What’s Compressing Flip Margins the Most Right Now?

Question

For those actively flipping:

What has been the biggest challenge lately?

• Purchase price competition
• Holding costs
• Construction timelines
• Financing structure

Curious what investors are seeing across different markets.

Jaron Walling · Answer

@Tracy Thielman We recently sold a flip. We're not experts but here's our take.

Holding costs were much longer than expected. We listed in early October and that was too late in the year. The buyer demand fell off a cliff in our market in October. Bad timing.

Material costs have gone up. I was under budgeted on number of small projects. I'm able to DIY projects to save the budget but a lot of investor cannot or will not do that.

Price reductions were happening all around us. We had multiple weeks of no showings. We stayed firm and did one price drop. That increased our DOM but I knew it flip deserved the price. If a property is subpar it's not even getting showings. Buyers are picky. I think the market will start picking up but the winter months were brutal.

Bo Smith · Answer

Tracy, all four of those are biting right now, but if I had to rank them: holding costs, then purchase price competition. Construction timelines used to be number one, but contractors have gotten faster and more available. Financing has actually gotten better -- rates are still high but lenders know the market and aren't being stupid anymore.

The real pressure is holding costs. If you're carrying a deal 120+ days with property taxes, insurance, utilities, and loan interest running, that's eating 3-5% of your profit right now. A 00k purchase with 4-month hold on a hard money loan at 9% plus 2 points costs you -7k in financing alone. Add property taxes, insurance, contractors going slow, and suddenly you're down to 10-15% ROI when you underwritten at 25%. Purchase price competition hasn't gotten worse -- it's just that the prices needed to work your numbers are lower. Sellers still want 2021 money, so most deals don't pencil.

Are you finding more deals in the sub-50k rehab category just because the shorter timeline reduces holding costs?

Cody Waller · Answer

Holding costs, no question. Every extra month on my HML is another 2-3K in interest on a typical 180K purchase, and that's before taxes and insurance. I've done 22 flips in Texas and the ones that went sideways were never about the rehab budget, it was always time.

Bo Smith · Answer

Seasonality kills more flips right now than anything else. Jaron nailed it -- October through January is a graveyard for flip sales. Buyers slow down, showings tank, and sitting inventory eats margin in real time. If you're targeting a Q4 sale, you're already fighting uphill.

But here's what's actually strangling margins across the board: holding costs are up, but ARVs haven't moved. Material cost inflation stuck around longer than most predicted. Labor is scarce and expensive. Buyer standards went up (they want finishes that look new, not flipped). So the gap between what you can buy for and what you can sell for is compressed from both sides.

The counter-move is tighter underwriting and faster execution. If you're doing a flip that takes more than 120 days on hard money at current rates, the carrying costs alone eat 3-5K per month. That means every month of delay is almost a full percentage point off your ROI. Faster project = fewer problems. More problems = slower project. It's a feedback loop. So you need properties where the scope is absolutely crystal clear before you even make an offer.

What's your current average hold time from purchase to sale, and what are the hard money rates you're seeing in your market?

Bo Smith · Answer

@Jaron nailed it on timing and buyer picky-ness. That DOM problem is real - you're fighting seasonal demand cliffs and picky buyer standards. Material costs are still elevated too, but honestly the bigger hit right now is purchase price competition. You've got cash buyers, flippers, and owner-occupants all competing on the same deals so acquisition prices are just higher than fundamentals support.

The margin squeeze isn't really about any single thing - it's the combo: holding costs are up (interest rates), purchase prices are up (competition), buyer standards are tighter (so rents don't justify holding vs selling), and the sweet spot for flips is shrinking. I'm seeing markets where the old 70% rule margins just don't exist anymore. You either buy at 65% and hope for execution, or you pass. A lot of operators can't stomach the lower return profile.

Biggest margin killer right now is the days-to-sell piece. Used to be 30 days on market was standard. Now it's 45-60 in most markets unless it's genuinely a screamer property. That's an extra 6-8 weeks of carrying costs that didn't exist before. Are you guys still seeing demand for move-in ready, or does the market want more aggressive value-add deals?

Henry Lazerow · Answer

Material and labor costs are way up. In my market pre covid the margin between as is + rehab vs ARV was much higher. Not sure why it narrowed maybe just lower suppply market now a days but much harder to make numbers work now on a flip. Here close costs to sell can be $40k+ and rehab loan interest 10´s of thousands as our price points higher so adds an extra hurdle. Many of my clients focus more on cheap cosmetic value add to raise rents create a little equity and hold long term.

