Newbie Flip Underwriting – Am I Thinking About This the Right Way?

Question

Hi everyone,

I’m just getting started with understanding fix-and-flips and have built an underwriting deck (inputs, itemized rehab Gantt, base-case P&L, liquidity/risk dashboard, rental fallback, cash-flow timeline, and performance scenarios).

I went through PropWire and found an out-of-state owner with a vacant property just to try out the filtering. Here is the property link.

Quick deal summary:

• 3/2, 1,517 sq ft, built 2002 in East Dalton (flood zone AE + railroad proximity)
• $125k purchase, ~$62k all-in rehab, hard-money financing
• Base case shows ~$9.7k profit (4.1% margin on ARV) — marginal at best

I’m not pursuing this deal. I’m using it purely as a practice run to test whether my analysis process makes sense.

- I can already see that, despite the costs, construction carries huge risk. This can easily get away from someone.
- Cash flow is tough mid-deal. Although the deal is positive overall, it still has negative cash flow early on.
- Small town comps are hard; I will need to get more comfortable with that process.

PDF link is here.

High-level ask from experienced flippers: Am I thinking about this in the right direction? What am I completely missing? What am I wasting my time on as a beginner?

Not asking anyone to get into the details, simply high level directional.

Any feedback is appreciated. Thanks in advance!

Nicholas L. · Answer

@Adam Fenner

you got a great response from @Jeff S.

i was going to say something similar. i primarily BRRRR (though I have sold a couple of intended BRRRRs, so i guess those are flips. that's why i have flipper in my profile.) here's my detailed, exhaustive analysis process i go through. buckle up and get ready to read:

1. do i want to own in this area

2. could i get most to all my capital back

that's it. yes, there's some math behind it but that is how i think about it. ARV is absolutely critical as Jeff noted.

here are the advice / cautions i usually give new flippers (or BRRRRers - a lot is the same):

1. flipping a house is easy. buy any house. improve it. sell it. congrats, you did a flip. now, flipping AND MAKING MONEY is exceptionally difficult. EVERYONE is competing for inventory right now. so finding that somewhat but not too distressed property is the hard part. you're competing with retail buyers and investors.

2. for both rentals and flips, there are lots of costs that get overlooked or ignored, and new investors are always baffled and utterly chagrined at them when they come up: purchase and hold (for both), and then sale (for a flip) or refinance (for a BRRRR). these can add up to TENS OF THOUSANDS OF DOLLARS.

3. new investors also want some kind of magic QB for their projects. in my experience this mostly doesn't exist. you're the QB. which is what makes OOS so hard.

hope this helps

Norbert Manikowski · Answer

Hey Adam, glad the flood zone angle was useful - that's exactly the kind of thing that doesn't show up in a spreadsheet but kills your buyer pool.

Your underwriting structure is solid for someone just getting started. Most beginners skip the stress test entirely. The fact that you built scenarios and still walked away tells me your instincts are right.

Keep posting these practice deals. The reps matter more than any single deal.

Norbert

Norbert Manikowski · Answer

Adam, solid instinct walking away. The structure of your analysis is right, the deal just doesn't work.

One thing nobody mentioned: flood zone AE and railroad proximity are not just cosmetic flags. They are ARV compressors that rarely show up in the model.

Flood zone AE means mandatory flood insurance, typically $1,500 to $3,000 per year for the buyer. That kills your buyer pool. Owner-occupants get scared off, investors price it lower. Your comp set needs to be flood-zone-only properties, not the broader neighborhood, or your ARV is overstated from the start.

Railroad proximity does the same thing on the buy side. Days on market will be longer, and you will need to price slightly under comparable non-railroad comps to move it.

Both factors together mean your real ARV ceiling is probably 5 to 8% below what clean comps suggest. Run it again with that adjustment and the deal gets even thinner.

The 70% rule already killed this one. But for your next practice run, bake in location-specific ARV haircuts before you even open the model.

Jeff S. · Answer

I think you’re missing the forest for the trees, @Adam Fenner, and totally overthinking this. Why are you spending time creating Gantt charts and some sort of liquidity/risk dashboard -- whatever that is? If you are just filtering, i.e. screening, how are these relevant? You need the purchase price, construction estimate, and ARV, which you conveniently omitted.

Add the purchase price to the rehab estimate. If the total is less than 70% of the ARV, you have a deal worth pursuing. Use 75% for ARVs greater than $300K. Either way, if met, your detailed P&L will show a profit between around 12% to 15% of the ARV.

If $9.7K profit represents 4.1% of the ARV, your ARV is $236K. I shouldn’t have to do that. ARV is a fundamental metric.

($125k + $62k)/$236k = 79%

79% >> 70%  We agree. This is not a deal. That took five seconds of work.

