3 Secrets to Nailing the After Repair Value of a House Flip
A few months ago I wrote a blog post about how to make money flipping houses entitled Do you Need to be Smarter than a 5th Grader to Flip Houses?, and I think it turned at least a couple of heads. Its true folks, you do not need a graduate degree in mathematics to make money flipping houses. All it takes to flip a house successfully is some simple multiplication, subtraction and addition.
However it’s the numbers you use that will make or break your house flip deal. The math itself may be extremely simple. Discovering the correct numbers to use, on the other hand, requires research and help from certain experts.
By far the most important number to absolutely nail down to make money flipping houses is the ARV. The ARV is the after repair value of a house flip. Said another way, the ARV is what you expect to be able to sell the house for after renovation. Every single other projection you make will be based off the ARV. It is critical to get the ARV correct, or every single other projection will be off – and your profit margin could suffer as a result.
If you get the ARV substantially incorrect, you will be fighting an uphill battle for the rest of the house flip. To consistently make money flipping houses, you want to avoid this at all costs, and here’s how.
Network to Find the Best Real Estate Agent or Broker
To determine ARV, a real estate agent or real estate broker will conduct a comparative market analysis or CMA as it is commonly called. Because you are relying on someone else to determine this number (albeit a VERY important number!) you need to make sure that this person knows what they are doing. It is very important that you align yourself with the right real estate agent or broker.
Remember, just because this is their profession, it does not guarantee that they will nail down the ARV. What if they are new to the area, inexperienced or just don’t really care about doing a good job? Always remember that this is your house flip, your deal, and that you are responsible for everything that happens.
A good realtor or broker will look at properties that have sold in the area of your house flip. They should not pay attention to properties that are for sale, because these properties have not yet sold. A good realtor will only pay attention to properties that have recently sold – which will help them gauge how much your particular property may sell for.
Do whatever you can to align yourself with an expert and knowledgeable real estate agent/broker. I once worked with an agent that grew up in the town she was working in, and knew absolutely everything there was to know about the market. Low and behold we sold that particular house flip in just 1 day – much thanks to her exceptional projections.
Effectively Communicate your Plans to your Agent/Broker
Communication is so important in this business (and in any business for that matter). In last week’s blog post I stressed the importance of communicating effectively with your contractors. We also talk a lot here at HFS about communicating well with lenders and investors. The same theory holds true with real estate agents and brokers. Good communication is essential to making money flipping houses with any degree of consistency.
Once you align yourself with an expert agent, be sure to fully and explicitly communicate your plans for the property with your agent. Make sure that they are 100% on the same page with what you are trying to do. Communicate the importance of nailing down the ARV, and show them how the a wrong ARV will affect your bottom line.
I think it is always important that your house flipping team is on the same page. Don’t let the details get lost due to poor communication.
A few phone calls and emails won’t cut it. I meet 1 on1 with any new members of my house flipping team. I think this is the best way to gauge the competence level of a new team member. If I rely on a new agent to determine the ARV of a property, I want them to meet and get to know me. People will naturally do a better job if they know, like and understand their client. I figure if my team members know me, and understand who I am, that they will naturally put forth the extra effort and do the best job possible.
Do your own Due Diligence
In a best case scenario you will have aligned yourself with an expert agent, effectively communicated your plans to them, and received what at first glance seems to be an accurate ARV. Remember that you are the captain of your own house flipping ship, and that you are responsible for whether you sail off into the horizon, or sink at port. When you receive your comparative market analysis from your agent, your work has really just begun.
To ensure that the ARV your agent has provided you is accurate, consider the following:
- Get a second or third opinion
Find another agent or broker and ask what they think. Then find another agent and ask them what they think. If this is your first flip, consider finding another. I think you get the idea – lol.
- Get a paid appraisal
Consider hiring an expert appraiser to appraise the property. Yes this is another expense that you will pay for from your bottom line. However, the cost of the appraisal will be much less than gauging all your projections off an inaccurate ARV.
- Do your own research
The internet can be a good resource for double checking after repair values. I would never recommend gauging your final ARV off information obtained through the internet, however it is a good tool for double checking.
More importantly, pull out a map of the area and make a list of questions to review 1 on 1 with your agent. Look for sold properties that they did not include in their comparative market analysis. Ask them why they did not include them. Look for things that you think may lower the value of the ARV, and ask your agent about it.
If your agent is confident in their CMA and ARV, they will say things like:
“Well Mike, I did not include that property because that specific house does not have a water view, like your property does.”
“Mike, that section of town is less desirable to live in because of [reason A] and [reason B]. Your property does not have to deal with these issues.”
The All Important ARV
ARV is so important that I am currently developing much more detailed and in-depth videos that dive deep into other strategies and techniques I use to nail down this extremely essential number.
Stay tuned, because I will be releasing these videos to HFS members when we launch the NEW House Flipping School on April 22nd.
See you at the top!