After Renovation Value and Comps?

3 Replies

Hi,

I am a newbie. I had a question about renovating and flipping homes, and the after reno value.  

Reading around, I've read on some sites that home remodel projects don't often equal a return on investment. For example, you could spend 25k on a kitchen remodel, but only recover 60% of what you put into it.  How is it that then when you flip a house, you are not only able to get all your cash back, but actually come out with a profit?

Is this because you are buying a seriously distressed property which is on the lower end of the comps, and then putting in additions/features that now make the property equal to something on the higher end of the comps? Therefore, you get a return on your investment because the property was distressed, whereas my personal home is already in good condition? 

In otherwords, is the highest comp the most I can realistically expect to get on my investment for a flip?

Jimmy

@Jimmy Humphrey That is exactly it. If I could get 3x what I put in for renovations I could flip any house on the MLS.

It is about buying at the right price. You make your money when you buy, as they say.  If a house would sell for $100K fixed up but needs $30k of work I need to buy it at $40k or $45k to make a profit. 

The answer is twofold

One you are buying a house no homeowner would buy because of the work needed. You then fix it up enough for a homeowner to want it. To do this you need to buy at a deeply discounted price. 

The other part of the equation is that you are using different contractors than homeowners use. You should be getting much better prices for construction than Harry homeowner. You will see that construction estimates can easily vary by 100%  or more; From say $40K to $80K+

In other words, is the highest comp the most I can realistically expect to get on my investment for a flip?

Not necessarily; the highest comp could be an anomaly and more than you can expect, or you may be able to push the market by adding features or expanding the size of the house. Estimating ARVis as much art (or gut feel) as it is science. The better your knowledge of the market, the better you can estimate. Things like what level of finishes does the buyer expect (granite or fancy Formica; Hardwood or nice laminate), how fast are homes selling, how much inventory is on the market, are prices climbing etc. all factor into the ARV

Some renovations return their value and some don't.  The renovations that return the most value are the ones that take a house from unlivable to a house that's livable.  That's because buyers can't get a loan on a house that's unlivable, so the before repair value on those houses is essentially $0 to owner occupants (that's an exaggeration, but you see what I mean).

The minute you get a house into financable condition, the value increases tremendously. That's why most rehabbers prefer very distressed houses, because they are essentially taking the value from near $0 to ARV with their renovations.

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