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Posted almost 9 years ago

Avoid losing a deal because of a wrong rehab or ARV estimate

Nothing hurts more than finding a property and then locking it up only to not be able to sell it. This is normal and it will happen more often that not in the investing world, but it can really kill your momentum when you are starting out. Wholesaling to me is the hardest of all investment strategies. Not only do you have to be a good negotiator with seller's but you also have to be a decent sales person with your end-buyer's, don't forget the additional skills of marketing, problem solving, and having a tough skin. So you got all these qualities, that's great, now add the ability to estimate a rehab cost and find an after repair value (ARV) and your head will soon start spinning with so many numbers. It's happened to me and it'll keep being one of the most asked about subjects on BiggerPockets. So how does someone go about finding out these numbers without being an actual contractor or appraiser?

Let's start of with estimating rehab numbers.  The best way to estimate rehab cost is to bring a contractor and have them give you an estimate. Now you have a written paper you can give your buyer showing them there is someone that will do the work and how much it will cost. The problem is that when you are starting out it gets really hard to have a contractor come out to every potential property and give you an estimate without a guarantee of a job. Here is a few tips that you can do to help estimate the cost. 

1) Go to Home Depot or Lowe's and find their prices for the materials that you would use. These stores are usually overpriced on materials so you will have a small buffer already growing in your estimate.

2) Call some contractors off craigslist or that you meet at your local REIA and ask them what labor cost they charge for a type of job. Once you have a couple of answers then get the most expensive price for the labor cost for each type of job (kitchen remodel, bathroom remodel, flooring) and make that your labor cost estimate for that job. Again you're building a buffer on your estimates for your buyer.

3) Another great tool I've used to help me estimate repair estimates is the website Homewyse. This website has over 800 different types of jobs and will give you an estimate after you put in your zip code and the sq.ft of the area being repaired. You can also change the quality of the product use, the type of labor, what repairs specifically you want done. 

4) Once I get my final estimate I always add 20% to the estimate to account for unknown cost.

Now that the rehab estimate has been accounted for the next step is finding the ARV. This is to me the hardest number to come up with. I consider finding this value more of an art than an actual science. I say this because if I have 2 appraisers come to do an evaluation on my house I can guarantee you that I will get 2 different values. Sometimes these values are off by $20,000 or more. So how can an individual that is not an appraiser finding a value to work their offer for? You can try these tips:

1) Go to your local REIA. My REIA has a huge range of classes every month from "how to estimate ARV without being an agent" to "how to sell your house without a real estate agent" and these are taught by local flippers that have been doing it for years successfully. They also hold a guest speaker from an appraiser at least once a year. 

2) Don't use Zestimate! I can not stand the Zillow Zestimate and I really don't understand why so many people use it when even their own CEO has said that nationwide Zestimates have a "median error rate" of about 8%. That is a huge difference and in a high market like Los Angeles and New York you can lose a huge amount of money. What I recommend to use Zillow for is to find actual sold homes in the neighborhood that have sold recently and also look at what other homes are on the market.

3) The best way to run comparable is to use the MLS if you are a licensed agent or have your agent run them for you, as it has the most recent data. The problem here is that everyone can use different criteria when running a report. I'm a very conservative person when I run my comps. My motto is I rather under promise and over deliver. I rather give my buyer an ARV and then have them come back to me saying they went to a bidding war and sold it for way more. We both win! I like starting out with a 1/2 mile radius from the house, I also make sure not to cross over any major streets, highways, lakes, rivers or other major things that separate an area. I also look back 6 months of sales in that radius. This gives me a good amount of sold homes to start off with. Once I have the starting homes I narrow it down to homes in the same subdivision and if I still have a lot of homes then I narrow it down to the ones sold in the last 90 days. This gives me the most accurate number of what the current market in that area is. This also allows for the appraiser for the new buyer to be able to use those comps as well. 

These are the things I did when I first started that really helped me out in learning how to estimate things. Like I said before, estimating is an art not an exact science so your goal is to be as close as you can.



Comments (3)

  1. homewyse hum nice thanks


  2. Thanks for the Homewyse tip Christian! Will use. 😊


    1. No problem Nikki. It's a great website.