The One Real Estate Investing “Secret” the Gurus Don’t Want You to Know
Whether you’re flipping houses or investing in real estate for the long haul, there are really no “secrets” to success.
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Forget all those guru offers that appear in your inbox that claim to “reveal the insider secrets” to “only a select few” while they “pull back the curtain”…(of course you need to buy the $40,000 course in order to find out what those “secrets” really are).
When it comes to real estate investing and house flipping success, it’s really not as secretive and cloak and dagger as you may think.
Mostly, it’s just about the numbers – and being disciplined and formulaic in your approach to each and every deal.
And perhaps more importantly, it’s about the single most important number in any real estate deal you ever do…
That “secret” is After Repair Value or “ARV” for short.
ARV: A Bit Like Goal Setting
ARV is the most important number in house flipping, period. This is largely because it determines so many other things in all your calculations. Everything in your entire deal flows from this number.
With ARV, you are reverse engineering your entire deal – in essence, working backwards to where you want to be from where you currently are.
Think of it like goal setting.
Let’s say in the year 2014, you want to make $50,000 investing in real estate. This is a great goal to set for yourself.
To take the next step in your goal, you’ll then need to write down all the steps that you’ll need to take in order to achieve that goal.
When buying houses to flip, ARV is like setting a goal. You are determining the end value of a property before you would ever consider putting an offer. The ARV gives you the basis for creating the offer.
It’s like beginning with the end in mind.
Forget the “I Can Get This House for $50,000” Mindset
I hear this all the time for newer investors: “I can get this house for $50,000 Mike, it’s a steal! Should I buy it?”
Although buying a house for $50,000 is a really good price, but the purchase price is completely irrelevant unless it’s put into context. In that context is ARV.
These investors think they’re getting a property for so cheap they automatically have “a great deal”.
Not so fast…
My first question back to them is: “Sounds promising. What are their projections for selling that house for?”
Some of them look at me and they say, “I have no idea, I can maybe selling at $150,000?”
Right there I say to them, “So, how do you know if this is a deal?”
That’s what I get the blank stare…
Many investors make this mistake by just basing a deal on the acquisition price because it’s so cheap. Although this house in this example may be a great deal, without ARV, you have no context for whether or not it’s a good deal or a crappy one.
Although it’s tempting, this is a trap you should never fall into.
ARV : Who to Contact
There’s a couple of different ways to determine ARV.
You can try to do it on your own or you can hire a professional. I don't recommend doing it on your own. Since this number is so important, don't leave anything to chance. Call on the services of an active real estate agent who has a ton of experience in your particular area.
If at all possible, seek out the top expert in your area. This is typically someone who will attend REIA meetings, MeetUps and local events. You can also call real estate offices or ask for referrals as well.
Simply tell them that you’re a real estate investor and explain your model to them. Tell them about the property you are considering buying and ask them about the neighborhood and other homes that have sold in the area that are similar to this one.
Explain to the agent that this number is a very important number which will determine the success of your project. If they work with real estate investors before, they'll understand exactly what you're getting at.
ARV: How to Determine
Once you contacted your real estate broker, simply ask them, “What do you think I can sell this house for when I relist it?”
The most important question they should answer to you is, “What do you plan on doing to it?”
This is where you will outline what you’re renovation plans are. Perhaps you’ll be installing a new kitchen with new cabinets and granite countertops and maybe even stainless steel appliances. Tell them that you’re planning on putting in a new roof, new Windows, new water heater, etc.
As you start listing out all these improvements, the real estate broker should start to get a better idea as to what your ARV should be. With this information, the real estate broker will be able to evaluate the property far more easily instead of evaluating it in and “as is” condition.
No, this does not stand for “Country Music Awards”…
Once you real estate agent starts to understand what you're going to do to the house, they can then run a Comparative Market Analysis or "CMA" for short.
When you get the CMA, don't necessarily agree with or go with the first number the real estate agent gives you. Real estate agents at times have a tendency to over inflate ARV based on CMA's.
