Fix-and-Flip Financing Without the Jargon: ARV, Loan-to-Cost and Rehab Draws

The three numbers every flip loan starts with

Purchase price. What you pay for the property. Lenders typically fund a percentage of it.

Rehab budget. Your scope of work, line by line. Many lenders fund all or most of it, released in draws.

After-repair value (ARV). What the property should be worth when the work is done, based on comparable sales. ARV acts as the ceiling on the whole loan.

Two ratios do most of the work from there: loan-to-cost, the loan as a share of purchase plus rehab, and loan-to-ARV, the loan as a share of the finished value, often the cap that binds.

A worked fix-and-flip loan example

Say a lender's structure is 85% of the purchase price plus 100% of the rehab, capped at 70% of ARV. Structures vary with the lender and your experience, so treat these figures as illustrative.

Deal sheet: Flip loan structure, illustrative

The cap matters most when the ARV is thin. If this house were only worth $380,000 finished, 70% of ARV would be $266,000, and the loan would shrink by $6,500.

How rehab draws work

Most flip loans don't hand you the rehab budget at closing. Instead:

1. You or your contractor complete a phase of the work.
2. You request a draw, and the lender sends an inspector to confirm it.
3. The lender releases the funds for that completed phase.

So you front each phase before it's reimbursed. Build that cash into your plan, hire a contractor who understands draw schedules, and keep receipts and photos for every phase.

Ask, too, how interest is charged. Some lenders charge interest only on funds actually drawn; others charge on the full loan from day one. On this deal, over six months at 11%, that's $13,613 versus $14,988.

Under contract or about to offer? Send the numbers and we'll size the loan before you commit. Size my flip loan

What a flip really costs

Where the $420,000 sale goes on a six-month flip: 2 points, $7,500 closing costs, 11% interest on drawn funds, $600 a month in holding costs and 7% selling costs.

That's a profit of about $50,400 on roughly $67,700 of cash in. Now run it three months long: more interest, more holding costs and a 1% extension fee take about $12,000 off the profit, leaving roughly $38,400. Timeline discipline is worth real money.

Five mistakes that cost flippers the most

• Budgeting the rehab without a contingency; 10 to 15% is common.
• Taking the ARV from the best comp instead of the most similar ones.
• Forgetting carrying costs and the time it takes to sell.
• Not knowing the extension terms before you need them.
• Starting work before you understand the draw process.

Decide to keep the house instead? A cash-out refinance can turn the flip into a long-term rental.