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Flip Math: Pricing a Colorado Fix-and-Flip Offer

The maximum offer: building it from the house's numbers

Pricing a house the investor way · 1 study hours

Bottom line: The maximum offer comes from working backward from that house's after-repair value, subtracting its repairs, holding, buying and selling costs, fees and a profit target; the 70% rule is only a rough first screen.

Bottom line first. A cash buyer does not guess a price. They start from what the finished house will sell for and subtract every cost and the profit they want. What is left is the most they can pay. Every number here is per house, taken from that house's beds, size, condition and neighborhood. County or market averages are only summaries, never the price.

Working backward

We use one made-up house the whole course: a 3-bed, 2-bath, 1,400 square foot ranch in a made-up neighborhood called Aspen Bend Heights. Its after-repair value (ARV) is $450,000. ARV is what the house should sell for once the work is done, judged from similar finished houses nearby. Earlier lessons built the repair bill, the holding cost and the closing costs on both sides. This lesson puts them together.

Working backward means you begin at the ARV and walk down. Each step subtracts one cost. The last step subtracts the profit the buyer needs. The leftover number is the maximum offer: the most the buyer can pay and still reach the target profit. Pay more and the profit shrinks. Pay less and the profit grows.

The cost lines for this house

  • Repairs: $75,350. This is the budget from lesson 2, including a contingency of 10 percent, which is extra money set aside for surprises found once walls are open.
  • Holding costs: $19,740. Five months at $2,940 a month ($14,700) plus 2 points on the loan ($5,040), from lesson 3. The loan is 90 percent of the $280,000 price ($252,000), interest-only at 11 percent.
  • Buying costs: $2,150 before the documentary fee: owner's title policy $1,500, closing fee $600 and recording fee $50 (examples from lesson 4).
  • Selling costs: $27,345. Commission of 5 percent of the ARV ($22,500), title and closing $1,800, a seller concession of $3,000, and the sale-side documentary fee of $45.
  • Documentary fee. Colorado charges a fee when a deed is recorded: one cent for each one hundred dollars of consideration, or major fraction of it, once the price is over five hundred dollars (C.R.S. 39-13-102(2)(b)). The sale at $450,000 is 4,500 hundreds, so the fee is 4,500 x $0.01 = $45 (already inside the selling line). The same fee applies on the buy side, on the buy price. (In real deals who pays it can be negotiated; here we count it against the buyer both times.)
  • Target profit: $45,000. This is a choice. A buyer picks it from the risk, the work and what else the money could do. Another house, another buyer, another target.

Example with real numbers

Step by step, before the buy-side documentary fee:

  1. Start with ARV: $450,000.
  2. Subtract selling costs: $450,000 - $27,345 = $422,655. (This is the net from the sale in lesson 4.)
  3. Subtract target profit: $422,655 - $45,000 = $377,655.
  4. Subtract repairs: $377,655 - $75,350 = $302,305.
  5. Subtract holding: $302,305 - $19,740 = $282,565.
  6. Subtract title, closing and recording: $282,565 - $2,150 = $280,415.
  7. Subtract the buy-side documentary fee at about $280,000 ($28.00): $280,415 - $28 = $280,387.

Check against lesson 4: at a $280,000 purchase the whole flip made $45,387. That is $387 more than the $45,000 target, which is the same $387 of room the build-back shows over $280,000.

One honest wrinkle. The $19,740 holding cost was figured at a $280,000 price. The loan is 90 percent of the price, so every extra $1 of price adds 90 cents of loan. That brings about 4.1 cents more interest over 5 months (0.90 x 0.11 x 5/12), 1.8 cents more in points (0.90 x 0.02) and 0.01 cent more documentary fee. Each extra dollar of price therefore costs about $1.0594 in all. The $387 of room divided by 1.0594 is about $365, so the true ceiling is about $280,365. The clean offer is $280,000, which leaves $387 spare. A buyer who wants more cushion rounds down further; lesson 7 shows how much.

The 70% rule is only a first screen

The 70% rule is a shortcut: take 70 percent of the ARV, then subtract the repairs. It gives a quick yes or no on whether a house is worth a closer look. For our house: 0.70 x $450,000 = $315,000, minus $75,350 repairs = $239,650.

