Determining AS-IS or ARV value in a correcting market

4 Replies

Hello all,

I live in the Montréal area which is in the process of going through a serious correction. It has changed from sellers to buyers market and housing prices are dropping rapidly (which I am thrilled about because deals are coming faster) however I am concerned that the ARV that I establish today will be too high even two or three months down the road.

How would you recommend that I proceed?

Thats a tough situation. My advice is to stay on top of the market as best you can and update. This obviously makes thing much tougher when doing a flip or buying and holding but It can be done successfully if you are getting good enough deals. If you aren't an agent I would advise getting a good agent on your side to help you with this. 

@Casey Cuppy Unfortunately most agents are way too optimistic about the ARV for my liking. I have heard of people from Phoenix (there's actually a BP podcast with one) who were buying at 70% in 2007, 2008 and lost everything when the market bottomed out. I am looking for a way to safeguard for this. So far I have decided to buy at 65% instead of 70%. I am open to other suggestions as well.

Yup, cutting back on your ARV from 70% to 65% might be a good idea if you think the market will decline by 5% in the next few months. There are so many other factors to consider - from personal risk tolerance to your market conditions in Montreal to how you are leveraged currently.

I've heard of some rehabbers slicing their margins down to 15-20% in certain markets here in the U.S. We are having a terrible time with "over priced" REO inventory and banks not budging too much off their asking prices, even when they have been on the market for 6 months. Going too thin on your margin can be troublesome if you are not dead on with your numbers going in to the deal though.

Risk/reward!!!  Go for it!

@William Johnson you can calculate the month or month depreciation and use that in your calculations.  Also, look at active properties/pending properties and see how long they are sitting.  

A great way to measure "hotness" or "Coolness" of an area is to look at the contract ratio.  Contract ratio is simply pending listings/Active Listings.  I wrote a BP blog on it: Contract Ratio

Good luck!

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