“Flipping” is a term used to describe the process of buying a house that has fallen into disrepair with the intention of renovating it back to a livable condition and reselling it at a profit. For those with the right skills and available funds to invest in a remodel, flipping houses can generate a significant source of income. How much do investors spend on a flip? Although prior experience can help flippers estimate the price of renovations, no two flips are alike. This can make budgeting difficult. As a real estate agent, you can assist investors searching for distressed properties and help them calculate a realistic profit potential. By serving as an advisor to your client, you'll have the potential to generate repeat business from investors looking to flip houses.
Initial Investment: Purchase Price and Beyond
The purchase price is typically the largest cost of a flip and can set the tone in terms of how much profit an investor will earn. For this reason, you’ll want to help your client search for an opportunity to buy properties that are priced below market value. This gives them room to spend additional funds on renovations and resell the house at or above market value. Flippers refer to their expected resale price as the After Repair Value (ARV).
To ensure that an investor doesn't overpay for a fixer-upper, you’ll want to work with them to calculate a maximum allowable offer (MAO) for each property under consideration. The MAO may differ between investors, based on their individual assessments of the repairs needed, financing costs, and their desired profit margin. One formula used to calculate the MAO starts by reducing the estimated After Repair Value (ARV) by 30%. Next, subtract the expected cost of the renovations from that number. For example, if newly updated or renovated homes in the area sell for around $200,000, reduce this number by 30%, which equals $140,000. If your client expects to spend around $40,000 on renovations, then the maximum allowable offer should be in the neighborhood of $100,000 ($140,000 ARV -$40,000 repairs).
Aside from the purchase price, investors incur additional expenses when buying a house. These expenses may include the costs of performing due diligence, home inspections, and appraisal costs. You should also let them know which closing costs they will be responsible for paying at settlement.
Renovation Costs: Plan for the Unexpected
As you walk through a distressed property with an investor, discuss the items you believe will need to be fixed to bring the home into livable condition and add value to a future buyer. The house may only need cosmetic improvements like updated flooring and paint. If more costly renovations are required, like a roof replacement or a new heating system, they should be factored into the investor's renovation budget. Remind your client that it's not always possible to visualize all the work that needs to be done prior to the home purchase. They should plan for the unexpected with additional funds in their renovation budget.
Once investors determine what renovations are needed, they'll need to price out replacement materials. They may ask you if you can get away with a simple builder’s grade kitchen cabinet, or will spending the extra money for a luxury kitchen net you both a higher sales price and higher profit for the home? Prepare to share your thoughts on home fixtures based on your knowledge of buyers in the local area. You should also recommend that your clients get more than one estimate for the work to be done and ask their contractors how unexpected repair costs will be handled.
Holding Costs: The Expenses of Time
Many first-time flippers discount the costs of holding onto a property while renovating. While the individual expense of a utility bill may seem small, over several months, these holding costs can accumulate. Here are some common examples of holding costs to discuss with house flippers:
Property Taxes
As the owner of record, they will pay property taxes while the house is in their name.
Loan Payments
If they're like nearly 36% of flippers today, according to Attom Data Solutions' latest house flipping report, the buyer will need a loan to purchase the property. Monthly payments will need to be made until the house can be resold and the loan paid off.
Utilities
Utility services must be established to complete the renovations and keep the property from suffering the effects of freezing cold or extreme heat. Flippers should count on paying for electric, gas, water, sewer, heating oil, and trash removal while they work on the property and list it for sale.
Association Dues
If the home is located within a homeowners association or condo association, add the monthly or quarterly fees into their budget for holding costs.
Insurance
Whether or not they finance the property with a mortgage loan, they'll still want insurance to protect their investment. As a real estate agent or broker, you can develop a list of insurance companies to provide to homebuyers looking for referrals.
Permits
Many cities and townships require permits and inspections for significant renovations to existing homes. Real estate agents should learn about the local permitting process to help inform clients in the process of flipping a house.
Selling Costs
After the renovations are complete, flippers continue to pay holding costs until the house is resold. Additional sales costs may include the following:
Marketing and Photography
Discuss a marketing plan with your client. Some of the expenses may be built into your selling fees. If not, the investor will need to budget at least a few hundred bucks for professional photography, along with any additional advertising costs you recommend that will help attract a buyer.
Agent Commissions
Discuss your commission with the investor before they buy a property to flip. They will need to factor this amount into their budget.
Staging
Work with your client to determine if staging is worthwhile. This additional cost could help a home sell faster and may net a higher offer price. The average price for staging is $500-600 per room, per month.
Seller’s Closing Costs
In addition to your agent commissions, the seller may owe prorated utilities, fees associated with paying off their mortgage, and credits to the buyers for inspection items or repairs. Transfer taxes and pro-rated property taxes may also be due at closing.
Capital Gains Taxes
Due to the timing of a flip, investors should also expect to pay taxes on short-term capital gains taxes related to the flip. Federal short-term capital gains are taxed at the same rate as income. Some states also take a cut through capital gains taxes. The federal tax is a given no matter where they buy.
