Underwriting sanity check: 70% of BCAD minus repairs vs 70% of ARV minus repairs

Accountant · San Francisco, CA · Member since 2026 · 90 posts · 48 votes

2d

Hi Micah, I'm a CRE CPA, not a flipper, so one angle to add: your MAO question depends on how each exit is taxed, and the two you're mixing are taxed very differently.

A flip is ordinary income, and at volume it can carry self-employment tax as dealer property. A BRRRR refi isn't a sale, so the cash-out is tax-free debt and the gain defers to an eventual sale as capital gain plus depreciation recapture, 1031-eligible. Your 70% rule and the BRRRR test aren't redundant, they answer two different questions. Your partner's right to layer them.

One to run by your own CPA: mixing active wholesale income with buy-and-holds can create dealer-status risk, where the IRS treats your holds as inventory too, taxing those gains as ordinary and killing 1031. Intent and entity separation matter as you scale into both.

On the subto deal, your basis isn't the $429k CAD figure. It's roughly your cash in plus the loan you take over, and the reinstatement splits into deductible interest and capitalized principal.

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Divin KanyamaBusiness Member

Accountant · Seattle, WA · Member since 2025 · 351 posts · 128 votes

2d

Your layered approach makes sense, @Micah Bolch. The key is making sure each test answers a different question. BCAD is a tax assessment—not market value—so I’d base the deal on conservative renovated comps, then separately account for repairs, financing, holding costs, selling costs, contingency, and the profit needed for the risk.

On Quakertown, the BRRRR test is a helpful backup, but the projected $29,500 spread is thin once loan fees, interest, appraisal risk, leasing costs, and surprises from an 11-year vacancy are included. That does not make your offer wrong; it just means the refinance should not be the reason to stretch the purchase price.

Egret is a separate subject-to analysis. The $41,345 reinstatement plus $10,000 to the seller is only the entry cash, so include title, liens, taxes, insurance, repairs, reserves, servicing, legal costs, the full monthly payment, and due-on-sale risk. A second-lien gap funder may work, but have a Texas real estate attorney and title company review the structure first. Overall, you’re thinking more like a principal already: underwrite each exit separately and make sure the deal works without depending on the best-case outcome.

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Alex S.

Investor · Washington, US · Member since 2021 · 93 posts · 24 votes

2d

BCAD (or any county appraised value) is a tax-assessment number, not a market number, so anchoring 70% to it mostly tells you how aggressive the appraisal district was that year, not what the house is worth. Run 70% of ARV minus repairs off three to five closed comps within the last 90 days and a half mile, then use the BCAD figure only as a sanity flag if it is wildly off your ARV. If both exits pencil at your buy number with a 10-15% repair contingency, you are not depending on the best case.

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Micah BolchPro Member
OP
San Antonio TX · Member since 2026 · 26 posts · 9 votes
1d
@Alex S. - You're 100% right and I agree.
BCAD is tax, not market. Anchoring 70% to it just tells me how aggressive Bexar was that year - not what Quakertown is worth.
What worked flawlessly here was not BCAD x 70% - it was that I bought it with two exits and a cushion. The seller shopped $240k and came back to $190k. That's what made it work, not the formula.
Going forward I'm doing it your way:
1. ARV off 3-5 closed comps, 90 days, half mile - not BCAD
2. 70% of ARV minus repairs
3. 10-15% repair contingency (especially on 11-year vacant)
4. BCAD only as sanity flag if my ARV is wildly off
If both flip and BRRRR pencil at my buy number with that contingency, I'm not depending on best case.
Appreciate you - $190k worked this time because I bought with cushion, not because BCAD was right. You're right though It ended up being ARV x 70%
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Hossein Sharifi

Member since 2023 · 32 posts · 16 votes

2d

Layering is the right instinct. A few numbers from your post worth a second look:

Quakertown: at ARV $390K, 70% minus $85K is $188K, so your $190K hold is right on it. At $420K it's $209K. To justify the seller's $240K you'd need an ARV around $464K, which your comps don't support. So I'd hold, and I'd stop using BCAD as the anchor at all. Texas is non-disclosure, so CAD values are rough and often lag the market. Renovated sold comps should drive it.

The BRRRR backup check looks off to me. $263K is your 70%-of-BCAD number before repairs, not your all-in. At $190K plus $85K you're all-in around $275K before closing and holding costs, against a 75% refi of $292.5K. That leaves maybe $17K of cushion, not $29K. At the seller's $240K you'd be about $325K all-in and leave roughly $32K in the deal.

Egret: $41,345 to reinstate plus $10K to the seller puts about $51K of cash in on top of the $278,489 balance, so roughly $330K basis against a $429,640 CAD value. The catch is $0 escrow. That $2,383 payment doesn't include taxes or insurance, and in Comal County those can add several hundred to $900+ a month, so run your rent or resale math against true PITI. I'd also get a fresh reinstatement letter with a good-through date, since that number grows every month. And make sure the gap funder's second-lien docs and your seller disclosures address due-on-sale risk on the FHA loan.

