Buy Retail – Rehab Deal
Buy Retail – Rehab Deal
Funding, Contractors, Scope of Work & Selling to Retail Buyers
A retail-rehab deal is the classic fix-and-flip model: you buy a property at a discount, do the renovation work yourself (or manage contractors), and sell it on the open market to a retail buyer at full market value. Unlike wholesaling — where you assign the contract without touching the property — a retail rehab means you are actually doing the work.
The profit comes from the difference between your all-in cost (purchase price + rehab + holding costs + selling costs) and the after-repair value (ARV). The bigger the gap, the bigger the profit.
Part 1: Analyzing the Deal — The 70% Rule
Before you buy anything, you need to know your Maximum Allowable Offer (MAO). The standard formula is the 70% Rule: never pay more than 70% of the ARV, minus repair costs [citation:1][citation:10].
Formula:
MAO = (ARV × 0.70) − Repair Costs
Worked Example:
| Item | Amount |
|---|---|
| After-Repair Value (ARV) | $280,000 |
| ARV × 0.70 | $196,000 |
| Less: Repair Costs | −$42,000 |
| Maximum Allowable Offer | $154,000 |
If you buy at $154,000 and spend $42,000 on repairs, your all-in cost is $196,000. Selling at $280,000 gives you a gross profit of $84,000 — but after commissions (5-6%), closing costs, holding costs, and loan interest, your net profit may be closer to $39,000 to $54,000 [citation:1].
⚠️ Why the 30% Buffer Matters: If you pay $185,000 instead of $154,000 on the same deal, your net profit drops to $8,000-$23,000. One unexpected repair could wipe out your entire profit [citation:1].
Part 2: Funding the Deal
Retail-rehab deals require capital for both the purchase and the renovation. There are three primary funding sources:
Option 1: Hard Money Lender
Hard money lenders provide short-term, asset-based loans specifically for fix-and-flip projects. They focus on the property’s value rather than the borrower’s credit [citation:9].
Typical terms:
- Interest Rate: 8-15% annually [citation:9]
- Loan-to-Value (LTV): 65-75% of ARV
- Loan Term: 6-18 months
- Origination Points: 1-10 points (1 point = 1% of loan) [citation:9]
How draws work: Hard money loans are structured in two parts: acquisition funds (released at closing) and rehab funds (released in draws as work is completed) [citation:3]. Each draw requires proof of progress — photos, contractor invoices, or a site inspection [citation:3].
Typical Draw Schedule:
- Demo and framing
- Electrical and plumbing (rough-in)
- Drywall and flooring
- Kitchen and bath installs
- Final punch list [citation:12]
Option 2: Private Money
Private lenders are individuals or private companies that lend their own capital. They are typically faster and more flexible than banks, though rates are higher [citation:9].
Advantages over hard money:
- Lower rates: Often 8-12% vs. 10-15% for hard money
- Flexible terms: Negotiated directly with the lender
- No due-on-sale clause: Can transfer to LLCs or land trusts without triggering loan acceleration
- Relationship-driven: Better terms as trust builds
Option 3: Joint Venture (JV) Partner
A JV partner provides capital in exchange for a share of profits. The structure typically pairs a capital partner (provides equity) with an operating partner (provides expertise, deal flow, and management).
Typical JV structure:
- Capital partner contributes 80-90% of the equity
- Operating partner contributes 10-20% and manages the project
- Profits split 50/50 or 60/40 after return of capital [citation:2]
Part 3: Hiring Contractors
Do You Need a General Contractor?
The basic rule: if the project is beyond cosmetic, you likely need a licensed general contractor (GC) [citation:4].
| Project Type | Who You Need |
|---|---|
| Cosmetic (paint, flooring, fixtures, landscaping) | You or subcontractors |
| Extensive (foundation, walls, additions, HVAC, electrical) | Licensed General Contractor [citation:4] |
Many hard money lenders require a licensed contractor for extensive rehab projects [citation:4].
How to Hire a Contractor
- Get 3 bids minimum. Same scope to each — every line item, every room. Line-item bids beat lump sum for tracking costs [citation:13].
- Check references. Ask for recent similar projects and call those clients. A bid 30% under the others often means they’re cutting corners or will hit you with change orders later [citation:13].
- Lock the scope in writing. Walk the property with your contractor before closing. Agree on every item. No “we’ll figure it out later” — that’s how scope creep starts [citation:13].
- Use milestone-based payments. Never pay 100% upfront. Typical: 30% to start, 30% at rough-in, 30% at finish, 10% retainage until punch list is complete [citation:13].
- Require written change orders. Any addition must have a price and timeline impact in writing before work proceeds [citation:13].
Part 4: Creating a Scope of Work
A Scope of Work (SOW) is a line-item document that describes all planned renovation work, organized by trade division. It typically includes every task required to bring the property to its projected after-repair condition, along with estimated costs per line item [citation:5].
Lenders use the SOW to evaluate the deal, validate the ARV, and structure draw schedules. A well-organized SOW can reduce underwriting friction and speed up funding [citation:5].
