule.

Timeline Sensitivity

Which is why the calendar gets its own table. Using the example’s hypothetical carry — $1,500 per month of interest plus $1,000 per month of holding costs on top of $3,500 of fixed fees:

Every extra month costs $2,500 in this example, straight off the profit — and delay is the most common flip outcome there is. A deal that only works on a perfect schedule is a deal that mostly does not work.

Common Fix-and-Flip Underwriting Mistakes

• Overestimating ARV, or building it from weak comps — active listings, wrong finish level, wrong micro-location
• Underestimating rehab because the budget preceded the scope of work
• Skipping contingency, then paying for the surprise from the profit
• Ignoring permits — their cost, and the schedule they control
• Underestimating project duration, the mistake that multiplies every other one
• Forgetting financing fees, or counting interest twice — once in financing, again in holding
• Omitting holding costs entirely because no line on the loan statement claims them
• Ignoring selling costs and quoting the gross spread as profit
• Assuming appreciation will rescue a thin deal
• Using the 70% rule as the entire underwriting instead of the pre-screen it is
• Never stress-testing ARV and rehab together — the pair that actually kills flips. Running scenarios is the habit that catches it

Fix and Flip vs Buy and Hold vs Wholesale

The same house supports three different investments, and each gets its own model:

The single-family investing guide covers all three side by side, and the buy-and-hold rental model has its own full walkthrough. The practical point: a number that makes one strategy work says nothing about the others, and the entry discipline is shared — overpay, and no strategy rescues the deal.

How DealWorthIt Analyzes a Fix and Flip

DealWorthIt’s single-family workflow models a flip as its own analysis rather than a rental calculator wearing a costume. You enter the purchase price, rehab budget, estimated ARV, hold period and financing costs, with closing costs, selling costs and the monthly carry alongside — and the model returns the net profit and return on cost after rehab and carry. The downside case is built in as a re-run: every assumption stays editable, so the higher-rehab and lower-ARV cases from the sensitivity tables above are a few changed inputs, not a rebuilt spreadsheet.

The research side feeds the assumptions: ownership, mortgage and equity, tax and assessed values, sales and MLS listing history, flood-zone data and sales comparables are available on the property itself, so the estimated ARV and repair assumptions start from records rather than a guess — and the finished analysis can be shared as a report with a partner, lender or buyer. DealWorthIt does not appraise the property, estimate your rehab for you, or guarantee an exit price; the assumptions are yours, which is exactly why they stay visible and editable.

Analyze a fix and flip deal — or start with the strategy fundamentals in the single-family investing guide.

Final Takeaway

A flip is one subtraction defended by ten estimates: net sale proceeds minus total project cost, where the proceeds depend on an ARV you must prove with comparable sales and the costs depend on a budget, a loan and a calendar that all drift the same direction. Underwrite it in order — ARV from real comps, acquisition beyond the purchase price, a scoped rehab with contingency, financing and holding costs on a realistic schedule, honest selling costs — then stress the exit, the budget and the timeline before you write the offer. The 70% rule can tell you which houses to look at; only the full model can tell you what to pay.