Some deals I see sell at absurd valuations where no way the owner will turn a profit after rehab and those mostly sell to owner occupants who likely do not know what doing. I had someone call me a month ago with this exact story, bought a building that needed 200k of rehab did not even start but got several quotes, he thought could do it for way less and was asking what I could list the place for to exit. First time buyers often do not understand how expensive rehab work is in big cities.

Bo Smith · Answer

Tracy asked the right question. For me it's a mix of all four, but the sequencing matters. You can control purchase price if you have deal flow, you can manage construction timeline with good crews, but holding costs are brutal if either of the first two slip.

Right now the biggest pressure is probably purchase price competition. Too many flippers chasing deals in decent markets, which inflates purchase prices and compresses margin on the front end. If you can only find deals at 68-72% of ARV, you're fighting to hit a decent profit number. By the time you account for holding costs, contractor markup, and contingency, your 20% margin target becomes 12%.

Jaron's point about seasonal timing on the exit is real too. October/November is tough in most markets -- buyer demand drops off, days on market increase, and price reductions become necessary. I'm way more selective about timing flip completion now. Instead of forcing a flip to completion by a certain date, I'm willing to let a project sit 2-3 weeks if it means hitting the market at a better time. That holding cost bump is often worth avoiding a price reduction.

What's your typical hold time on flips, and are you seeing better exit timing in certain months in your market?

Bo Smith · Answer

Jaron's take is spot-on. The holding cost squeeze is real. Inventory isn't moving like it used to, especially if you're not hitting the market at the exact right time. Early October is brutal -- everyone's thinking about winter and the holidays. You're fighting psychology, not just numbers.

What I'm seeing across markets: purchase price competition is still aggressive, but the real margin killer is the combination of longer holding periods plus higher financing costs. If you're using hard money and sitting on a property for 5-6 months instead of 3-4, that interest compounds fast. A deal that pencils at 18% margin at 3 months becomes 12% at 5 months real quick.

Material costs have plateaued which is good, but labor is still elevated in most markets. And you're right that buyer pickiness is up -- the days of a basic flip moving fast are gone. You have to finish better, price tighter, and have patience. That eats time and margin.

The DIY advantage is huge if you can do it. Most investors can't or won't, so those who can are capturing extra margin while everyone else is squeezed.

What market are you in, and how's the DOM comparing to earlier in the year for finished flips?

Bo Smith · Answer

For me it's a combo of purchase price competition and construction timelines. Wholesalers have dried up in my market (everyone's buying them instead of flipping), so I'm competing directly with other flippers on MLS deals, which kills your margin out of the gate. That's forced me into more off-market sourcing, which takes time and money upfront.

Construction delays are brutal right now. Labor is tight -- good GCs are booked 4-5 months out, so your holding costs stretch. Material costs have stabilized compared to 2021-2022, but labor hasn't come down. If your timeline slips from 4 months to 6 months, you're eating an extra -12k in carrying costs on a median flip. That wipes out a lot of margin.

What I've adjusted is being more selective on property type. I'm moving away from cosmetic flips in saturated neighborhoods -- everyone and their cousin is doing those. I'm looking for deals where the after-repair value is strong enough that even with higher acquisition costs, the risk-reward still works. Markets where there's actual demand for the finished product, not just supply chasing returns.

What specific cost line item has hit you hardest -- purchase price, construction, or carrying costs during the hold?

Bo Smith · Answer

The margin squeeze is real right now. I'm seeing it across my portfolio. Holding costs are the biggest culprit in my deals. If you're carrying at 6-7% on money, that's $300-400/month on a $60K loan. Extend a flip by 30 days (because listing-to-close takes longer now) and you've blown through $10-12K in carrying cost that wasn't in your original underwriting.

Purchase price competition is second. There are still cash investors, wholesalers, and institutions bidding on properties. If you're using leverage and trying to hit your 15-20% margin, you're often outbid. The deals that work right now are the ones most flippers skip -- the ones that need heavier work, the ones in less hot zip codes, or the ones that require creative exit (rent, hold for appreciation).

Construction timeline is the invisible killer. Subs are more selective about jobs. If they're not slammed, they're slow because margins got tight on their end too. I've had rehabs slip 6-8 weeks because electricians or framers were booked. That compounds into carrying costs and lost holding period.

What I've done is get more selective on deal source. I'm now working more directly with wholesalers and bird dogs who know my criteria, rather than chasing every deal. Also anchoring myself to one or two contractors who I trust won't slip timelines. Are you finding deals through wholesalers or hunting them yourself?

What’s Compressing Flip Margins the Most Right Now?

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