Intermediate10 min read

How to Underwrite a Flip Like an Operator

Amateurs underwrite a flip as 'buy price + rehab vs. ARV.' Operators account for every cost, build in contingency, and refuse to start unless the deal clears a minimum profit. Here's the full stack.

Underwriting is just disciplined math done beforeyou commit. The goal isn't a rosy projection — it's a conservative one you'd still be comfortable with if the rehab runs long and the market softens. Work through every cost bucket below.

Start at the exit: ARV

Everything backs off the after-repair value. Build it from recent, nearby, similar sold comps in renovated condition — and be honest. A 5% ARV error swings your profit far more than 5% because it sits on top of all your costs. When comps are thin or mixed, underwrite to the conservative end.

The cost stack

●Purchase price + buy-side closing costs (title, recording, ~1–2%).
●Rehab — a real line-item budget, not a guess (see our rehab-estimating article), plus a 10–20% contingency.
●Financing — on hard money: points/origination (1–3%), plus interest. Most flip loans are interest-only, so monthly carry = loan balance × rate ÷ 12.
●Holding costs — property taxes, insurance (builder's risk), utilities, and any HOA — multiplied by your realistic timeline, not your hoped-for one.
●Selling costs — agent commission (often 5–6%) + seller-side closing (~1–2%). On ARV, this is frequently your second-biggest cost after the purchase.

The line investors forget: double the financing/holding clock

Underwrite the timeline you'll actually hit, then ask: what happens if it takes 2–3 extra months? Every extra month is more interest, taxes, insurance, and utilities — and possibly a worse selling season. A deal that's thin on a 4-month timeline can go negative on a 7-month one.

Net profit & the metrics that matter

Net profit = ARV − purchase − buy costs − rehab − financing − holding − selling. Then judge it three ways:

●Dollar profit — set a minimum (e.g., $25k–$40k+) that justifies the risk and effort.
●Margin = profit ÷ ARV. Many operators want ~10–15%+ as a cushion against surprises.
●Cash-on-cash / ROI = profit ÷ cash invested. Measures how hard your actual capital worked.

The 70% rule as a sanity check

Max offer ≈ (ARV × 0.70) − rehab. It bakes in roughly 30% for costs and profit. Use it to screen fast, but always follow with a full underwrite — in cheap price bands or expensive markets the percentage needs adjusting.

Stress-test before you sign

●ARV down 5% — do you still profit?
●Rehab over 15% — does contingency absorb it?
●Timeline +3 months — does the extra carry sink it?
●If two of those hit at once, what's your downside?

If the deal survives a reasonable stress test, you have a real margin of safety. If it only works in the best case, it's not a deal — it's a gamble.

The Deal Underwriter runs the full flip stack — financing, holding, selling, profit, margin, and the 70% offer.Underwrite a flip →

Key takeaways

✓Back every number off a conservative, comp-supported ARV.
✓Account for all cost buckets: purchase, buy costs, rehab + contingency, financing, holding, selling.
✓Judge profit three ways — dollars, margin (÷ ARV), and cash-on-cash.
✓Underwrite a realistic timeline, then stress-test extra months of carry.
✓Use the 70% rule to screen, a full underwrite to decide, and a stress test to confirm the margin of safety.

Educational information only — not legal, tax, or financial advice. Real estate involves risk; verify numbers and consult licensed professionals before making decisions.

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