Most house flippers lose money not on the sale price but on the rehab budget. Underestimating renovation costs is the number one mistake that turns profitable deals into losses. Here is how to build an accurate scope of work before you make an offer.
Step 1: Walk the Property Systematically
Bring a notepad and walk through every room in a consistent order. Check the roof, foundation, electrical panel, plumbing fixtures, HVAC equipment, windows, flooring, kitchen, bathrooms, and exterior. Note the condition of each element and flag anything that needs repair or replacement.
Step 2: Categorize Repairs by System
Organize your scope of work into systems: structural, roof, HVAC, plumbing, electrical, exterior, interior finishes (flooring, paint, trim), kitchen, bathrooms, and site work (driveway, landscaping). This approach ensures you do not miss entire categories.
Step 3: Use Cost-Per-Square-Foot Estimates as a Starting Point
Light cosmetic rehab (paint, flooring, fixtures): $15 to $30 per square foot. Medium rehab (kitchen and bath updates, some systems): $30 to $60 per square foot. Heavy rehab (full gut, new systems, structural work): $75 to $125 per square foot. Full gut to studs with luxury finishes: $100 to $200 per square foot. These are ranges and vary significantly by market and material choices.
Step 4: Get Contractor Bids Before Finalizing Your Offer
If possible, bring a trusted contractor to walk the property with you before submitting an offer. A rough verbal estimate from someone who has done similar work is far more reliable than any calculator. Even if the bid takes a week, the data is worth it.
Step 5: Build in a Contingency Buffer
Always add 10 to 20 percent on top of your estimated rehab costs as a contingency. Hidden water damage, permit surprises, and scope creep are nearly universal on older homes. The flipper who budgets right has a cushion; the one who does not gets squeezed.
The Maximum Allowable Offer (MAO) Formula
After Purchase Price (ARV) multiplied by 70 percent, minus Rehab Costs equals the Maximum Allowable Offer. Example: A home with a $300,000 ARV and $50,000 in estimated rehabs has a MAO of $160,000. This formula accounts for holding costs, agent fees, and profit margin.
Common Budget Killers
Foundation repairs, mold remediation, full roof replacement, asbestos or lead abatement, full HVAC replacement, and unpermitted additions that must be brought to code are all budget-killers. Price these out specifically if any apply.