Onset Part 2 | ARV and how I used it

Ryan: Hi, I'm back with Mike. We're talking about the Onset, Massachusetts house flip, and let's dive into the ARV. You said it was somewhere around $206,000. I want to know every little detail about that number.

Mike: Yes, and let me be clear, Ryan. ARV is in my opinion, and probably some other experienced investors' opinions, the most critical number. Because, if you get ARV incorrect or substantially incorrect, you are going to be fighting an uphill battle to make any money on a property.

What you need to do to determine ARV; and ARV folks, by the way, is after-repair value. After-repair value is nothing more than what you think you can sell that house for after you repair it, and you need to get that number right. Because if you don't then it's going to be basically money out of your pocket and you're not going to be very successful in the house-flipping business. So, Ryan, to determine the ARV on a property, you have to do what's known as a CMA, which is a comparative market analysis.

Gathering CMAs is basically what a good real estate broker or realtor will do for you, to help you determine what you can sell that house for. But, it's very important that you get that number right, and it's very important that you work with the right realtor. Because let's just say you have put all your trust and faith in a realtor and they tell you that you can sell the house after renovations for $250,000. So you base your numbers on $250,000, but in the end you only sell it for $210,000.

Well, that's a $40,000 difference, and if you purchased too high based on the number that you were projecting of $250,00 then you could be in a lot of trouble.

So, how a good Realtor is going to do it, well they basically are going to look at property A, which is the one you're looking to buy and they're going to try to see what properties sold around that property, as close in proximity as they possibly can. Sometimes they have to work a little bit harder if there's not a lot of sold properties in the area. We're not too interested in what's for sale because those numbers aren't real until they are actually sold.

Once they begin to research sold prices, let's just say house A sold for $210,000 and house B sold for $199,000 they come up with sort of an average, and then they come back to you and say I feel pretty confident based on what you told me you're going to do to this house, that we can sell your house at this price.

It's important that you communicate with the broker as well, to let her know the details of your renovation. You need to let them know if you're going to put stainless steel appliances in. You need to let them know if you are going to put granite counter tops in. You need to have a really intimate conversation with them, and include a detailed description of what you're going to do.

Because for brokers to do their job effectively, you need to do your job effectively. To break down that 70%, what w'ere going to do is we're looking at the after- repair value in this particular case of $206,000. We take 70% of that, which we talked about in an earlier video, to determine the price that we would pay before repairs. Then, we deduct the cost of repairs and we come up with what we want to buy that house for.

As the owner of your company, you've got to remember this folks, at the end of the day you are the CEO. You are the captain of your own ship. If you put your trust and faith in a real estate broker, it's up to you to really make sure that real estate broker or agent is completely capable of determining the after- repair value for you. How do you know that? Well, you can always get a second opinion.

You could get a third opinion. You could actually do a paid-for appraisal. Now, if you're a little bit tight on cash, and you don't feel you want to pay the money for an appraisal, then you really need to make sure you get other opinions on that after repair value, to determine if that number is going to work, especially if this is your first or second deal. You just can't afford to make a mistake.

You can also check out other sites online, like Zillow or Redfin; there's a bunch of them. But, those are just to give you some generalities, so don't rely too much on them. It's more or less for you to do your research to back that up against the real estate agent's numbers to see if they make sense to you.

What I would advise you to do is this - and I've done this personally myself.

We recently bought a property in another market, one I'm not familiar with. It was out in Scituate Massachusetts and I didn't know that market well at all. What I did was I sought out a reference for a good real estate broker in Scituate, and low and behold it was actually a person that I established a little bit of a relationship with through a  REIA meeting.

We met and she gave me her CMA, and I spent a good 2 or 3 hours in my office, at this table, with the map of Scituate  laid out in front of me. I took all her properties that she did her CMA on, and with my marker started circling, doing research on her analysis.

I identified properties that sold that she didn't have on her CMA, and I identified another area that she didn't include. I developed a list of some pretty good questions.

What I did was I invited her back to my office and I asked her all the questions on the areas that I thought maybe she was missing, that would actually lower the value of the CMA that she gave me. She answered every one of those questions with complete confidence -because she knew her market.

I'll give you specific examples. She said, "Well Mike, although on the map this property here appears to be the same distance to the ocean as your property, well this property here does not have views of the ocean like yours does, and you can't see that on the map."

I said, "Well okay, that explains why that house sold for $30,000 less." I said, "Well what about this area over here, you didn't include any of those?" She goes, "Well on the map it appears they are very close, and they are somewhat close, but a half a mile in this business could be the difference of $50,000, and that's specifically the case here."

At that point, now I could say I could make my best educated decision that her number was real. The only real way to tell is when you rehab it and you sell it, and quite honestly the number she gave us, well we sold the house the very first day it was on the market for our asking price.

So, that's how you have to do your due diligence, in regard to when you take the numbers that a real estate broker gives you.

So remember that at the end of the day, if a deal goes right or if a deal goes wrong, you still have to take responsibility for it. I hope that answers your questions on how to determine the after repair value.

Ryan: It certainly does. Thank you.

Mike: You're welcome.