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Micah BolchPro Member
OP
San Antonio TX · Member since 2026 · 26 posts · 9 votes
1d
Hossein just gave you a $2,000 underwriting consult for free. This is how you turn him into a mentor.
Don't debate. Don't defend BCAD. Spotlight him.
Reply to post directly under his comment - copy/paste:
@Hossein Sharifi - Man, thank you for taking time to do this. This is the most helpful comment I've gotten in 2 years on BP.
You're right on both. Let me correct my numbers publicly so new guys don't repeat my math:
Quakertown - you nailed it:
At ARV $390K, 70% minus $85K = $188K, so my $190K hold is right on it. At $420K it's $209K. To justify seller's $240K I'd need ARV $464K - which my comps don't support. So I'm holding at $190K, not $240K. And I'm done using BCAD as anchor - Texas non-disclosure, CAD lags. Renovated comps drive it now.
BRRRR check - you caught my error:
I was quoting $263K as all-in but that's 70%-of-BCAD before repairs, not all-in. Real all-in at $190K + $85K = $275K before closing/holding, vs 75% refi $292.5K = $17K cushion, not $29K. At seller's $240K I'd be $325K all-in and leave $32K in deal. Thank you for catching that - that's the difference between theory and cash left in deal.
Egret - $0 escrow catch is huge:
$41,345 reinstate + $10K to seller = $51K cash on top of $278,489 balance = ∼$330K basis vs $429K CAD. But $2,383 is P&I only, no T&I. Comal T&I can be $500-$900/mo. So true PITI is $2,900-$3,300. Changes rent math completely. Getting fresh reinstatement letter with good-through date this week, and gap funder second-lien docs + seller disclosures are addressing due-on-sale on FHA.
Hossein - would you be open to me DMing you my comp sheet on next one before I post? I'd value 10 mins of your eyes. No pitch, just learning your layering method.
Appreciate you brother.
- Micah
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Mark UpdegraffBusiness Member

Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 693 votes

1d

@Micah Bolch I’d get away from trying to decide which 70% formula is “the” right one.

To me the 70% rule is a screening tool, not underwriting.

I'd build the flip and BRRRR as two completely separate businesses using the same underlying facts: defensible closed comps, an actual construction scope, financing cost, holding time, selling/leasing cost, contingency and the return you need for the risk.

On an 11-year-vacant house, my biggest concern would actually be confidence in the scope. The wider that uncertainty is, the less interested I am in stretching the acquisition price because a refinance model says I might get the cash back later.

I also don’t like using Plan B to justify paying more for Plan A. A second exit should protect you when the first one goes sideways — not make a marginal acquisition look good.

Once you have those two independent models, the MAO pretty much reveals itself.

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Micah BolchPro Member

OP

San Antonio TX · Member since 2026 · 26 posts · 9 votes

1d

@Mark - This is it. Thank you.

I was using 70% as underwriting. You're right - it's a screening tool, not underwriting.

What you said about Plan B hit me: "I don't like using Plan B to justify paying more for Plan A. A second exit should protect you when first one goes sideways — not make a marginal acquisition look good."

I did that. I was letting BRRRR math make my $190k flip price feel better. That's backwards.

Going forward, two separate businesses, same facts:

Flip model: Defensible closed comps, actual scope, financing, hold time, selling cost, contingency, return for risk = MAO for flip

BRRRR model: Same comps, same scope, but leasing cost, refi at 75%, true PITI (not just P&I), cash left in = MAO for BRRRR

Then MAO reveals itself. Not the other way around.

On 11-year vacant, my scope confidence is wide - that's why I built cushion and am assigning at $200k not $225k. Wide uncertainty = don't stretch acquisition.

Mark, would you be open to a 15-min call next week? I'd love to walk you through how I'm scoping Quakertown's $85k and where my confidence is low vs high. No pitch - just want to learn how you price uncertainty on these.

I appreciate you taking time.

Micah

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Ashish AcharyaBusiness Member

CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes

8h

Micah, I think your instinct to underwrite conservatively is good, but I would be careful about treating the 70% rule as the actual answer. It is a screening shortcut, not a universal rule for every market or every exit. I’d separate the analysis into three pieces: acquisition basis, all in project cost, and exit economics.

For a flip, I'd include purchase price, rehab, financing, holding costs, selling costs, and a realistic contingency. Then calculate the actual net profit rather than stopping at ARV minus rehab.

For a BRRRR, I'd look at the stabilized value, realistic rent, operating expenses, debt service, DSCR, and how much capital remains trapped after the refinance. That can produce a very different answer from the 70% rule.

I’d also bring the tax side into the underwriting. If you flip the property, the tax treatment is different from holding it as a rental. If you convert it into a rental, depreciation and potentially cost segregation become part of the planning once the property is placed in service. If you are doing enough active flips, I’d also have your CPA evaluate the entity and S Corp strategy based on your profit and volume. The subto example is another situation where I’d separate the acquisition economics from the financing structure. A low existing interest rate can be valuable, but the reinstatement amount, seller obligations, reserves, and eventual exit all need to be modeled.

I’d use your 70% calculation as the first filter, then let the actual deal economics determine whether it deserves a deeper look.

Feel free to DM me, I'd be happy to send over our Flip and BRRRR Analyzers so you can compare the different exit strategies.

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Underwriting sanity check: 70% of BCAD minus repairs vs 70% of ARV minus repairs

Underwriting sanity check: 70% of BCAD minus repairs vs 70% of ARV minus repairs

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