For example, on a property I did in Scituate, Massachusetts last year, I was looking to flip a property in an area that I really had no prior knowledge of. The broker came highly recommended to me and I had actually met her at a REIA meeting a few months prior.
I wasn’t familiar with the area at all and she came back with a really good CMA for me. As I had a good sense about her, I took her projection at face value.
Regardless, I did research on my own anyway!
So what I did was I got a map of the area with all the other comps that she and given me and I identified them all on a spreadsheet using a map around where my target property was.
I started to pick apart her CMA house by house. Why didn’t she pick this one? Why did she pick that one? How come she included a property that sold a month ago that appears to be very close to buy property?
After my analysis, I had a few questions for her. The next day I went to her office in analyzed the CMA with her house by house by house.
The really cool thing was that she had an answer for everything that I asked her about. And each answer was backed up by solid data and insight that I never could’ve gotten from Trulia or Zillow in a million years.
Additional Factors That Determine ARV
ARV is not determined in a vacuum. There are some of the other things you need to know about ARV before you put in an offer:
- Square Footage: For example, you might have a 1200 ft.² ranch where all others in the neighborhood are 1400 or 1500 ft.² or maybe much more on the low, say 900 ft.² is this is the case, you’ll need to adjust your values accordingly either up or down.
- Number of Bathrooms: Let’s say your house is 1.5 baths and the other houses in the market are 2.5 baths, then your house is going to be worth less because it has less bathrooms. The reverse is true as well.
- Number of Bedrooms: Same as with bathrooms, a three-bedroom house obviously is less valuable than a two-bedroom house. You’ll need to make adjustments upward or downward based upon the comps in the market.
- Kitchens: If you see that not many of the comps in your market have branded kitchens, you may be able to price yours at somewhat of a premium. As with all our house flips, we do full renovations and install brand-new kitchens which show and sell extremely well.
- Kitchen Appliances: Let’s say you’re seeing lots of comps in other houses with non-updating kitchens that are being sold for $400,000. If you really do your kitchen especially if you install updated appliances and even nice countertops, you’ll probably be able to sell the house for $430,000 or maybe even $440,000. Yes, kitchens are that important.
- Days on Market: The days on market will help you determine carrying costs as well as ARV. Typically, we like to figure 6 months on every property from purchase to close, so we factor in six months of soft costs into all of our equations. Having said that, will always project out 12 months if things don’t go according to plan for whatever reason. You can also figure out what your cost will be nine months as well.
So, Is It REALLY “A Good Deal”?
Let’s take that $50,000 house as an example as to whether it really is “a good deal” using two different scenarios.
Let’s also assume that the property needs $50,000 worth of renovation in order to be able to sell it on the market.
- Bad Deal
ARV LESS THAN $140,000
If you use the 70% rule alongside ARV, this property barely meets our criteria. Here’s why:
70% Rule: $98,000
Acquisition Cost: $50,000
Renovation Cost: $50,000
Total Cost: $100,000
If you’re familiar with the 70% Rule, your acquisition cost plus your renovation costs should equal 70% of your ARV. Using round numbers, 70% barely covers it. Typically, renovation costs always are more than your original projection. In fact, we typically will add 10 or even 20% on to our renovation costs at times just to be safe.
- Good Deal
ARV OVER $150,000
70% Rule: $105,000
As you can see, the 70% rule actually gives us a $5,000 cushion between our acquisition cost and our renovation cost. Of course, an ARV of let’s say $200,000 makes this an absolute home run.
ARV “Secret” Conclusion
So as you can see, this “secret” is no longer a secret (unless you already knew it anyway)…its really more about the numbers and knowing how to use them – as well as having the DISCIPLINE to use them correctly. When it comes to flipping houses in nailing your profits, it’s more numbers than secrets…
But don’t tell the gurus that…:-)
And if you’ve made it this far, please leave a comment below if you have any questions on how it’s done or how I can help you to do it as well leave a comment, I’d love to hear from you. Do you use ARV to flip houses? If so how? If you haven’t ever heard of ARV or the 70% Rules, that’s cool too, leave a comment and ask more!