Common SOW Line Items
| Division | Typical Work |
|---|---|
| Plans & Permits | Architectural drawings, permit applications, inspection fees |
| Demo | Interior demo, hazmat abatement, debris removal |
| Foundation & Concrete | Footings, slab repairs, crawlspace work |
| Framing | Structural repairs, wall framing, subfloor |
| Roofing | Full replacement, repairs, gutters, flashing |
| Electrical | Panel upgrades, rough-in wiring, fixtures |
| Plumbing | Rough-in, water heater, fixtures |
| HVAC | System replacement or repair, ductwork |
| Drywall | Hanging, finishing, texture |
| Flooring | Hardwood, tile, carpet, LVP |
| Kitchen & Bath | Cabinets, countertops, appliances, fixtures |
| Paint | Interior all rooms, ceilings, trim; exterior paint and siding |
| Landscaping | Grading, sod, driveway repairs, fencing |
| Contingency | 5-10% of total renovation budget [citation:5] |
Part 5: Hiring a Listing Agent
Once the rehab is complete, you need to sell the property. A good listing agent does far more than put a sign in the yard.
What a Listing Agent Does
- Prices the property: Analyzes comps to set the optimal list price
- Markets the property: Professional photos, MLS listing, syndication to major real estate websites [citation:6]
- Manages showings: Coordinates open houses and private showings
- Negotiates offers: Handles buyer agents and counters
- Manages the closing: Coordinates with title, lender, and inspectors [citation:15]
What to Look For in a Listing Agent
- Experience with renovated properties: They understand the value of your upgrades
- Marketing budget: A good agent invests in professional photography and paid advertising [citation:6]
- Local market knowledge: They know which neighborhoods are hot and what buyers want
- Staging expertise: Staged homes sell faster and for more money
Commission: Typically 5-6% of the sale price, split between the listing agent and the buyer’s agent [citation:1].
Part 6: Selling Retail to FHA Borrowers
FHA loans are a major source of retail buyers. They offer low down payments (3.5%) and more forgiving credit requirements than conventional loans. But selling to an FHA buyer comes with specific property condition requirements.
FHA Property Standards
FHA appraisals are more stringent than conventional appraisals. The property must meet Minimum Property Standards (MPS) for safety, security, and soundness. Common issues that can kill an FHA deal:
- Peeling paint: Especially on homes built before 1978 (lead-based paint concerns)
- Broken windows or doors: Must be repaired or replaced
- Roof issues: Leaks or missing shingles must be fixed
- Electrical hazards: Exposed wiring, missing outlet covers
- Plumbing leaks: Active leaks must be repaired
- HVAC problems: Systems must be functional
- Structural issues: Foundation cracks, settling
FHA 203(k) Loans: A Powerful Option
The FHA 203(k) loan allows buyers to finance both the purchase and the renovation in a single mortgage [citation:7]. This is a powerful tool for selling a property that needs work but doesn’t qualify for a standard FHA loan.
How it works:
- Buyer gets one loan for purchase + renovation
- Loan amount is based on the after-renovation value, not current condition [citation:7]
- 3.5% down payment
- Up to $35,000 for Streamlined 203(k); higher for Standard 203(k)
- HUD consultant oversees the project
- Renovation funds held in escrow and released in draws [citation:7]
Why this matters for flippers: If you have a property that won’t pass FHA inspection, you can market it to buyers using a 203(k) loan. They buy it “as-is,” finance the repairs, and you still get your retail price — without doing the work yourself.
⚠️ Risk Warnings
Budget Overruns: Renovation costs often exceed estimates. Always add 10-15% contingency to your repair budget [citation:1].
Timeline Delays: Contractors run late. Permits take time. Weather delays happen. Build buffer time into your holding cost calculations.
Scope Creep: Every “while we’re at it” addition adds cost without necessarily adding ARV. Stick to your scope and require written change orders [citation:13].
Market Shifts: If the market drops while you’re renovating, your ARV may not hold. Have a Plan B — rent it out or sell at a reduced price.
Tax Implications: Flip profits are typically taxed as ordinary income (not capital gains) plus self-employment tax. Consult a CPA [citation:8].
Key Takeaways
- The 70% Rule is your starting point: MAO = (ARV × 0.70) − Repair Costs [citation:1][citation:10]
- Funding options include hard money (fast, higher rates), private money (flexible, relationship-driven), and JV partners (equity split) [citation:9]
- Hire a licensed GC for any project beyond cosmetic work [citation:4]
- Get 3 bids, lock the scope, and use milestone-based payments with 10% retainage [citation:13]
- Create a line-item SOW organized by trade division — lenders use it to structure draws [citation:5]
- Hire a listing agent who invests in marketing and knows your local market [citation:6]
- FHA buyers are a major retail segment, but FHA appraisals require specific property conditions [citation:7]
Ready to Master Retail-Rehab Deals?
Learn funding, contractor management, and retail selling from experienced investors.
Disclaimer: This page is for educational and informational purposes only. It does not constitute legal, financial, or tax advice. Real estate investing involves significant risk. Always consult a licensed attorney, CPA, and financial advisor before entering into any real estate transaction.
