Whether you\u2019re flipping houses or investing in real estate for the long haul, there are really no \u201csecrets\u201d to success.<\/p>\n
Forget all those guru offers that appear in your inbox that claim to “reveal the insider secrets\u201d<\/em> to \u201conly a select few\u201d<\/em> while they “pull back the curtain”<\/em>…(of course you need to buy the $40,000 course in order to find out what those \u201csecrets\u201d really are).<\/p>\n When it comes to real estate investing<\/a> and house flipping success, it\u2019s really not as secretive and cloak and dagger as you may think.<\/p>\n Mostly, it\u2019s just about the numbers<\/strong> – and being disciplined and formulaic in your approach to each and every deal.<\/p>\n And perhaps more importantly, it\u2019s about the single most important number in any real estate deal you ever do\u2026<\/em><\/p>\n That \u201csecret\u201d is After Repair Value<\/a> or \u201cARV\u201d for short.<\/p>\n 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 \u00a0number.<\/p>\n With ARV, you are reverse engineering your entire deal \u2013 in essence, working backwards to where you want to be<\/em>\u00a0from where you currently are.<\/p>\n Think of it like goal setting<\/a>.<\/p>\n Let\u2019s say in the year 2014, you want to make $50,000 investing in real estate. This is a great goal to set for yourself.<\/p>\n To take the next step in your goal, you’ll then need to write down all the steps that you\u2019ll need to take in order to achieve that goal.<\/p>\n When buying houses to flip, ARV is like setting a goal. You are determining the end value of a property before<\/strong> you would ever consider putting an offer. The ARV gives you the basis for creating the offer.<\/p>\n It’s like beginning with the end in mind<\/a>.<\/p>\n I hear this all the time for newer investors: \u201cI can get this house for $50,000 Mike, it\u2019s a steal! Should I buy it?\u201d<\/em><\/p>\n Although buying a house for $50,000 is a really good price, but the purchase price is completely irrelevant unless it\u2019s put into context. In that context is ARV.<\/p>\n These investors think they\u2019re getting a property for so cheap they automatically have “a great deal\u201d.<\/p>\n Not so fast…<\/p>\n My first question back to them is: \u201cSounds promising. What are their projections for selling that house for?\u201d<\/em><\/p>\n Some of them look at me and they say, \u201cI have no idea, I can maybe selling at $150,000?\u201d<\/em><\/p>\n Right there I say to them, \u201cSo, how do you know if this is a deal?\u201d<\/p>\n That\u2019s what I get the blank stare\u2026<\/p>\n Many investors make this mistake by just basing a deal on the acquisition price because it\u2019s so cheap. Although this house in this example may be a great deal, without ARV, you have no context for whether or not it\u2019s a good deal or a crappy one.<\/p>\n Although it\u2019s tempting, this is a trap you should never fall into.<\/p>\n There\u2019s a couple of different ways to determine ARV.<\/p>\n You can try to do it on your own or you can hire a professional. I don\u2019t 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.<\/p>\n 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.<\/p>\n Simply tell them that you\u2019re a real estate investor and explain your model to them<\/a>. 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.<\/p>\n 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\u2019ll understand exactly what you\u2019re getting at.<\/p>\n Once you contacted your real estate broker, simply ask them, \u201cWhat do you think I can sell this house for when I relist it?\u201d<\/em><\/p>\n The most important question they should answer to you is, \u201cWhat do you plan on doing to it?\u201d<\/em><\/p>\n This is where you will outline what you\u2019re renovation plans are. Perhaps you\u2019ll be installing a new kitchen with new cabinets and granite countertops and maybe even stainless steel appliances. Tell them that you\u2019re planning on putting in a new roof, new Windows, new water heater, etc.<\/p>\n 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 \u201cas is\u201d condition.<\/p>\n No, this does not stand for \u201cCountry Music Awards\u201d\u2026<\/em><\/p>\n Once you real estate agent starts to understand what you\u2019re going to do to the house, they can then run a Comparative Market Analysis or \u201cCMA\u201d for short.<\/p>\n When you get the CMA, don\u2019t 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\u2019s.<\/p>\n 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.<\/p>\n I wasn\u2019t 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.<\/p>\n Regardless, I did research on my own anyway!<\/em><\/p>\n 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.<\/p>\n I then started doing some of my own research on Zillow<\/a>, Trulia <\/a>and a few other real estate sites where you can pull information on recent real estate sales.<\/p>\n I started to pick apart her CMA house by house. Why didn\u2019t 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?<\/em><\/p>\n 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.<\/p>\n 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\u2019ve gotten from Trulia or Zillow in a million years.<\/p>\n 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:<\/p>\n Let\u2019s take that $50,000 house as an example as to whether it really is \u201ca good deal\u201d using two different scenarios.<\/p>\n Let\u2019s also assume that the property needs $50,000 worth of renovation in order to be able to sell it on the market.<\/p>\n ARV LESS THAN $140,000<\/strong><\/p>\n If you use the 70% rule alongside ARV, this property barely meets our criteria. Here\u2019s why:<\/p>\n ARV:<\/strong> $140,000<\/p>\n 70% Rule:<\/strong> $98,000<\/p>\n Acquisition Cost:<\/strong> $50,000<\/p>\n Renovation Cost<\/strong>: $50,000<\/p>\nARV: A Bit Like Goal Setting<\/h2>\n
Forget the \u201cI Can Get This House for $50,000\u201d<\/em> Mindset<\/h2>\n
ARV : Who to Contact<\/h2>\n
ARV: How to Determine<\/h2>\n
The CMA\u2026Beware<\/h3>\n
Additional Factors That Determine ARV<\/h3>\n
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So, Is It REALLY “A Good Deal”?<\/em><\/h2>\n
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