The Importance of Estimating ARV and Repairs for Flips

Below we have an estimated ARV of $200,000 (Table 1) on our flip. The derivation of the purchase price depends on your profit requirements. Typical real estate gurus/seminars will say to get the property for 70% of ARV and then less repair costs. Others start with the amount of profit they want to make, either a gross amount, like $50k, or a profit percentage, say 30%. The market has been so hot that many people seem to buy with little room for profit if anything goes wrong. This is why it is important to make sure your ARV and repair estimates are as accurate as possible.

Table 1 shows all the estimated expenses and potential net profit if a flip was wholly funded by the flipper without any financing. With an ARV of $200k and purchase price of $110k and repairs of $30k and other purchase, sale and holding costs, the flipper's potential profit is almost $40k. Table 2 shows interest costs if the flipper uses 100% or 70% financing, respectively at 12% (no points in these scenarios, but the flipper most likely would be paying a couple of points if using hard money). Table 3 accounts for the interest costs that decrease the flipper's overall net profit. Each line represents the total number of days the loan is outstanding which coincides with the purchase and sale of the flip. I have 180 days as an average holding time until a flip is sold. Notice the flipper's potential profit at 180 days using financing is still above $30k. Still an OK profit for one flip.

Now look at Table 4 to see what may happen at 180 days if the actual ARV (final selling price) is overestimated by $15k, or actual repairs are underestimated by $10k. Now profits are mostly around $20k. Ok, still making a good chunk of cash (hopefully you don't have to split profits with a bunch of partners).

Worst case scenario - both actual repairs are higher than estimated and the final selling price is lower than estimated. A double whammy! If you self-funded the flip you are looking at almost a $15k profit ($39,500 - $25,000 = $14,500), but if you financed, you might have to pay to get out of this flip.

The purpose of this post was to emphasize the importance of being as accurate/thorough as possible when coming up with your estimates for ARV and repairs on a potential flip, so that you give yourself the best chance to make a profit.