How to Stress-Test a House Flip Deal for Market Risk

By Josh Cote · Underwriting · 8 minute read

A deal can have good nearby sales and still get hurt by a slow market. If houses are taking longer to sell, buyers are pushing back on price, or your finished house hits the market during a slow time of year, the plan may have less room than it first appeared. I like to test those problems before I decide what I can pay.

Photo via Unsplash.

Keep the nearby sales separate from the big market picture

Start with a resale price based on recently sold houses that match your house, its location, size, layout, condition, and finish level. Big market numbers give you context, but they do not replace sales for the actual kind of house you are buying. If your nearby sales are weak, a ZIP-code average will not fix that.

Then look at where the local market is headed and how fast houses are moving. Sale prices, asking prices, year-over-year changes, pending sales, days on market, how many months of houses are for sale, and how close sellers are getting to their asking prices all tell you something different. Do not grab the one number that makes your offer look good. Look at the whole picture.

Turn a slow sale into a real dollar amount

Days on market does not tell you exactly how long your house will take to sell, but it can warn you not to expect a quick sale. Months of supply gives you another look at how much competition is out there. If both numbers point to a slower exit, run the deal with a longer loan and more monthly costs.

Pay attention to the calendar too. Figure out when the work should finish, add time for the punch list and getting the house ready to list, then add the time between an accepted offer and closing. A house finished right before a slow season may cost you more than the same house finished during a busy buying season. The sale month changes your interest, utilities, insurance, taxes, and how long your cash is tied up.

Make the numbers push back on the deal

1. Enter a resale price from nearby sales, the purchase price, the repair budget, and a realistic cushion.
2. Add local market numbers from a source you trust, and check when and where the numbers came from.
3. Set the repair time, the time needed to get the house ready to list, the expected hold, and the normal busy and slow seasons in that area.
4. Look at the lower resale price, your profit goal, warning signs, and monthly costs together.
5. Try a longer hold or a lower sale price. If the deal only works when everything goes right, lower your offer or pass.

Use the result as a warning, not permission

A calculator can show how the numbers move together and point out what you need to check. It cannot prove your resale price is right, tell you whether the market data is current, or promise that your house will sell for the number on the screen. I still verify the sales, inspect the house, talk to contractors, and confirm the financing before I commit.