Evaluating Deals
Introduction / Objective
Once you have properties to look at, the next skill is deciding which ones are worth pursuing. This is deal analysis, which means running the numbers to estimate whether a property is likely to work for your plan. Most properties will not. A good analysis process helps you reach that "no" quickly and saves your time for the few that deserve attention.
This article gives you a repeatable screening and analysis process. You will learn to estimate value, total costs, and your exit, and to use a couple of quick checks that filter out weak options fast. The aim is not to guarantee a profit. No method can do that. The aim is to make consistent, honest comparisons so you understand what you are buying before you commit.
Key Concepts / Definitions
A handful of ideas do most of the work in deal analysis.
The after-repair value, often shortened to ARV, is the estimated price a property would sell for after repairs and improvements are complete. It is your anchor number for many calculations.
Total project cost is everything you spend to buy and prepare the property: the purchase price, repairs, closing costs, holding costs, and financing costs.
An exit is how you plan to get your money back out, whether by selling the property or by refinancing and renting it.
The 70% rule and similar shortcuts are quick screens, not final answers. The 70 percent guideline suggests that for a flip, an investor might pay no more than 70 percent of the ARV minus repair costs. It is a rough filter to flag deals worth deeper study.
The one percent rule is a quick screen for rentals suggesting that monthly rent should be around one percent of the total purchase price. Like the 70 percent rule, it is a starting filter, not a promise.
Step-by-Step Guidance
1. Estimate the ARV first. Look at recent sales of similar properties nearby, called comparables or "comps." Match size, condition, and location as closely as you can. Your agent can pull these. A reliable ARV is the foundation. If it is wrong, everything downstream is wrong.
2. Estimate the repair cost. Walk the property if you can, or study photos and the inspection. List the major work needed. Beginners almost always underestimate this, so build in room for surprises. A later article covers rehab budgets in detail.
3. Add all other costs. Include closing costs on the purchase, holding costs such as taxes, insurance, and utilities while you own it, financing costs, and closing costs on the sale if you plan to sell. Each one chips away at the result.
4. Apply a quick screen. For a flip, use the 70 percent guideline as a first pass. For a rental, check the one percent rule and whether rent reasonably covers all monthly costs. If a property fails the screen badly, you can usually stop there.
5. Run the full numbers on survivors. For properties that pass the screen, build a complete estimate: ARV minus every cost. This tells you the rough margin you are working with and whether it leaves enough room for error.
6. Decide and document. Record your numbers and your decision. Whether yes or no, write down why. This builds your judgment over time and lets you revisit assumptions later.
Practical Example
Suppose a property is listed at $150,000 and you believe the ARV is $250,000 after repairs. You estimate repairs at $40,000.
Using the 70 percent guideline as a screen, you would multiply $250,000 by 0.70 to get $175,000, then subtract the $40,000 in repairs, leaving $135,000 as a rough maximum purchase price under that rule. The asking price of $150,000 sits above that figure, which is a signal to either negotiate or look closer before assuming the deal works.
Now suppose you negotiate the price to $130,000. You add estimated closing costs of $5,000, holding costs of $6,000, and selling costs of $15,000. Your total cost becomes roughly $130,000 plus $40,000 plus $5,000 plus $6,000 plus $15,000, which is $196,000. Against an ARV of $250,000, that leaves about $54,000 of margin before financing costs and before anything goes wrong.
Whether that margin is enough depends on your financing, your risk tolerance, and how confident you are in the ARV and repair estimates. The point of the exercise is that you now see the full picture instead of just the asking price. These are hypothetical numbers used only to show the method.
Common Mistakes
Trusting an optimistic ARV. Hoping a property is worth more does not make it so. Use real comparable sales, not asking prices of other listings.
Underestimating repairs. This is the most common and most costly error. When unsure, estimate high.
Forgetting holding and closing costs. These are easy to leave out and they quietly erase margin. Always include them.
Treating quick screens as final answers. The 70 percent and one percent rules are filters. Passing one does not mean a deal is good, and failing one by a small amount does not always mean it is bad. They start the conversation; they do not end it.
Refusing to walk away. If the numbers do not work, no amount of wishing changes that. The best investors say no far more often than yes.
Next Steps
Run your numbers with DLV Deal Intel, a tool that helps you organize the inputs and see how costs add up against your estimated value.
Because repair estimates make or break an analysis, continue with Understanding Rehab Budgets to learn how to build a complete and realistic repair number.
To structure your own analysis, watch for the Deal Analysis Worksheet, coming soon to the Download Center.
Terms in This Article
- After-repair value (ARV): The estimated sale price of a property after repairs are complete.
- 70% rule: A quick screen suggesting a flip purchase price of no more than 70 percent of ARV minus repairs.
- One percent rule: A quick rental screen where monthly rent is around one percent of the purchase price.
Disclaimer
This article is educational information only — not financial, legal, tax, or investment advice. Real estate investing involves risk, including the possible loss of money. Consult licensed professionals before making decisions.