Fix-and-flip underwriting: ARV, loan-to-cost, rehab budgets and draws

Separate value, cost and cash availability

A fix-and-flip financing review should keep three schedules distinct: what the completed property might be worth, what the project will cost, and when money must leave the investor’s account. A favorable value estimate cannot answer the last two questions.

After-repair value (ARV) is an estimate of completed value after the proposed improvements, used in the financing analysis. It is not the loan amount and does not promise proceeds. Loan-to-cost (LTC) compares the loan with total project cost:

LTC = loan amount ÷ total project cost

Confirm the cost definition and valuation basis used in the actual proposal; do not assume every expense is financed or that all committed proceeds arrive at closing.

The OCC’s CRE lending handbook distinguishes cost and value analysis and addresses construction budgets. Its bank-supervision context should not be mistaken for universal private renovation-loan terms.

Make the renovation scope reviewable

Organize a scope that ties the proposed work to a budget and sequence. Instead of one “rehab” figure, separate the work packages and identify who priced them. Flag unresolved bids, permit questions and items whose condition is not yet known.

Use three columns in your working schedule: confirmed cost, estimate awaiting confirmation, and contingency. This is a preparation method, not a lender-prescribed form. It helps keep an unpriced item from disappearing into an apparently complete budget.

Ask what happens to the financing plan if a necessary repair adds cost without increasing completed value. Which funds cover the difference? Does the change require review before work begins? A clear answer belongs in the plan before the original budget becomes obsolete.

Understand what a draw releases

A draw is a release of loan proceeds during the project. Lima One’s public product explanation describes rehab funds drawn against completed work and a documented construction budget. This illustrates why committed funds and cash currently available can differ; it does not establish the draw terms of a Duke scenario.

Before selecting a structure, ask:

• Which costs can be paid at closing and which are held for later release?
• Must the investor pay a contractor before requesting reimbursement?
• What evidence or inspection is needed for a draw?
• How are deposits, change orders and disputed work handled?
• What cash remains available if a release takes longer than planned?

Do not assume a public draw-speed advertisement applies to your transaction. Build the payment sequence around the agreement being reviewed.

Test the project’s cash gap

Consider an educational scenario: a contractor needs a materials deposit before work starts, while the proposed draw process pays after work is verified. The construction budget may balance overall, yet the investor still needs cash at that point in the schedule.

Prepare a simple timeline of investor contributions, closing disbursement, contractor payments, expected draw requests and carrying costs. Mark uncertain timing explicitly. This is a liquidity question separate from ARV and LTC.

Evaluate the exit before the work begins

Write down the intended sale or hold plan, what must be complete for that exit, and which assumptions need confirmation. A refinance is another underwriting decision. The [Bridge-to-DSCR Insight](/insights/bridge-to-dscr-financing/) explains that transition in more detail.

Use Duke’s [Single-Family Investment financing page](/single-family-investment/) to frame the scenario. Bring the acquisition basis, scope, budget, value support and cash timeline so the financing conversation can address the whole project.