What does it mean to fix and flip real estate?

The fix and flip strategy has grown exponentially since the 2008 global financial crisis. Investors who have built their real estate investing business plan around the fix and flip strategy purchase distressed properties at a discount, rehab/renovate them and sell them at a higher price. This strategy profits from the property’s appreciation post-renovation.

How to calculate the fix and flip value (FAFV)?

Fix and Flip Value = Purchase Price + Cost of Repairs

Example: An investor from Bali acquires an investment property that he is looking to fix and flip in Detroit, Michigan for $75,000 but the surrounding properties are valued at an average of $130,000. The property is in poor condition and will require $15,000 in rehab.

Fix and Flip Value = $90,000
Purchase Price = $75,000
Cost of Repairs = $15,000

How to calculate the after-repair value (ARV)?

After-Repair Value = Fix and Flip Value + Profit

Example: The investor from Bali finished rehabbing the property in Detroit, Michigan and is ready to sell. However, the investor discovered that the property only needed $10,000 in rehab rather than the expected $15,000. The market’s average property value is $130,000.

After-Repair Value = $130,000
Fix and Flip Value = $85,000
Profit = $45,00

Profit = $45,00
Average Value = $130,000
Fix and Flip Value = $85,000

Fix and Flip Value = $85,000
Purchase Price = $75,000
Cost of Repairs = $10,000

Calculation notes:

The after-repair value of a fix and flip project should be calculated pre-rehab and post-rehab. This investor from Bali generated two different after-repair values as the cost of repairs was $5,000 less than anticipated. In this example, the investor was greeted with a pleasant surprise post-rehab as his expenses were less than expected. However, buying distressed properties can also come with unexpected repairs which means a property may require additional rehab expenses than expected. This will increase the fix and flip value, decrease the profit, and decrease the after-repair value.

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