Stress-Test a Flip in 10 Minutes: Find Your Break-Even Price Before You Make an Offer

MAO Tells You What to Offer. Break-Even Tells You How Much Room You Have.

Most flippers run one number before making an offer: the Maximum Allowable Offer. The formula is simple. MAO = (ARV x 0.70) - repairs. It gives you a disciplined ceiling, but it says nothing about how much can go wrong before you lose money on the deal.

The second number is your break-even purchase price, the most you could pay and still walk away with zero profit. To find it, start with ARV and subtract selling costs (agent commissions, seller concessions, closing), the full rehab budget, holding costs (loan interest, taxes, insurance, utilities), and your buy-side closing costs. Whatever is left is the price at which the deal stops making money.

The third number is the cushion, the gap between your offer and break-even. Here is a quick illustration. Say ARV is $200,000 and repairs are $30,000. Your MAO is ($200,000 x 0.70) - $30,000 = $110,000. Now assume $16,000 in selling costs, $6,000 in holding costs, and $3,000 in buy-side closing. Break-even is $200,000 - $16,000 - $30,000 - $6,000 - $3,000 = $145,000. Buy at $110,000 and you have a $35,000 cushion.

A single MAO hides risk because it treats every input as certain. Two deals can share the same MAO while one has a $40,000 cushion and the other has $12,000, depending on local selling costs, loan terms, and how long the project runs. The 70% rule assumes a typical cost structure, and your deal may not be typical. If you only look at MAO, you cannot tell those two deals apart.

A fast stress test shows you exactly how that cushion holds up. You ask what happens if the ARV comes in 5% low, the rehab runs 20% over, or the house sits on the market two extra months. Each scenario eats into the cushion, and you see right away whether the deal survives a bad outcome or only works when everything goes right.

Worked Example: Calculating MAO and Break-Even on a $300K ARV Flip

Say you're looking at a three-bed ranch with comps supporting a $300,000 ARV and a rehab estimate of $45,000. The 70% rule gives you a quick ceiling: $300,000 x 0.70 = $210,000, minus $45,000 in repairs, for an MAO of $165,000. That number is where most investors stop. It tells you what to offer but says nothing about the price where the deal stops making money.

To find break-even, list every cost the flip will actually carry. For this deal, use these assumptions:

• Selling costs at 8% of ARV (commissions, seller closing, concessions): $24,000
• Buy-side closing costs at 2% of purchase price
• Holding costs of $2,200 per month for 6 months (loan interest, taxes, insurance, utilities): $13,200
• Rehab: $45,000

Break-even is the purchase price (P) where profit equals zero. Start with the $300,000 sale, subtract $24,000 in selling costs, $45,000 in rehab, and $13,200 in holding. That leaves $217,800 to cover the purchase and its closing costs, so P x 1.02 = $217,800. Divide by 1.02 and P comes out to about $213,500.

Now check your profit at the MAO. Buying at $165,000 adds $3,300 in closing costs, so all-in costs total $165,000 + $3,300 + $45,000 + $13,200 + $24,000 = $250,500. Subtract that from the $300,000 sale and you net about $49,500. The gap between your $165,000 offer and the $213,500 break-even is roughly $48,500, which is the cushion the next section will try to break.

The slow part of this base case is usually the inputs, not the arithmetic. Pulling comps for ARV and building a line-item rehab budget can eat an hour in a spreadsheet. FlipSmrt returns the ARV from comparable sales, a rehab estimate, and the MAO from just the property address, so your starting numbers are ready in seconds. That leaves your time for the part that actually protects you: testing what happens when those numbers move.

Worked Example: Running Three What-Ifs and Setting Your Offer Ceiling

Start from the base case: a $165,000 purchase, $45,000 rehab, six-month hold at $2,200 per month, 2% buying costs, and 8% selling costs on a $300,000 ARV. That deal projects about $49,500 in profit. Now change one assumption at a time and watch how fast that cushion shrinks. Each scenario below uses the same deal, so the only thing moving is the variable you are testing.

• ARV drops 5% to $285,000: Net sale proceeds fall by $13,800 ($15,000 less 8% selling costs), so profit drops to about $35,700.
• Rehab runs 20% over to $54,000: That extra $9,000 comes straight off the top, leaving about $40,500.
• Hold stretches to 9 months: Three more months at $2,200 adds $6,600 in carrying costs, so profit lands near $42,900.
• All three at once: $49,500 - $13,800 - $9,000 - $6,600 = about $20,100.

The combined scenario is the one that matters. Bad news on a flip rarely arrives alone. A slow sale often means a softer price, and a rehab that runs long usually runs over budget too. If $20,100 is less than you need to justify six to nine months of risk, the deal at $165,000 is too thin.

So work backward. Set a minimum acceptable worst-case profit, say $25,000, and solve for the purchase price. Worst-case net proceeds are $285,000 x 0.92 = $262,200. Subtract the $54,000 rehab and $19,800 in holding costs, which leaves $188,400. Take out your $25,000 profit floor and you have $163,400 left for the purchase plus closing costs.