That is $40,350 below the $280,000 we just built. Why the gap? The rule bakes in one flat 30 percent of ARV ($135,000 here) for all holding, buying, selling and profit together. On this house those lines plus the profit add up to only $94,263: $27,345 selling + $19,740 holding + $2,178 buying (title, closing, recording and the $28 fee) + $45,000 profit. The difference, $135,000 - $94,263 = $40,737, less the $387 of spare room, is the $40,350 gap. A house with a long timeline, expensive borrowing or a thin market could need far more than 30 percent. The rule cannot tell the difference. It uses the same percentage for a 1,400 square foot ranch and a house that needs a new foundation.

So use it like a smoke detector, not a map. If a seller wants $400,000 on this house, the rule says walk away fast, and you saved an hour. If the seller wants $260,000, the rule says no but the real math says yes. Only the house's own numbers can say which.

What a margin tells you

A margin is profit as a share of the sale price. Here $45,000 / $450,000 is 10 percent. Buyers compare margins across houses, but a margin is a result of the math, not a substitute for it.

Common mistakes

  • Forgetting a cost line. Each missing line raises the offer by the same amount and eats the profit by the same amount.
  • Using an ARV from the best-looking sale instead of from houses really like this one in size, beds and condition.
  • Treating the offer as the opening price. It is a ceiling, not a target.

The ceiling is also where the wholesale math in the next lesson starts. General education, not financial advice. Every figure here is a made-up example except the documentary fee rate, which comes from the statute.

Law cited

Key terms

After-repair value (ARV)
What the house should sell for once the repairs are finished, judged from similar finished houses nearby.
Maximum offer
The most a buyer can pay and still reach their target profit, found by working backward from the ARV.
Contingency
Extra money set aside inside the repair budget for surprises found once work begins.
Holding costs
What it costs to own the house while you work on it and sell it: interest, points, taxes, insurance, utilities.
Target profit
The dollar profit a buyer needs to make the deal worth the risk and work; chosen per house and per buyer.
70% rule
A quick screen: 70 percent of ARV minus repairs. Rough only; it ignores a house's real costs.
Margin
Profit as a share of the sale price.
Documentary fee
A Colorado fee on recorded deeds: one cent per $100 of consideration, or major fraction of it, over $500 (C.R.S. 39-13-102).
Working backward
Starting from ARV and subtracting costs and profit to reach the price you can pay.

Flashcards

What is a maximum offer?

The most you can pay and still reach your target profit.

Where does working backward start?

At the after-repair value.

Max offer for Aspen Bend Heights at a $45,000 target?

$280,387 before the holding shift, a true ceiling of about $280,365, and a clean offer of $280,000.

70% rule for our house?

0.70 x $450,000 - $75,350 = $239,650.

Is the 70% rule a price?

No. It is a rough first screen only.

Doc fee on a $450,000 sale?

4,500 hundreds x $0.01 = $45.

What is a contingency?

Extra repair money for surprises; here 10 percent.

What is a margin?

Profit divided by sale price; here $45,000 / $450,000 = 10%.

Why is the 70% rule $40,350 below the built-up offer?

It sets aside a flat 30% of ARV ($135,000); this house's real costs plus profit are $94,263.

Is the maximum offer an opening price?

No. It is a ceiling.

Quiz: 10 questions

Tap an answer. It shows right or wrong and opens the reason. Your score is saved in this browser and counts in the study app.

  1. What does it mean to build an offer by working backward?

    1. A Start from the seller's asking price and add your costs
    2. B Start from the after-repair value and subtract costs and profit to reach the most you can pay
    3. C Start from the county average and multiply by 70 percent
    4. D Start from the repair bill and add a fixed profit
    Show answer and why

    Answer: B. Start from the after-repair value and subtract costs and profit to reach the most you can pay

    The ARV is the one number you are trying to reach in the end, so you subtract everything standing between it and your profit. Starting from the asking price tells you nothing about what the house can support.

