How to Underwrite a House Flip Before Making an Offer

By Josh Cote · Deal analysis · 8 minute read

Before I make an offer, I want one number I can stand behind: the most I can pay and still make money. I do not start with the seller's price and work backward until the deal looks good. I start with what the fixed-up house should really sell for, take out every cost and the profit I need, and see what is left for the house.

Photo via Unsplash.

Start with what the finished house will look like

ARV means after-repair value. That is just what the house should sell for after the work is done. It is not the seller's asking price, an online guess, or the most expensive house you can find nearby. It should be based on a few homes that look and feel like the one you plan to finish.

I keep the search tight before I pick a number. Look in the same subdivision or an area that really compares. Do not cross a busy road or a different neighborhood just because the prices are higher over there. Stay close on size, layout, bedrooms, bathrooms, garage, lot, and level of finishes. I like sales from the last 90 days. Once I have to reach back more than six months, I get careful. Then I compare the condition and features, not just the price per square foot.

Three good sales that look like the house I plan to deliver are worth more than twelve weak comparisons. If I cannot find sales I believe, that tells me something. I either lower my resale number or leave the deal alone.

Write down every cost before you negotiate

The resale price is not your profit. Selling costs, closing fees, buyer credits, loan interest, points, insurance, utilities, taxes, and the months it takes to finish and sell all come out of the deal. The repairs get their own line too. I want every cost on the page, even when the first number is only a rough estimate.

Then I take out the profit I need. I decide that before I get attached to the house. If I cut my profit every time the deal comes up short, I am not checking the deal anymore. I am making excuses for it.

Have a number you can walk away from

Your maximum offer is not a guess about what the seller will accept. It is the line that keeps you from paying more than the project can handle. If the seller wants more, explain your number, make a lower offer, renegotiate when you learn something new, or move on. You do not have to make every house work.

After six years of flips and spec builds, I have found that moving fast comes from using the same solid process every time. It does not come from skipping the checks. A simple worksheet you trust beats complicated math built around a resale price you are hoping for.

Before you send the offer

• Can I show where my resale price came from using recent nearby sales?
• Did I count the cost of buying, holding, fixing, and selling?
• Does the deal still hit my profit goal if the repairs and schedule run a little worse?
• What new fact would make me lower the offer or walk away?