That means P x 1.02 = $163,400, so P = $163,400 / 1.02, or about $160,200. That figure is your offer ceiling, roughly $4,800 under the 70% rule MAO of $165,000. The 70% rule got you close, but the stress test tells you exactly where to stop negotiating. Walk into the conversation knowing $160,200 is your hard line, not a starting point.

Which Variable to Stress Hardest Depends on the Deal

A cosmetic flip lives or dies on ARV. If the plan is paint, LVP flooring, new fixtures, and a $25,000 rehab on a $300,000 ARV, the repair number is small and predictable. A 5% miss on ARV is $15,000, which is more than half the entire rehab budget. On light-touch deals, put most of your stress testing into the resale price.

Full guts and older homes flip that priority. Once you open walls in a 1950s house, you can find knob-and-tube wiring, galvanized supply lines, or rotted subfloor that no walkthrough would catch. Pad these budgets 15% to 20% before you trust them. On an $80,000 rehab, a 20% overrun adds $16,000, and that comes straight out of profit.

Hold time deserves the hardest look on permit-heavy jobs (additions, structural changes, moved walls) and in slow or seasonal markets where listings sit through winter. Hard money makes each extra month expensive. A $240,000 loan at 12% costs $2,400 a month in interest. Add roughly $600 for taxes, insurance, and utilities, and every month costs about $3,000. A two-month permit delay costs $6,000, and if it pushes you past the loan term, many lenders charge another point (another $2,400 on that loan) to extend.

Comp quality should set the size of your ARV haircut. Five recent sales within half a mile with similar square footage justify a 5% cut, taking $300,000 to $285,000. Three comps spread from $270,000 to $330,000, some older than six months, call for 10%, taking you to $270,000. Run that through the 70% rule and the wider haircut lowers your MAO by $21,000 ($30,000 x 0.70), compared with $10,500 for the 5% cut.

Before you run any what-ifs, identify the one variable this specific deal is most exposed to. Stress that one twice as hard as the others, and let the result set your offer ceiling.

Stress-Test Mistakes That Make a Bad Deal Look Safe

The most common error is stressing one variable at a time. Testing a lower ARV, then a bigger rehab, then a longer hold, each in isolation, tells you very little, because bad flips rarely fail on just one front. A rehab that runs long usually also means more months of holding costs, and a soft market that drags down your ARV often stretches your days on market too. Always run at least one combined scenario where two or three things go wrong together.

The second mistake is treating selling and holding costs as fixed numbers. Selling costs are mostly percentage-based, so they shrink when ARV drops. At 8%, selling a $300,000 house costs $24,000, but at $280,000 it costs $22,400, a $1,600 cushion. Holding costs move the other way. At $2,500 per month, two extra months add $5,000, which wipes out that cushion three times over.

Third, many investors use the contingency line as their overrun test. If your $45,000 rehab already carries a $4,500 contingency, saying "a 10% overrun is covered" means your worst case looks identical to your base case. That is double counting. Keep the contingency in the base budget, then apply the overrun on top of it in the stress scenario.

Fourth, people forget the buy side. On a $210,000 purchase with a $200,000 hard money loan at 2 points, you pay $4,000 in points before swinging a hammer. Add roughly 1.5% in buy-side closing costs ($3,150) and that is $7,150 that never shows up if you only model rehab, holding, and resale.

The last mistake happens in the heat of a bidding war. You ran the worst case at $210,000, then the agent says another offer came in, so you bump to $220,000 without re-running anything. Every dollar you add comes straight out of your break-even cushion, and higher purchase prices often raise loan points too. Re-run the downside before you raise, every time.

FAQ: Break-Even and Stress Testing a Flip

How big a haircut should I apply to ARV? Start with 5% when you have three or more recent, close, truly similar sold comps. Move to 10% when comps are older than six months, farther than a half mile, or differ in square footage or finish level. On a $300,000 ARV, that is a $15,000 to $30,000 reduction. If your deal only works at full ARV, you are betting on a perfect sale.

Is a deal with a break-even close to asking price automatically a pass? No. Asking price is the seller's opening number, not your offer. If break-even sits at $215,000 and the list price is $212,000, you simply have no room to pay asking. The deal becomes a pass only if the seller refuses a price that leaves your required profit intact, so make your offer and let the math hold the line.

What minimum worst-case profit should I require? The floor is not losing money. Most investors set a higher bar, such as 5% of ARV or a flat dollar figure that justifies their time and risk. On a $300,000 ARV, 5% means at least $15,000 of profit even after the ARV haircut, the rehab overrun, and the longer hold all hit together. If the worst case dips below that, lower your offer until it clears.

How often should I re-run the stress test during negotiation? Every time an input changes. That includes a counteroffer, a contractor bid, an inspection finding like a failing sewer line, or a new comp that closes nearby. A $6,000 roof surprise lowers your break-even by $6,000 and should lower your offer ceiling by the same amount. Re-running takes minutes, so there is no excuse to negotiate on stale numbers.

Can I do this fast without a spreadsheet? Yes. Paste the address into FlipSmrt to get the base ARV from comps, a line-item rehab budget, and the MAO in one pass. Then adjust the three variables: cut ARV by your haircut, raise rehab by 15% to 20%, and add two to three months of holding costs. The projected profit updates with each change, showing your worst case before you call the seller.