Most investors learn deal analysis by doing deals and losing money. There's a better way.
This is a complete walk-through of how to analyze a fix-and-flip deal from start to finish, using a concrete example. Every number is hypothetical but realistic. By the end you'll know exactly what to do when a motivated seller calls.
The scenario
A seller contacts you about a 3-bedroom, 2-bathroom, 1,400 square foot house built in 1978. The property has been a rental for the past decade and it shows: dated kitchen, dated baths, worn carpet, aging HVAC, and a roof that's got about three years left. The seller wants to close fast and wants to know what you can offer.
Before you can answer, you need four numbers: ARV, repair estimate, holding costs, and closing costs. Everything else is arithmetic.
Step 1: Establish the ARV
ARV is what the property will sell for once repairs are done. You're not estimating what it's worth today — you're estimating what it will sell for to a retail buyer after a full renovation.
Pull sold comps from the last 90 days within half a mile. You want renovated homes of similar size, age, and bedroom count. Filter out distressed sales, estate sales that look off-market, and anything across a major road or school district line.
For our example, you find five relevant sales:
- 123 Maple St: 3/2, 1,350 sqft, sold 45 days ago at $258,000 — renovated kitchen and baths
- 456 Oak Ave: 3/2, 1,420 sqft, sold 62 days ago at $247,000 — updated but not full renovation
- 789 Elm Rd: 3/2, 1,380 sqft, sold 28 days ago at $253,000 — full renovation, new HVAC
- 321 Pine St: 3/1, 1,450 sqft, sold 55 days ago at $230,000 — only one bath, less comparable
- 654 Cedar Dr: 3/2, 1,600 sqft, sold 80 days ago at $272,000 — larger, adjust down
You remove the 3/1 because the different bath count is too significant. For the others, the size-adjusted range clusters around $248,000-$258,000. You use $250,000 as your ARV — it's the median of your best comps and you can defend it.
Step 2: Estimate repairs
Walk the property with a systematic approach. Use the same checklist every time so you don't miss anything. Major categories:
Foundation and structure: This house has a crawl space. A quick inspection reveals no obvious issues — no visible cracks, no moisture. Note it as "appears sound — full inspection required." This is not a number yet; it's a risk flag.
Roof: You've been told it has about 3 years left. You'll replace it. A new 30-year architectural shingle roof on a 1,400 sqft house typically runs $7,000-$12,000 depending on pitch and materials. Budget $9,000.
HVAC: Aging system. Budget to replace both the furnace and AC. $6,000-$9,000 installed. Budget $7,500.
Kitchen: Full gut, new cabinets, counters, appliances, flooring. $15,000-$25,000 depending on scope. You want to compete with those renovated comps. Budget $18,000.
Bathrooms (2): New vanities, tile, toilets, fixtures. $5,000-$8,000 each. Budget $6,500 each = $13,000.
Flooring: Pull carpet throughout, install LVP. 1,400 sqft at $4-$6 installed = $7,000.
Paint: Interior full paint, $3,500. Exterior touch-up, $1,500. Total $5,000.
Windows: 8 original windows from 1978. Budget for replacements: $400 each = $3,200.
Electrical and plumbing: 1978 construction may have aluminum wiring or galvanized plumbing. Budget $3,000 for minor updates; flag for inspection to determine if major work is needed.
Landscaping and exterior: Cleanup, mulch, minor grading. $2,000.
Permit allowance: Budget $1,500 for permits.
Contingency (15%): Add 15% to your subtotal for surprises. You will find surprises.
Subtotal: $9,000 + $7,500 + $18,000 + $13,000 + $7,000 + $5,000 + $3,200 + $3,000 + $2,000 + $1,500 = $69,200
With 15% contingency (add 15%): $69,200 × 1.15 = roughly $80,000 — that’s your repair budget
That's your repair estimate. It feels high on a $250,000 ARV house, which is correct — this is a heavy rehab. We'll use it as-is in the MAO calculation.
Step 3: Calculate holding costs
You expect this rehab to take 4 months given the scope. Add 2 months to list and close. Total hold: 6 months.
Monthly holding costs at a 12% hard money rate on your expected loan of $105,000:
- Interest: $105,000 × 12% / 12 = $1,050/month
- Taxes: $200/month
- Insurance: $150/month
- Utilities: $125/month
- Maintenance: $75/month
Total per month: $1,600 Six months: $9,600 → round to $10,000
Step 4: Calculate closing costs
Buy side:
- Origination points (2 points on $105k loan): $2,100
- Title insurance, closing costs: $2,500
- Inspection: $500
Sell side:
- Agent commission (5%): $12,500
- Seller closing costs: $2,500
- Transfer tax: varies by state, budget $500
Total closing costs: approximately $20,600 → round to $21,000
Step 5: Run the MAO formula
MAO = ARV × target % − repairs
At 70%: $250,000 × 0.70 = $175,000 − $80,000 repairs = $95,000 MAO
Let's verify that number tells the full profit story:
- ARV: $250,000
- Purchase price: $95,000
- Repairs: $80,000
- Holding costs: $10,000
- Closing costs (buy + sell): $21,000
- Total costs: $206,000
- Gross profit: $44,000
- Less hard money points ($2,100 already included): net profit approximately $44,000
That's a 17.6% return on costs, or about 8.8% annualized on a 6-month hold. Reasonable for a heavy rehab in a mid-priced market.
If you can get the property for less than $95,000, your profit improves. If your repair estimate runs over — which it might on a 1978 house — your profit compresses. This is why the contingency buffer matters.
Step 6: Make the offer
Your offer is $90,000 — slightly below MAO to give yourself negotiating room and a little cushion if the inspection reveals anything unexpected.
Frame the offer professionally. Explain the comps and the repair estimate briefly. Sellers who understand why you're offering what you're offering are more likely to accept than sellers who feel like they're just getting a lowball with no reasoning.
If the seller needs more, you have room to move to $95,000 (MAO) and still hit your target return. Beyond that, the deal doesn't work at a full rehab scope — unless you can find ways to cut repair costs, which a second scope walk sometimes reveals.
What makes deals fall apart after this point
Most deals that look good at analysis fail for one of three reasons:
Inspection reveals structural issues. Hidden foundation problems, mold behind walls, or plumbing/electrical issues beyond the budget. This is why you need an inspection period and a real contractor walk before you remove contingencies.
ARV shifts. In a fast-moving market, your comps can be stale by the time you're ready to list. Build in 3-6 months of possible market change when you're analyzing.
Repairs run over. They almost always do. The 15% contingency helps, but heavy rehabs on older properties frequently run 20-25% over the initial estimate. That's part of why your first offer should be below MAO, not at it.
Run every deal through Underwritey before you make an offer. The comps get pulled automatically, the MAO formula runs in real time, and every number is visible so you can spot where you're making assumptions. Start your first underwrite free →