When making offers on properties to flip, it is important to have a good system. I believe that you should be able to quickly figure out your offer range, make lots of offers, and then do thorough due diligence once a property is under contract.
The 3 things you need for getting an offer price for a real estate flip are:
- ARV or FMV – These stand for After Repair Value or Future Market Value.
- Rehab estimate – Get a ballpark rehab estimate based on a walk through, don’t bother with bids yet just a conservative ballpark estimate.
- Confirm it is a decent area – Confirm crime is not an issue, the whole street is not in foreclosure or vacant, and the number of sold comps is close to or higher than the number of for sale properties.
Now, an agent that is good at rehabs and working with investors should be able to provide this information. All agents can pull comps and give your ARV or FMV. You may want to have your contractor do the rehab estimates and if necessary make it worth their time. Once you get these 3 items, your formula is simple. Your offer range should be 50-70% LTV minus rehab.
ARV * 50% – rehab
ARV * 70% – rehab
So if ARV is 100K and rehab is 20K your formula looks like this:
100K * 50% – 20K = 30K
100K * 70% – 20K = 50K
Your offer range is 30-50K. This system is quick, simple and effective. You can delegate most or all of the research then you can focus on finding more prospects. This has worked time and time again. How do you come up with your offer range?
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{ 5 comments… read them below or add one }
Good post Ryan. The formula is easy for people to learn (in my opinion). What takes time to learn is:
A) how the heck do I accurately estimate repairs?
and
B) what exact number do I need to use for my ARV? Are properties selling fast? Is there a lot of competition in the neighborhood? Am I looking to sell my house before any of the competition? Therefore, do you need to be super aggressive in pricing?
and
C) 50-70% — What the heck do I need to use? In my opinion, it all depends on the area (how fast is stuff selling) and your entire local market (how fast is stuff selling)
Good info Ryan!
Thanks Brooks. It is hard for any one person to become an expert at everything in real estate. That is why I use and recommend using a team of experts. Here are some responses, I hope this helps.
a) an agent, contractor or other expert can help with the rehab estimate. When you are in escrow, do the difficult things in 3s such as 3 rehab bids, 3 ARV estimates, 3 market rents and rental desirability checks, etc.
b) Get comps from your agent. Look at days on market averages, how many for sale vs pending vs solds. Drill down into individual listing if necessary to see if they sold near original asking or if there where multiple large price reductions. Get comps for a few years back if necessary. Eventually you will become an expert and will target certain areas so you won’t need to do as much due diligence.
c) Use comps, sold comps. Be conservative and realistic. I recommend to always price aggressive with flips, try to sell fast and move on to the next one. You want to maximize annualized return so a 5K profit in one month is a 60% annual return where as a 15K in 6 months is only 30%. You can also give free stuff like a flatscreen tv, do small weekly price reductions to keep your listing at the top of searches, etc.
Yep, great feedback
I would respond with….
A) definitely get multiple contractor bids. But….A LOT of times to get the hot deals that are on the MLS you don’t have time to bring out contractors. You better know your stuff. This is why I brought up learning to get pretty close when estimating repairs.
B) I would disagree with going back years. Heck, we currently don’t even want to go back more than 3 months if we can avoid it. Why? Because the market is moving so fast and we don’t want to get stuck with a property. And comps? We use Pendings as well in a huge way! Pendings (if you can get sneaky and find out what they’re selling for) are the newest Solds.
C) I completely agree. I recently finished a post on my blog entitled ”The Velocity of Money”
Bingo! Couldn’t agree with you more!
Having agents do the work for you is a great idea. I’m licensed, but outsourcing is key. Sometimes we’ll have one of our agents go check out a property, take pics, and report back, etc.
I see your point on comps for trends, etc.
Discount another 10% to be safe — Bingo Again!
So many times we’ve got a deal that’s close, but if you let your emotions get involved you may just be getting yourself into trouble :/
Thanks for the props on my post!
Thanks Brooks, I read your velocity of money post, great article. It is definitely an art estimating rehab. I find agents that are good with investors and rehabs usually. They do a walkthru and create a quick rehab estimate and list out the items and cost. I’ve done enough rehabs know where I was able to take a 52K estimate and cut it down to 35K which leaves 5-8K of reserves even. It takes time.
You are right about using 3 months of comps and pendings. Sometimes we have to go back 6 months to get enough comps. Going back a few years is only useful to see trends, days on market, etc. I should have clarified that more. I still discount about 10% from the last 3 months of comps to come up with a realistic and conservative ARV. Best to paint worst cases and have surprises be good ones!