As you seem to understand, percent of ARV is the proper way to define the profit from a flip. Using ROI is illusory because, depending upon your ability to borrow, you can put very little of your own money into a deal and drive the ROI toward infinity. If you put close to zero dollars in, as many experienced borrowers are able, using 1st and 2nd loans, your profit could be $10, which might represent nearly an infinite return. Is that good?

Next, where did you get your construction cost? This will be your greatest expense after the purchase price. You correctly note that this cost carries a huge risk. Both in terms of dollars and time. It will be the toughest to control and the hardest to scrub. This post will give you a better idea of how we approach it.

Behind the rehab, hard money is typically the next greatest cost and is obviously time-dependent. These are affected by construction delays as well as the time it takes to sell your property. Nowhere did I see any mention of the market in your evaluation. Sale price trends and DOM trends, in particular.

I don’t know where you live or why you picked a low-dollar home in a small town. For the same work, modestly bigger dollar deals offer more profit. Also, as you correctly note, values are easier to predict in larger cities. And borrowing will be easier. My advice, Adam, is to flip as close to home as you can where you can monitor everything and control as much as possible. Don’t be blinded by elaborate analyses even though you have the skills to create them.

Adam Fenner · Answer

@Jeff S., I really appreciate it. I knew I'd overcomplicate things while missing something incredibly fundamental. In my head, it was there, but since you are calling it out, that means that the presentation isn't even remotely appropriate, and I'll work on that. In addition to making it that quickie item, it really should be.

I can see more clearly how it starts with a simple math formula and extrapolates into a reasonableness and profitability test. I didn't think much of the costs other than putting something into the template to test it out. But I can see better how that can really be make or break on the deal. Not just from a time component, which I worried about from its impact on holding costs.

I was listening to some flippers on YouTube talking about how they will assess necessary repairs, then compare them to market expectations. In my model, I redid all the flooring, kitchen, and bathroom cabinets and counters. Roof, water, electrical updates, and such. The house may need it, but it kills the deal, and the next buyer may not care enough to make it worth the deal. That push-pull dynamic of what the market will accept and what is necessary to sell the house is the flipper's risk, and establishing guardrails through the ARV calc seems to be the trick.

I'm going to try this again, but with an initial focus on that ARV, more reasonable construction costs, and in a better market.

Thank you again for such a thoughtful and thorough response. I was looking for a kick on this one to bring it closer to reasonableness.

Adam Fenner · Answer

Norbert, I appreciate the vote of confidence. The reps is where my head is at as well. With an update for flooding next round.

Adam

Evan Polaski · Answer

@Adam Fenner, I know I am chiming in late here, and the basics have been hit.

A couple items to think about:

First, have a floor on absolute dollars AND percentage. I.e. I will not look at a flip if there isn't $50k of net profit minimum. There are too many unknowns when walking into a flip that can eat up even $50k pretty quickly, but certainly $20-30k. Even if you are only in the deal $100k (unlikely in any major market), I would not touch it with less than $50k. If I am in a deal $400k than I want at least 20% profit, or $80k net.

Second, don't forget selling costs. 6% agent commissions, credits due from seller at closing, etc.

Third, as noted above: KNOW THE MARKET. Many markets are so short on supply that any decent property at an affordable price will sell. But, within a broader market, you have areas that you need to go higher end features and finishes and areas were you just need a clean house.

Fourth, and again this is getting a little far from your initial post: finishes get deals under contract and inspections kill deals. So, even though kitchens and baths are great areas to invest, typically, if you do so at the expense of the HVAC or an old roof or aluminum wiring, you will likely not be able to sell the house. So don't skimp on the major systems.

Now, back to your point: for quick deal assessments, as noted above, you only need three inputs: Purchase price (only controllable one prior to buying) + Rehab costs < ARV

70/75% ratio is always healthy, but these are few and far between for cosmetic flips. My flips have all, effectively, become large scale renovations: tree fell on roof, reworking floor plans, additions, etc, in order to extract enough value to make it worthwhile.

Adam Fenner · Answer

Norbert, solid feedback. I didn't consider it from a comp perspective but that is a really good way to think about this.

I really appreciate you taking the time to read through this and share your thoughts.

Adam Fenner · Answer

Thanks so much for taking the time to review my post and share your feedback. I really appreciate it.

You're spot on about the margin. That 4.1% is razor-thin, and your point about how quickly things can shift (higher rehab costs, longer timeline, or softer resale) makes total sense. It's a great reminder that I need to build in a much bigger cushion, especially as a beginner.

I like your suggestion to stress-test the numbers by assuming worse-case on rehab, holding time, and ARV. That’s exactly the kind of practical advice I was hoping for.

Appreciate you highlighting that my overall underwriting structure is heading in the right direction. That gives me confidence to keep refining the process.

Thanks again for the thoughtful response, it is really helpful as I build reps!

Best, Adam

Newbie Flip Underwriting – Am I Thinking About This the Right Way?

Newbie Flip Underwriting – Am I Thinking About This the Right Way?

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