How to Analyze a Fix-and-Flip Deal

For a new real estate investor, analyzing a deal can be overwhelming. There are a lot of moving parts and without the right guidance it can be hard to know where to start.

But once you understand the basics you’ll have a solid foundation from which to build on (pun intended). We’re going to cover those basics here.

For the sake of simplicity let’s assume you’ve already found a property you’d like to flip.

There are five important numbers to consider when determining whether or not a deal makes sense: 

  1. After Repair Value (ARV)
  2. Loan to Value (LTV)
  3. Rehab Costs
  4. Purchase Price
  5. Cash on Hand

Step 1: Determine the Properties After Repair Value (ARV)

The ARV is the price the market will be willing to pay for the property after you’ve bought it and fixed it up.

The reason you start with the ARV is because it will be key in determining the other numbers mentioned above which are essential to analyze a deal properly.

The key to coming up with an ARV for your property is to figure out what other comparable properties (comps) are selling for in the area. This will give you a good idea of what people are willing to pay for your property once you’ve fixed it up in line with the market.

When looking at comps you want to try to find properties that have sold recently (within the last 3-6 months) and that are as close as possible to your property in both (1) build and (2) location.

For example, if your property has three beds, two baths and is on Main St., then you’ll want to find other properties with three beds and two baths on Main St. that have sold within the last 3-6 months to understand what price people are willing to pay.

The best places to find comps will be:

  1. Websites like Zillow, Redfin, Trulia, etc.
  2. The Multiple Listing Source (MLS)
  3. A local Real Estate Agent

Step 2: Know Your Max Loan to Value (LTV)

LTV is the ratio of the loan you receive for your project compared to the value of your project upon completion.

It’s typically calculated using the following formula: 

(Purchase Price + Rehab Costs) / ARV = LTV

For example, you purchase a property for $50,000 and it needs $20,000 of rehab. The property’s ARV is $100,000. In this case, your LTV will be as follows:

($50,000 + $20,000) / $100,000 = 70% LTV

The reason LTV is so important is because if you exceed a certain ratio then you will find it difficult, and maybe even impossible to find funding for your project. Most lenders will issue a loan with a maximum LTV of 65-75%.

Step 3: Determine Your Rehab Costs

Rehab costs may be the hardest number to come up with if you’re an inexperienced investor.

Your Rehab Costs are how much you will have to pay to fix the property up. 

This will include the cost of labor and cost of materials as well as any additional costs such as insurance, taxes, interest, etc. that you may have to pay while holding the property before you sell it.

In addition to doing your research online and at meetups, you may want to spend some time looking at quotes from local general contractors, roofing companies, painting companies, etc. to get a feel for pricing in your area.

You can also try to partner with or request consulting from more experienced flippers in your area.

Step 4: Determine Your Purchase Price

Once you know your project’s ARV, your max LTV and the Rehab Costs for your project, you can now determine how much you can pay for the property.

The key here is to keep the Rehab Costs and ARV in mind so you can keep the purchase price low enough to remain under your lender’s max LTV.

For example, if your project’s ARV is $100,000, your Rehab Costs are $20,000, and your lender’s max LTV is 70%, then your formula looks like this: 

(Purchase Price + $20,000) / $100,000 = 70%

Armed with this information you know that the absolute most you can pay for this property is $50,000 to stay under 70% LTV.

 Step 5: Consider Your Cash on Hand

Going into any Fix-and-Flip deal you’re going to want to have cash available. There are a number of reasons for this but one important one is that your lender may require it.

Between closing costs, your down payment, monthly interest on your loan, construction reserves, construction overages, etc. you’re going to want to have between 20-30% of the loan amount in cash available to bring to the deal.

It may seem like a lot, but having sufficient cash available when taking on a fix-and-flip will ensure you’re prepared for the inevitable surprises that will come your way.

If you have any questions about how to analyze a deal, the team at Sharper Capital Partners is here to help.

Your Friends at Sharper Capital Partners,

Chris and Grant

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Grant Smith

Principal - Investor relations

An alumni of the University of Cincinnati. Graduate of the Lindner College of Business AFA Finance Curriculum. Grant is a real estate investor in both commercial notes and commercial real estate. 

Chris Cascella

Principal - Underwriter

Graduate of the Lindner College of Business and double majoring in Finance and Marketing, Chris is a real estate entrepreneur, educator, and performance coach. 

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