The difference between a profitable flip and an expensive lesson usually comes down to one thing: whether the investor ran the numbers correctly before making the offer. Good deals look great on paper until you factor in holding costs, a realistic rehab budget, and a conservative ARV. Bad deals can look tempting right up until closing day.
At Hilton Financial Corporation, we’ve funded real estate investors since 1980, and we’ve seen every version of this story. The investors who win consistently are the ones who treat fix and flip deal analysis as a discipline, not a gut check. Here’s the framework they use.
Start With the After Repair Value (ARV)
Every fix and flip deal analysis starts with the After Repair Value. ARV is what the property will realistically sell for once the rehab is finished. Not what you hope it will sell for. Not what Zillow says. What an actual buyer will pay in the current market.
How to Calculate ARV the Right Way
The most reliable way to calculate ARV is to pull three to five recent comparable sales, called comps, that match the subject property after renovation. Good comps meet these criteria:
- Sold within the last 3 to 6 months
- Located within half a mile of the subject property
- Similar square footage, bedroom count, and bathroom count
- Similar lot size and year built
- Comparable condition after your planned rehab
Take the average price per square foot from those comps and multiply it by the subject property’s square footage. That number is your ARV. Avoid pending or active listings. Only closed sales count because only closed sales prove what buyers actually paid.
Common ARV Mistakes
Investors lose money when they inflate ARV with wishful thinking. The most common mistakes include using comps from better neighborhoods, ignoring days on market, assuming retail buyers will pay top dollar for a flip, or forgetting to adjust for features the subject property doesn’t have, such as a garage, basement, or extra bathroom.
If you wouldn’t bet your own cash on the comp, don’t use it.
Estimate the Rehab Budget Accurately
After ARV, the rehab budget is the biggest variable in your deal analysis. Underestimate it and your margin disappears. Overestimate it and you’ll pass on deals that would have worked.
Walk the Property With a Contractor
The single best way to get an accurate rehab estimate is to walk the property with a contractor you trust before you make the offer. Have them scope out the roof, HVAC, electrical, plumbing, foundation, windows, kitchen, bathrooms, flooring, and exterior. Get a written estimate with line items.
Use a Cost-Per-Square-Foot Baseline
Experienced investors keep a baseline of rehab costs per square foot for their market. Light cosmetic refreshes might run one rate, medium rehabs another, and full gut renovations significantly more. These baselines are rough, but they help you screen deals quickly before investing time in a full contractor walkthrough.
Always Add a Contingency
Every serious flip budget includes a contingency of 10 to 20 percent on top of the base rehab estimate. Something always comes up. Hidden water damage, outdated wiring, a failed inspection, a permit surprise. Investors who skip the contingency are the ones who run out of money halfway through the project.
Calculate All-In Costs, Not Just Purchase Price
A common mistake in fix and flip deal analysis is comparing the purchase price directly to the ARV. That ignores the half-dozen other costs that eat into profit. Here’s what actually goes into your all-in cost:
- Purchase price
- Rehab budget (including contingency)
- Closing costs on the purchase
- Financing costs (loan origination points, interest, lender fees)
- Holding costs (property taxes, insurance, utilities, HOA during the project)
- Selling costs (agent commissions, closing costs, staging, transfer taxes)
Add all of these together, and that’s your true cost basis. Your profit is ARV minus all-in cost. Not ARV minus purchase price.
Apply the 70 Percent Rule as a Sanity Check
The 70 percent rule is a fast screening tool used by experienced flippers to evaluate deals. It is an investor’s maximum-offer guideline, not a lender’s loan-to-value ratio. It says your maximum offer should be no more than 70 percent of ARV minus rehab costs.
Maximum Offer = (ARV x 0.70) – Rehab Costs
For example, if ARV is 400,000 and rehab is 50,000, your maximum offer would be (400,000 x 0.70) – 50,000, or 230,000.
The 70 percent rule isn’t a strict law. In hot markets, experienced investors sometimes push to 75 percent. In slower markets, they stick closer to 65 percent. The point is to leave enough spread for profit, financing costs, and unexpected surprises. If a deal only works at 80 percent of ARV, it’s probably not the right deal. If it is on the tight side, can additional volume get you to your goals?
Stress Test Your Numbers
Before you sign an offer, stress test the deal by asking three questions:
- What happens if the rehab budget is 20 percent higher than estimated?
- What happens if the ARV comes in 10 percent lower than projected?
- What happens if the property takes 60 days longer to sell than planned?
If the deal still produces an acceptable profit under those conditions, you have a solid fix and flip opportunity. If any one of those scenarios wipes out your margin, the deal is too tight.
Contact us to run numbers and see for yourself.
Know Your Financing Before You Analyze
Your financing directly affects every number in your analysis. Hard money loan terms, origination points, interest rates, and loan-to-value ratios all feed into your carrying costs and your required cash to close. The best time to understand your financing options is before you start running deals, not after you have a contract in hand.
Hilton Financial Corporation’s principals have been funding fix and flip investors since 1980. We’re a direct private lender, asset-based, with a 1-business-day pre-qualification turnaround so you know where you stand before committing to a deal. We serve real estate investors in Arizona, Arkansas, Colorado, Hawaii, Ohio, Tennessee, Texas, and Utah.
Get Pre-Qualified Before Your Next Deal
The smartest fix and flip investors line up financing before they start analyzing deals. That way, when the right property shows up, they can move fast and negotiate from a position of strength.
Call Hilton Financial at (602) 375-8951 or email getquotes@hiltoncorp.com, or apply online to get pre-qualified. Bring your target market, typical deal size, and any properties currently under review. We’ll give you a clear answer fast so you can focus on finding the next deal instead of chasing the next lender.
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