How Do You Decide Whether a Property Is Worth Rehabbing?

Question

Not every distressed property is a good investment opportunity.

A property might have an attractive purchase price, but once you factor in structural repairs, contractor costs, holding expenses, financing, and the estimated after-repair value, the deal may look very different.

For experienced flippers, what's your process for determining whether a property is worth pursuing?

Do you start with the rehab budget, the ARV, or the maximum allowable offer?

I'd love to hear what has helped you avoid expensive renovation mistakes.

Divin Kanyama · Answer

@Linda Murray I’d start with a conservative ARV supported by comparable sales, then work through a detailed rehab scope before setting my maximum offer. I’d treat that offer as the result of the analysis, not the starting assumption. A low purchase price wouldn’t mean much to me if the projected resale value or renovation budget depended on everything going right.

Before committing, I’d want qualified inspections for structural concerns, a contractor walkthrough, and a written scope that makes clear what’s included—and what isn’t. Then I’d account for financing, holding and selling costs, a contingency, and enough profit to justify the risk. My final check would be whether I’d still want the deal if the rehab ran over budget, the sale took longer, or the resale price came in lower. If the margin disappeared with a modest setback, I’d rather pass than try to make the numbers fit.

Vladimirs Veiss · Answer

@Linda Murray, thank you for the great question!

ARV first for me too, but I'd add one step before the max offer: price the rehab in versions. On our jobs in Switzerland we write up the house as it is, then with new plumbing, then with new wiring, each priced line by line. Then make the offer against the worst version that still makes money, so opening the walls doesn't decide the deal for you.

On a bathroom we finished recently, the old plaster took 2 more days than planned. That work was priced and sent to the owner to sign before we did it, so it never turned into an argument.

As a broker in Frankfort, do your sellers ever come with a priced repair list, or does every buyer bring their own number?

Have a great day!

Trevor Rice · Answer

ARV first, then I work backward and see what the house has to cost me. The thing that kills most flips is the repair number, so I never trust one I didn't get from someone who walked the place with a flashlight. If the deal only works when everything goes right, I let someone else have it.

Kevin Rapport · Answer

Linda, I'd separate what you know from what you're assuming. The resale value is an estimate. So are repairs until you've actually figured out the scope. Holding costs keep running whether the rehab goes smoothly or not.

I bought 10 houses at auction this fall without seeing the inside. Two of the three most recent purchases still have occupants who need to move out before we can get going. That's a different problem from estimating paint and flooring.

A deal needs room for the things you haven't figured out yet. If it only works with the highest comp and nothing going wrong, the spreadsheet isn't telling you much.

Mark Cruse · Answer

You have to have some understanding of all that. If I'm doing a full gut its easier. I know about how much it will be to rip it and put it back in. If its not a full gut, you have to understand approximately what it will cost to get it where you want. If you can't do that, you will fail. If your renovation surpasses the ARV, you are toast. I have tried to mentor people on this. People would bring me deals to evaluate and they ha d like zero idea of ARV and what anything would cost.

Dan H. · Answer

It all comes down to expected profit for the effort.

My 24 year old son (he closed on the same day we celebrated his birthday) has his first flip in progress. the effort he exerts for a profit is many times higher than I would commit to. My time, unless I am intentionally giving it away for free is very valuable (even giving it away for free it is valuable, but I a not expecting any financial compensation).

He purchased at $1.125m with projected ARV of $1.45m, rehab $150k then add holding and selling costs. Way too tight for me and this is with him doing a lot of actual work himself. He is hoping for $80k to $100k profit but I think he will be lucky to get as high as $80k profit. But if he gets $59k to $80k profit and learns from his 1st flip, I consider that great.

My general rule (I do not do flips) on a rehab is it must project a return of at least 2x the rehab cost with me not doing any of the actual work excluding necessary heroics.. His barely meets this 2x rehab with him doing significant actual work, but the flip makes the numbers different/worse.

Unfortunately these are the type of “deals” that can be found with some effort in my market. So he either takes this on or waits patiently for something much better.

Take care

BJ Everson · Answer

I'd start with a conservative ARV from sold comps finished to your standard, then a line-item rehab with a contingency, then work backward to max offer — and I throw out deals where the rehab is a huge share of ARV unless I already have the crew and draws locked. Holding costs through a Columbus winter (heat, interest, insurance) belong in the all-in number, not as a surprise. What's the heaviest rehab % of ARV you've personally made work?

Chris Seveney · Answer

It's a numbers game. Where are you currently at with the property, with your all-in cost compared to what you could sell it for today? What is ARV compared to what it will cost to renovate.

Now, you also want to make sure, if you're going to renovate it, you include your carrying cost, taxes, and insurance. It should not be of equal value to selling it today based on today's numbers. You need to make money on the renovation and treat it as if it's a separate venture, almost a little separate entity that you're doing as a project to make sure it makes money.

If it doesn't, or does not make enough, then you're better off selling it as is because there is, of course, a lot of risk and a lot of the unknown once you start rehabbing a property.

Cat Rauh · Answer

Agree with starting at the ARV. One thing I'd add from the lending side is to look at the rehab as a share of the ARV before you get attached to the purchase price.

A cosmetic job where the rehab is a small slice of the finished value is forgiving. If the budget runs 20% over, you still make money. A heavy job where the rehab is a big chunk of the ARV has no room for that, and those are the ones where the walls come open and the number moves. Same purchase price, very different risk.

The other check is the as-is value. Lenders usually base the purchase money on what the house is worth today, so if a big chunk of your profit only exists after the rehab, you'll be bringing more cash to close than the spreadsheet assumed. If the deal still works after both of those checks, it's worth pursuing.

I'm a lender, for context, so I see a lot of these right before they go under contract.

Megan Kim · Answer

From what I’ve seen, the number most likely to be off is how much repairs will cost. Lots of folks underestimate their repair cost. How do you make sure that number is accurate?

How Do You Decide Whether a Property Is Worth Rehabbing?

How Do You Decide Whether a Property Is Worth Rehabbing?

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