Christina and I have had a lot of laughs about some of our repair estimates on the properties we’ve flipped. No matter how closely we look at a flip house, it seems like we always miss some major issues that need to be taken care of before we flip a house. I feel like this is something that new investors always tend to struggle with, but even veteran investors like ourselves get tripped up by unforeseen repairs.
It can be really frustrating to watch your potential profits on a property get eaten away by all of those repairs and renovations, which is why I always advise new investors to make good ARV estimation a critical part of their real estate education. We can teach you about estimating your ARV in our Success Path workshops, but if you aren’t familiar with the term then you might want to read this first!
WHAT IS ARV?
First off, you may be wondering what ARV even is. ARV is your home’s after-repair value. This is the price you can sell your house for when you put it on the market after all of your rehabs. This is also one of the places that novice flippers really fail. When they see a property, they’ll do one of two things, either of which will mess them up and either make them miss a great deal or commit them to a terrible one.
I see a lot of first-time investors who think a property needs too much rehab. They’ll see a huge, costly mess where veteran flippers will see a potential gold mine. Because they get intimidated by potentially high rehab costs, they skip on some really great deals. I’m here to tell you, there is no such thing as a perfect deal, and you can go broke passing up good deals trying to find one.
The other problem that new investors struggle with is getting in over their heads. They miscalculate their ARV and think, “This is a great deal!”. Then they jump on a flip house that’s priced too high and/or needs too many repairs, and they find out that they have no margin or that they’re actually going to lose money when they sell. Pretty scary, right? Well, with the right tools, you’ll be able to estimate your ARV so that, even when you have to go over budget on rehab, you’ll still make money on the deal.
FIRST LOOK AT THE COMPS
Before I buy a property, I always look at the comparable houses in the area. And I don’t just look at them for square footage and property size, either. I look at what’s been updated, whether they’re near amenities, highways, or airports, and anything else that can affect the property value.
For example, if I find a comp that’s a few miles away selling for an attractive price, and it has new appliances, newly renovated bathrooms, and hardwood floors, I know that I’m going to have to make those upgrades to my property if I want to sell at that price. If, on the other hand, that same house is right next to an airport with planes flying in and out all day long, I know that all that noise pollution is going to bring the property value down. That means, if my house is otherwise comparable, I can sell it for more.
HOW IS THE MARKET TRENDING?
Now, the market can change pretty drastically from one month to the next, so looking at comps on the day you buy your house with no context can be a real gamble. However, if you look at the market trend over the past few months or even the past year, you can get an idea of where it’s going to be in a month or two when you’re ready to sell your flip.
If the market is slowly and steadily trending up, you can usually count on a more favorable ARV for your flip house. If it’s been level, you can probably base your ARV on current comps, but if it’s trending down in that area, you’ll need to pay special attention to your upgrades before you flip this house. If you’re nervous about your ARV, look at other deals you’ve seen in your area and come to one of our seminars to further your real estate education.
For more answers to frequently asked questions, visit the Success Path FAQ.