    Aspen Bend Heights example (made up)

  2. ARV $450,000, selling $27,345, profit $45,000, repairs $75,350, holding $19,740, title/closing/recording $2,150. Before the buy-side documentary fee, the maximum offer is:

    1. A $302,305
    2. B $282,565
    3. C $239,650
    4. D $280,415
    Show answer and why

    Answer: D. $280,415

    450,000 - 27,345 - 45,000 - 75,350 - 19,740 - 2,150 = 280,415. $302,305 stops after repairs; $282,565 forgets the buying costs; $239,650 is the 70% screen.

    Aspen Bend Heights example (made up)

  3. Documentary fee rate: one cent per $100 of consideration, or major fraction. What is the fee on a $280,000 purchase?

    1. A $28.00
    2. B $280.00
    3. C $2.80
    4. D $2,800
    Show answer and why

    Answer: A. $28.00

    280,000 / 100 = 2,800 hundreds, and 2,800 x $0.01 = $28.00. The tempting $2,800 treats a cent as a dollar.

    C.R.S. 39-13-102(2)(b)

  4. By the 70% rule, ARV $450,000 and repairs $75,350 give:

    1. A $315,000
    2. B $374,650
    3. C $239,650
    4. D $135,000
    Show answer and why

    Answer: C. $239,650

    0.70 x 450,000 = 315,000; 315,000 - 75,350 = 239,650. $315,000 forgets the repairs; $135,000 is the flat 30 percent the rule sets aside.

    Course example (70% rule)

  5. Why is the 70% rule only a rough first screen?

    1. A It is against the law in Colorado
    2. B It uses the same flat percentage for every house, whatever that house's real costs and profit target
    3. C It always gives a price that is too high
    4. D It only works for houses over $500,000
    Show answer and why

    Answer: B. It uses the same flat percentage for every house, whatever that house's real costs and profit target

    The rule bundles holding, buying, selling and profit into one 30 percent of ARV. A house's real lines can be well under or over that, so only the house's own numbers can set the offer.

    Course example (70% rule)

  6. Repairs rise by $10,000 and nothing else changes. The new maximum offer before the buy-side documentary fee, using the lesson's step-by-step subtraction, is:

    1. A $270,415
    2. B $290,415
    3. C $280,415
    4. D $260,415
    Show answer and why

    Answer: A. $270,415

    Every extra repair dollar comes straight off the ceiling: 280,415 - 10,000 = 270,415. Raising it to $290,415 would add the overrun instead of subtracting it.

    Aspen Bend Heights example (made up)

  7. Which is NOT subtracted when working backward from the ARV?

    1. A Repairs including contingency
    2. B Holding costs
    3. C Selling costs
    4. D The ARV itself
    Show answer and why

    Answer: D. The ARV itself

    The ARV is the starting number. Repairs, holding, buying and selling costs, fees and target profit all come off it.

    Aspen Bend Heights example (made up)

  8. In a repair budget, a contingency is:

    1. A A loan the buyer takes out to pay for repairs
    2. B The fee a county charges when a deed is recorded
    3. C Extra money set aside for surprises found once work begins
    4. D The profit the buyer wants after the sale
    Show answer and why

    Answer: C. Extra money set aside for surprises found once work begins

    A contingency is a cushion inside the repair number. The county charge is the documentary fee, and profit is a separate line.

    Aspen Bend Heights example (made up)

  9. Marcus pays $295,000 on this house with the same costs as lesson 4 (the loan is 90 percent of his price, so holding rises too). His profit is about:

    1. A $45,000
    2. B $29,500
    3. C $15,000
    4. D $34,800
    Show answer and why

    Answer: B. $29,500

    He pays $15,000 more than $280,000, and each extra dollar of price adds about 5.9 cents of interest, points and documentary fee: 45,387 - 15,000 - 890 = about 29,497. He is about $15,500 short of the $45,000 target.

    C.R.S. 39-13-102(2)(b)

  10. How far below the built-up $280,000 is the 70% rule's $239,650?

    1. A $40,350
    2. B $135,000
    3. C $94,263
    4. D $5,040
    Show answer and why

    Answer: A. $40,350

    280,000 - 239,650 = 40,350. The rule sets aside a flat $135,000 while this house's selling, holding, buying and profit lines total only $94,263.

    Course example (70% rule)

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