Investor's Worst Nightmare - ARV is Everything!
This is the story of a real estate investor I once worked with.
When I met Trevor, he told me all about how his first real estate investment had become his worst nightmare. As a new investor, he had decided to go to one of those big real estate investing seminars. At the seminar he learned how to find motivated sellers, how to get instant house values online, how to analyze those deals for an ARV (After Repair Value) and how to make offers based on those figures.
He thought is was all very interesting and it turned out he was pretty good at it. It didn't take long before he found the perfect real estate deal. The sellers were super motivated because they could no longer make their house payment and they wanted to avoid a foreclosure to protect their credit. So they were only asking $142,000, which was amazing because the ARV was only $265,000.
Trevor was so excited about his real estate investing success actually becoming a reality.
Once the deal closed, he immediately got to work on fixing the place up. He was careful to hire only the highest rated contractors with the most experience. Everything about the rehab seemed to go smoothly. It was completed after about 4 months and it only cost him about $40,000. He figured he would cash in with a $70,000 profit after holding costs.
He then contacted a great Realtor who was a trusted family friend to list it for him. The Realtor got to work evaluating the comps to find the perfect asking price that would help the property sell fast.
This is when all the trouble began. Unfortunately, the Realtor was having a very hard time trying to find any comps to support Trevor's estimated ARV. After much research she had no choice but to call him and break the bad news.
Her detailed comps analysis had revealed that this property was valued at only $175,000. Trevor was in disbelief. How could he be so far off with his calculations? But after a lengthy discussion with her, it became clear where he went wrong.
She went over her comps analysis with him in detail, helping him to understand just how important accurate comps are, how important an agent's knowledge of the neighborhood market is and why instant home value websites can be an absolute disaster for figuring an ARV.
What happened to my friend after finding the true ARV of his dream investment?
He lost his shirt on that deal. He did end up selling the house a few months after dropping the price again and again. In the end it sold for about $179,000. That’s $86,000 less than he had planned on. Not only did he make zero profit, but he had to borrow money to pay back the hard money lender.
Here’s an approximate numbers crunch on how the deal worked out:
$179,000 Final Sale Price
- 142,000 Purchase Price
- 40,000 Repairs
- 1500 Utilities, maintenance, etc.
- 500 Property Taxes & Insurance
- 10,500 Real Estate Agent Fees and Closing Costs
- 14,000 Hard Money Interest
= $29,500 Loss
The most important lesson to take away from this story is the absolute importance of enlisting the help of a knowledgeable real estate agent experienced in the local market you are investing in. An agent's help can be invaluable for investors. It's the only real way to get an accurate ARV and therefore, the only way to be confident that your deal will turn out how you expect it to.
Curious after hearing my friend's story, I did a test on my own home using my recent appraisal as the accurate value. Then I compared the values from 7 popular home value websites. I had recently refinanced my home so I used that appraisal and a CMA (Comparative Market Analysis) from my realtor to compare the website values to.
Here are the results . . .
$514,651 CMA Before Appraisal
$500,000 Actual Value Confirmed by Appraisal
Automated Home Value Estimation Sites:
- $606,483 Zillow Zestimate - Only 82% Accurate - $106,483 Potential Loss
- $682,000 Chase Home Value Estimator - Only 73% Accurate - $182,000 Potential Loss
- $588,078 ForSaleByOwner Pricing Scout - Only 85% Accurate - $88,078 Potential Loss
- $622,000 Eppraisal.com - Only 80% Accurate - $122,000 Potential Loss
- $606,259 Trulia Estimate - Only 82% Accurate - $106,259 Potential Loss
- $700,000 Realtor.com - Only 71% Accurate - $200,000 Potential Loss
- $718,000 Remax Home Estimate - Only 70% Accurate - $218,000 Potential Loss
As you can see, there is a huge difference between the instant estimated values for my house. But the CMA, done from a human being, a knowledgeable agent in my area, came the closest to the actual value.
So, there's really just one question:
How important is your real estate investing career to you? Are you willing to gamble on the potential loss of thousands of dollars just to get an instant value?
I know it can sometimes take a while to get comps from an agent. But now there is a faster way. If you can't get good comps from your agent right away, you can now simply order them online from RealEstateCompsToday.com. It only takes 2 minutes to order and costs 5 bucks.
They have agents in every market in the U.S., even rural areas. They can even run comps on land and on commercial properties.
Your order will be immediately given to a local agent who is knowledgeable in the neighborhood market of your subject property. The agent will pull your comps and email them to you within about 1 business day. Real Estate Comps Today will even follow through with you and the agent to make sure you received the very best comps.
Isn't your investing career worth a day? It could save you thousands of dollars and so much frustration. Now the most accurate way is also the easiest way!
To learn more about how home value websites compare to Realtor comps, read this informative article.