Flipping
Systems

The MAO formula

MAO = Maximum Allowable Offer

Standard 70% Rule:
  MAO = (ARV × 0.70) − Rehab
  → leaves 30% of ARV for all costs + profit

Refined version (J Scott):
  MAO = ARV − Fixed Costs − Rehab − Minimum Profit

Fixed costs (typical):
  Acquisition closing (3%)
  Holding costs (2% per month × 4 months = 8%)
  Sale closing + realtor (8%)
  Financing cost (3-5%)
  Total fixed:                 ~22-25% of ARV

Minimum profit:
  $25k minimum per deal, $40k typical, $75k+ premium

Example:
  ARV:                     $300,000
  Fixed costs (24%):        $72,000
  Rehab estimate:           $45,000
  Minimum profit:           $35,000
  MAO:                     $148,000

  → If seller won't hit $148k, walk.

Market-adjusted:
  Hot market (short DOM, bidding):  use 75% rule
  Normal market:                    use 70% rule
  Soft market (long DOM):           use 65% rule
  Premium or luxury segment:        use 60-65% rule
  (higher risk, longer hold, larger swing in ARV)

Rehab budgeting by scope

• Light cosmetic refresh. Paint, LVP flooring, new light fixtures, hardware. $15–25/sqft. 6–8 week timeline.
• Medium renovation. Add kitchen refresh, bath refresh, HVAC, some electrical and plumbing. $25–40/sqft. 8–12 weeks.
• Heavy rehab. Full kitchen and bath, full paint, LVP, HVAC, roof, electrical panel, plumbing repair. $40–65/sqft. 12–16 weeks.
• Full gut. Everything down to studs. New drywall, full systems, full finishes. $65–100/sqft. 16–24 weeks.
• Luxury. High-end finishes, addition, architectural work. $100–200+/sqft. 6–12 months.

Four-bucket rehab framework

• Structural and mechanical. Foundation, framing, HVAC, electrical (panel + wiring), plumbing, roof. The "hidden" systems that buyer inspection kills deals over.
• Kitchen and baths. The two rooms that drive ARV. Mid-tier finishes for ARV < $400k, upper-mid for $400k–700k, high-end for $700k+.
• Cosmetic whole-house. Paint, flooring, baseboard, trim, doors, hardware, lighting. Visible perceived-value lift for modest investment.
• Curb appeal and staging. Exterior paint, landscape, front door, mailbox, fencing, staging furniture. RESA studies show 586% ROI on staging.

Timeline — the 4-month cycle

1. Weeks 1–4: Acquisition. Contract to close. Inspection, due diligence, financing. Permits filed in final 1–2 weeks of this phase.
2. Weeks 5–12: Rehab. Demo (week 1), framing and structural (2), rough mechanical (3), drywall and insulation (4), flooring and cabinets (5), trim and paint (6), fixtures and finish (7–8).
3. Weeks 13–14: Market prep. Staging, photography, MLS listing, open houses.
4. Weeks 15–18: Under contract → close. Inspection, appraisal, lender clear-to-close, buyer walk-through, final close.

Budget 16–20 weeks from close to close. Every week over budget is holding cost. A $200k hard-money loan at 10% is $1,667/month interest alone — $6,668 over 4 months, $10,000+ over 6.

Capital stack

• Hard money. 70–90% LTC, 10–13% rate, 2–4 points, 12-month term. Primary source for most flippers.
• Private money. Friends, family, high-net-worth individuals. 8–12% rate, flexible terms, relationship-dependent.
• HELOC. Primary residence equity line. Prime + 0–3% rate. Draw for down payment and rehab.
• Cash. Best terms, fastest close, highest profit retention. Often used as down payment to a hard-money loan.
• Partnerships (JV). Money partner + operator split. 50/50 after return of capital + pref typical.

Tax treatment — dealer vs. investor

Flipping income is ordinary income plus self-employment tax. The IRS classifies active flippers as "dealers in real estate." Dealer property is inventory, not a capital asset — no long-term capital gains, no 1031 exchange eligibility.

• Ordinary income rate. Federal 10–37% plus state.
• Self-employment tax. 15.3% on net earnings. Can be partially avoided via S-corp election — paying reasonable W-2 wage and distributing residual as K-1.
• No 1031. Flipped property doesn’t qualify as "held for productive use in trade or business" — it’s inventory.
• No depreciation. No schedule E losses to offset.

Effective tax rate on flipping income for a middle-income operator can exceed 40%. A $35,000-profit flip nets $21,000 after tax. Factor this into minimum profit targets.

Common pitfalls

• Zip-code hopping comps. Pulling comps from adjacent zip codes with different price points. Buyers don’t cross that line. Use on-the-map comp analysis, not address-proximity sorting.
• Permit issues at resale. Unpermitted work disclosed in inspection kills buyer financing. Retroactive permitting slow and expensive.
• Asbestos / lead / mold surprise. Pre-1980 property surprise. Budget $10k–30k for abatement on pre-1978 homes.
• Contractor abandonment. Mid-rehab, contractor takes deposit and disappears. Mitigate: 10% deposits max, milestone payments, lien waivers at each draw.
• Over-improvement. Adding features (addition, deck, upgraded fixtures) that exceed neighborhood comp ceiling. Won’t appraise at investment cost.
• Market shift. Interest rates jump, buyer pool contracts, DOM stretches from 14 to 60 days. Price-reduction cascade eats profit.
• Appraisal gap. Buyer loan contingent on appraisal matching contract price. Low appraisal forces renegotiation or re-list.
• Over-budget holding. Rehab dragging past month 4. Every week adds $1,500+ interest + insurance + utilities + taxes.