How to minimize unforeseen forclosures prior to closing on a deal

Question

Hello BP. I bought a house and prior to closing on the deal, my agent said the ARV will be XXX. I closed on the deal and started the rehab. Well unfortunately during the rehab we had some foreclosures that popped up from the left field which affected my ARV. Is there any way I can avoid this pitfall from happening again? Has this ever happened to any of you? Any advice or strategies will be greatly appreciated!

Charlie Fitzgerald · Answer

I buy (and) lend on as-is value. If my acquisition can be made at enough of a discount to as-is value and my sale price after improvements + costs is at or above my initial as is value, I'm good to go.  Any forecasting with ARV as a component is to me nothing more than speculating.  There are too many unknowns that can affect my outcome if I hedge on ARV.  I get less deals I look at to pencil out, but the ones that do are not going to hurt me.

John Kent · Answer

@Joseph Tipa foreclosures shouldn't effect your ARV unless the condition is close to or comparable to your newly renovated property. Your ARV should be supported by traditional sales, newly renovated properties are even better. Short sale, auction, and REO sales all have a distress factor where a discount off of As Is value is expected.

Look at your agent's comps. Are they using distressed sales for comps? Are there any traditional sales comps available? If there are no traditional sales comps for sale then the market your property in may be distressed/declining. In a declining market foreclosures can definitely bring down the ARV over a short period of time. In a stable or appreciating market foreclosures don't have a large effect on ARV. St Cloud is outside of my market so I cannot speak with specific market knowledge about the conditions there.

Make sure you evaluate the comps yourself and determine an ARV. At a minimum, during your due diligence period take an in-depth look at the comps to very your ARV and to determine the level of finish required of your rehab to meet that ARV.

Joseph Tipa · Answer

Now I understand why certain lenders lend based on as-is value. Nice thanks for the info

Joseph Tipa · Answer

Thanks a lot David! great info. Okay so based on what you and others are saying about foreclosures not really having an affect on the selling price, sounds like the deal could have  been a bust from the beginning.

Joseph Tipa · Answer

Thank you so much for the in depth details!

Daria B. · Answer

I'm not sure what the county web sites look like where you are. Here, I am able to start with the property appraisers site and then link to the public records. From there I can do searches for lis pen and if I want to further my research I get the case# or just go to the court web site with the case# or name.

In your case you just want to know what homes are in the process of or perhaps just started depending on where you are with your flip.

So for instance, if I was considering a home to flip or buy/hold (probably not so much for this), I would look at the GIS map to see surrounding homes. The appraisers site here allows me to narrow my search to neighborhoods and it lists the owner so when I see Federal Mortgage or a bank name....then I know it's a foreclosure. In some cases though the process has just started, lis pen, so the public records is where I search because lis pen is a document type that I can narrow down a search.

I'm not sure how vested in this you want to go but I would think the web sites in your area for appraisal/court/public records should allow you to search for and get enough info.

Good luck.

David Friedman · Answer

Foreclosures aren't going to significantly affect your ARV unless you are holding the property for too long. 3-4 months tops should be the goal for flipping a house. That is why I believe flipping is so much lower risk than rental properties. My outside market isn't going to affect me as much in 3-4 months as the property itself will. Some people can't buy a foreclosure due to the condition. Assuming the condition of yours is turnkey, that represents a higher value than a foreclosure.

Gary Siver · Answer

i would say on an average arv is what most flippers use to find the value of a house they are looking to purchase.  Your arv should not affected by a couple foreclosures that popped up in your neighborhood,  there is a big difference in $/sqft for rehabbed versus a foreclosure.

Joseph Tipa · Answer

Great advice thank you! Can I concentrate the foreclosure list to the exact area where my flip is located? I'm not trying to go through this again! Also what part of Florida do you invest in?

Joseph Tipa · Answer

Thanks for the advice but isn't the ARV what we look for when flipping houses and before closing on deal? What strategies would you suggest?

How to minimize unforeseen forclosures prior to closing on a deal

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