Fixing and flipping means buying a distressed property below market, renovating it, and reselling at its after-repair value. It's the second rung on the come-up ladder ... bigger numbers than wholesaling, and real money and real risk on both sides of them. Here's the beginner's map.
Educational information only. Not investment, legal, tax, construction, or appraisal advice, and nothing here is a promise that any number produces a profit.
The flip in five steps
- Find a discounted, distressed property ... off-market sources give you the margin (see Finding Off-Market Deals).
- Analyze the numbers ... ARV, repair estimate, and a maximum offer from the 70% rule of thumb.
- Fund the purchase + rehab ... often hard or private money.
- Renovate ... on budget, on schedule, to a sellable standard.
- Sell ... list on-market at ARV and keep whatever survives the costs.
The numbers that decide everything
Flipping profit isn't the sale price minus the purchase price. It's the sale price minus all of this:
- Purchase price
- Repair costs (see How to Estimate Rehab Costs)
- Holding costs ... loan interest, taxes, insurance, utilities while you own it
- Transaction costs ... closing costs on both ends + agent commissions on the resale
That list is what the 70% rule is trying to cover in one line: MAO = (ARV × 0.70) − repairs. It is a rule of thumb, not a law, and no primary source establishes the 70 percent figure. We went looking and found none. No statute, no regulation, no federal agency handbook and no mortgage selling guide sets a maximum-offer multiplier, at 70% or at any other number. It circulates in investor and lender marketing content, and repetition is not authority.
What the gap between 70% of ARV and full ARV is actually doing is absorbing the holding and transaction costs above, plus the distance between the repair estimate and the repair bill. It is not profit. What survives those is the margin, and it is smaller than 30% every time. So use the rule of thumb for what it is good at, throwing out bad deals in ten seconds, and be conservative on both ARV and repairs ... optimism is how flips lose money.
Both inputs deserve real work. An ARV is built from closed sales of houses like the one you will be selling, and the best public standard for that is the appraiser's. For loans sold to Fannie Mae, "a minimum of three closed comparables must be reported in the sales comparison approach," matched on characteristics that "include, but are not limited to, site, room count, finished area, style, and condition" (Fannie Mae Selling Guide B4-1.3-08). FHA states the other half plainly, that comps "should be selected based on similar locational and physical characteristics, not sales price" (HUD Handbook 4000.1, II.D.4). Those are program rules for loans sold to Fannie Mae or insured by FHA, not law for an investor, and they are still the best public statement of how to pick a comp. Match on what the house is, never on the price you need it to support.
Funding a first flip
You need capital for purchase and rehab. Common beginner routes:
- Hard money ... asset-based, fast, finances much of purchase + rehab, but high interest/points and short terms.
- Private money ... an individual lender at negotiated terms.
- Partnering ... you bring the deal + sweat, a partner brings the cash, you split.
See How to Fund Your First Deal With No Money Down for the full menu and the honest costs.
The mistakes that sink first flips
- Optimistic ARV or repair numbers. The fastest way to turn a flip into a loss. Carry a contingency reserve on top of the repair estimate, and borrow a lender's number for its size. In its own 203(k) renovation program HUD requires a reserve of 10 to 20% of the financeable repair and improvement costs on a structure 30 years old or older, with the minimum rising to 15% when the utilities are not operable (HUD Handbook 4000.1, II.A.8.a, Standard 203(k) Financeable Contingency Reserves). Fannie Mae's HomeStyle program requires none on a one-unit property, though the lender may still set one (Fannie Mae Selling Guide B5-3.2-04). Those are what each of those programs requires of its own borrowers. Neither binds a cash flip, which is exactly why they are the benchmark to hold yourself to when nobody is making you. See How to Estimate Rehab Costs.
- Underestimating holding costs. Every extra month of interest, taxes, and utilities eats profit. Time is money ... literally.
- Over-improving for the neighborhood. Don't put luxury finishes in a mid-market block; you won't get it back at resale.
- No exit cushion. If the market softens or the rehab overruns, thin margins turn into losses.
- Managing the rehab blind. Vet contractors, get written scopes and bids, and inspect the work.
Is flipping right for you?
Flipping is active income ... it's a job, not passive wealth. It rewards project-management discipline and conservative math. Many investors flip to generate the capital that funds rentals via BRRRR ... turning active dollars into passive ones.
The come-up move
A flip is won at the buy and the budget, not the sale. Nail conservative ARV + repair numbers, respect holding costs, and pick a project you can actually manage.
Start free on Squatters to run flip numbers on real off-market properties before you risk a dollar. Squat it. Fund it. Own it. 🦝