Fix & flip basics

A flip is a construction project financed against a sales deadline.

The television version shows demolition, finishes, and a large subtraction problem at the end. The real version adds permit delay, draw timing, theft, change orders, buyer credits, selling costs, and interest that posts every month whether the contractor arrives or not.

Paint matters. The basis, scope, calendar, and exit decide whether anybody gets paid for choosing it.

Profit is the last account paid

The lazy formula is resale price minus purchase price minus rehab. That is not profit. That is three numbers ignoring everyone else in line.

Use the full calculation:

Conservative resale value - selling costs - purchase and closing - rehab - financing and holding - contingency = profit before tax.

Every input needs a source and a date. Pull closed sales and compare square footage, condition, bedroom and bathroom count, concessions, financing, location, and sale date. Active listings show what your finished property will compete against. Closed sales show what a buyer already funded.

Do not let the best comp carry the base case. If the project needs a neighborhood record to pay you, your margin is being held hostage by a stranger’s future mortgage approval.

The $320,000 resale that leaves $3,150

Assume a tired house is offered at $185,000. The cleanest renovated comps suggest $320,000, while ordinary renovated sales cluster closer to $305,000.

Line item	Sales-pitch case	Pressure-tested case
Resale price	$320,000	$305,000
Selling and closing costs	($22,400)	($21,350)
Purchase price	($185,000)	($185,000)
Purchase closing costs	($4,500)	($4,500)
Rehab	($52,000)	($62,000)
Financing and holding	($18,500)	($24,500)
Buyer credit and final punch	($4,500)	($4,500)
Profit before tax	$33,100	$3,150

The pressure case does not require catastrophe. It requires a $10,000 scope miss, three extra months, and a resale below the prettiest comp. Ordinary friction erased about 90% of projected profit.

Reverse the arithmetic before offering. With a $305,000 conservative exit, 7% selling costs, $62,000 rehab, $24,500 financing and holding, $4,500 acquisition costs, and a $30,000 minimum pre-tax profit, the maximum purchase price is about $162,650. The seller wants $185,000.

That $22,350 gap is not motivation waiting to be discovered. Retrade with evidence or let somebody else volunteer to fund it.

Gate one: make the exit prove its balance

Build a comp sheet from closed sales. Verify the details against public records or the local multiple-listing data available to your agent or appraiser. Record seller concessions and days on market. Then check the likely buyer pool—conventional, FHA, VA, or cash—and the financing constraints that may affect the sale.

HUD’s current FHA guidance says a resale within 90 days is generally ineligible for FHA insurance unless an exemption applies, and some resales from 91 to 180 days can require additional support. Your planned closing date can reduce the buyer pool. The calendar does not merely count days; it can edit the list of people able to finance your exit.

Use a conservative base sale, a lower downside sale, realistic selling costs, and a market-time assumption. The acquisition comp sheet is a dated document. Recheck it as the job moves.

Gate two: give the expensive systems a microphone

Inspect the roof, foundation, drainage, sewer, electrical service, plumbing supply, HVAC, windows, termites, insurance history, title, open permits, code issues, and flood exposure. When the general inspection raises a specialist issue, hire the relevant specialist.

FEMA’s Flood Map Service Center is the official starting point for flood-hazard mapping. The insurance quote and property history still require their own verification.

“Probably fine” cannot be entered in a cost ledger. Until evidence resolves it, an uncertain system is a range, a contingency, or a reason to leave.

Gate three: turn the scope into payment instructions

Before demolition, freeze a written scope. State quantity, material, labor, allowance, exclusion, responsible party, start date, finish date, permit duty, cleanup, and payment milestone. Get competing written bids for meaningful trades.

The FTC recommends written estimates and contracts identifying the work, materials, schedule, price, contractor, and license information where required. A draw should correspond to verified work and the contract—not the contractor’s unrelated cash emergency.

For pre-1978 housing, do not improvise around lead requirements. EPA says its Renovation, Repair and Painting rule applies when a house flipper pays for covered work that disturbs painted surfaces. Confirm certification, lead-safe practices, notices, and records before the work creates dust.

Approve change orders in writing before work starts, except for a documented emergency. The phrase “while we’re here” has opened more budgets than any crowbar.

Gate four: close the books every Friday

Update committed cost, paid cost, cost to complete, contingency remaining, days ahead or behind, interest accrued, permit status, and revised list date. Photograph concealed work before the walls close. Tie every draw to contract scope, inspection, invoice, and any required lien release.

A budget-to-actual report only tells you where the cash went. Cost to complete tells you whether enough cash remains to finish.

When projected profit falls below the minimum, stop defending the original idea. Cut unsupported finishes, change the exit, recapitalize deliberately, or sell the project. Hope has no approval authority and keeps terrible records.

Gate five: let the buyer audit your work first

Before listing, perform your own final walk from a buyer’s point of view. Close permits. Finish the punch list. Collect warranties, paid invoices, lien releases, material receipts, before-and-after photos, and disclosure support. Recheck title and the seller closing statement.

Then price against the market that exists now. Your acquisition spreadsheet has no vote at the buyer’s appraisal.

A small unfinished item can cost more than its repair when it triggers doubt about concealed work. Buyers do not need to love your bookkeeping, but the house should survive the questions your file claims it can answer.

Keep the money trail in one room

Your project file should include:

• purchase contract, title commitment and exceptions, survey, and inspection reports;
• insurance quote, available claims information, flood map, permit search, and code records;
• contractor licenses and certificates, signed scopes, bid tab, draw schedule, and approvals;
• invoices, change orders, lien releases, photos, warranties, and the weekly budget;
• financing agreement, interest and payoff calculations, and reserve balance;
• comp sheet, disclosure forms, listing agreement, and draft settlement statement.

Keep a tax folder too. IRS Publication 544 explains that property held mainly for sale to customers in a trade or business is not a capital asset. A repeated flipping operation can receive very different federal tax treatment from casually selling an investment. Ask a qualified tax professional how your facts apply before spending money labeled “profit.”

This is education, not legal, tax, lending, environmental, or construction advice. Local rules, contracts, property conditions, and professional requirements control the actual project.

The next move is mechanical: reverse-underwrite one candidate from a conservative sale price, price every account, and calculate the maximum purchase before writing the offer. A flip is not won by making an ugly house beautiful. It is won by leaving enough unclaimed cash in the project for ordinary bad news and your paycheck to coexist.

Sources

• IRS Publication 544: Sales and Other Dispositions of Assets
• EPA: Lead Renovation, Repair and Painting Program
• HUD FHA Connection: Property Flipping
• FEMA Flood Map Service Center
• Federal Trade Commission: How to Avoid a Home Improvement Scam