Financing a Flip: Exploring the Options
Investors have the option to pay in cash or to secure financing through a mortgage or other type of loan. They may ask you for advice about which method of payment will improve their chances of success when bidding on a home.
Cash purchases
Investors who buy a house with cash will do so because it’s cheaper and quicker than using a loan. Cash buyers may also have an advantage when competing with other buyers who need financing. Some distressed property purchases, like an auction buy, require cash. Other all-cash benefits include:
Added negotiating power allowing the buyer to ask for better pricing when offering a quick close and no mortgage contingency.
Avoids financing costs that reduce profit.
Removes the need to meet loan stipulations like a minimum required amount of insurance coverage. (Although the buyer should have some amount of insurance during the flip.)
Cash buyers do not need to meet a lender’s credit requirements.
Borrowing Funds for a Flip
Many people think of flipping homes as an investment strategy that’s limited to investors with hundreds of thousands of dollars in the bank. While that kind of cash certainly helps, it’s not always a necessity.
If a client needs to finance part of the purchase price, a conventional mortgage isn’t necessarily the only option. Hard money loans are one alternative that use the newly purchased property as collateral. These loans are structured with interest-only payments in the short-term and generally provide fast access to cash. The investor has time to fix up the house and sell it before they must begin paying down principle. But the downside of a hard money loan is a higher interest rate compared to a conventional mortgage. Traditional banks do not offer hard money loans, so it’s a good idea for you as an agent to develop a network of reputable lenders for clients seeking a hard money loan.
Like hard money lenders, private lenders are another option for financing, as they can set their own qualification terms for a loan. Interest rates will be higher when working through a private lender, but investors may develop a long-term relationship with a financing partner that gives them the ability to access funds and capitalize on flip opportunities when something pops up on the market.
Another option is to leverage equity in a primary home with a Home Equity Line of Credit (HELOC). HELOCs offer a source of credit to access as needed, typically at rates lower than credit card rates. However, not every investor has the appetite to use their primary home as collateral.
When reviewing financing options with clients, don’t forget to mention loan origination fees and interest points charged by the lender. These amounts can sometimes affect the overall economics of one loan compared to a different financing option.
Calculating Profit: Understanding ARV and ROI
Many flippers focus on a property’s After Repair Value (ARV) when calculating potential profit. The ARV is the amount they can expect to sell the home for when the upgrades and renovations are finished. Real estate agents can assist clients by looking at comparable sales data for similar houses in nearby locations to determine an approximate ARV. These sales are known as “comps.”
In addition to ARV, flippers should calculate their expected Return on Investment (ROI) for each property. If a house is purchased for $100,000 cash and the investor spends $50,000 on renovations and another $10,000 in carrying costs and selling costs, their total investment is $160,000. If the house goes on to sell for $200,000, the profit would be $40,000. The return on their investment is then $40,000 divided by $160,000, or 25%. However, if the investor needs to borrow money for the purchase and pays an additional $10,000 in interest, but the selling price is still $200,000, the total investment would be $170,000, the profit $30,000, and the ROI would be around 17.6%.
Risk Mitigation: Protecting an Investment in a Flip
In addition to securing property insurance against risk of theft, damage, or loss, it's important to consider other potential risks encountered during the flipping process, such as financial risk and logistical risk.
Investors are required to make financial assumptions in order to set their renovation budget and the purchase price they're willing to pay for a distressed property. They'll also calculate an ARV, or final sale price. Although these financial estimates may incorporate years of flipping experience, there’s always a chance that something could change. For example, the renovated home appraisal may be lower than expected, meaning the house cannot be sold at the estimated ARV. Or interest rates could rise significantly and affect financing costs.
Logistical risk refers to unforeseen or unaccounted for delays in the flipping process. Time is money for flippers, and any sort of slowdown adds to their costs. While they may budget carrying costs for three months, what if materials ordered don’t arrive as scheduled? Or a contractor suddenly goes out of business, leaving them no choice but to restart the bidding process?
To help clients manage the risks associated with flipping a house, you can work with them to do the following:
Set realistic profit goals: Although it’s tempting to look at the highest home sales in the neighborhood to come up with a top dollar profit, is that truly the most likely scenario? Instead, offer your client a range of potential pricing to help set realistic expectations.
Develop good relationships with contractors: Aim to build long-standing, trusted relationships with local contractors willing to offer their services to investors. Chances are better that the job will go smoothly, your client will hit their budget and return to you for future home purchases.
Develop your knowledge of the local market: Real estate agents are regarded as experts in their field. Spend time developing your understanding of home prices in your area. Commit to continuing education and aim to add value to clients in search of flipping opportunities.
Add Value to the Flipping Process as a Knowledgeable Real Estate Agent
The first step to flipping is finding a home to purchase. Real estate agents will add value to the process by bringing distressed home sales to their clients' attention and working through profitability metrics together. Knowledgeable agents will also assist in price negotiations and offer advice to clients looking to strengthen an offer to buy a home to flip.
Are you working with a client interested in flipping a property? Learn more about the process on our website, including how to find the best opportunities in your local area.
Updated 5/2/25