Question about house flipping and the houses value

10 Replies

If im buying a house for $5 dollars and adding $2 dollars of repairs... The house is now able to sell for $10?

Is the value of the actual material added and the ARV correlated?

It took us $100,000 to build this house...but we are selling it for $150,000.

Is that how Real Estate works?  Am I missing something?

The ARV is not a product of how much you put in, it's a product of how much you can sell it for which is directly associated to sold comps in the nearby area that match the home you are selling. If the materials and flip budget were a part of the real ARV, people could overspend and recoup, but it doesn't work like that. Your purchase price and ARV are not related, only in terms of how much profit you will make. Your ARV is an after repair value, but is the market value for a flip.

Thank you very much for the responses

Im still  confused. 

Is the ARV literally what the house is worth... If i add up all the value of the walls, paint, fans, wood - evrything in the house.. Is that the ARV? For example, the house literally has 100k in materials..wood,roof,lights,stove,etc... That means the houses ARV is 100k we cant sell it for whatever we want.

How do you "bring something up" to ARV?

Is it done sometimes by upgrading with materials that literally are worth less than what we are selling for?

"It cost us one dollar worth of materials to bring this house up to 100k".  How?  Its not correlated? 

I just remembered that house values go up and down all the time... Something like that.. So something else is influencing the house value not the actual materials of the house

Still trying to get it.

@Peter Fuentes

The improvements you make to a house all have different return values.  If you update a kitchen for $15,000 you might get a return of $25,000. The correlation of money spent does not always reflect on the value going up at the same rate.  Painting the house does not give the same return as updating a kitchen, but it might improve the property over a competitors property that is for sale.

ARV is what the property will sell for or what an appraiser would value the property at. Each market dictates what improvements are valued at. A kitchen update in the Midwest will not have the same impact as an update in California. I think you have the concept correct.

@Peter Fuentes , what you spend, how much the materials cost, etc have nothing to do with what the house is worth?  As you mentioned home values fluctuate. Your job as a flipper is to know what you can sell the house for at the end, based on what other houses around it, of similar size, finish, etc have sold for recently.

In Cincinnati, in a hot neighborhood I can buy a 2,000 sq ft, newly renovated home for $400,000 or a similar size and same neighborhood, but outdated home for $200,000. So the $400,000 is your ARV (after repair value). If you can buy the outdated house for $200,000 and fix it up, similar to the other renovated homes, for $100,000 you are in the house for $300,000 and you sell it for $400,000. You made $100,000.

The risk is knowing what the cost to rehab is and what the real sale price will be. If the market turns on you, and your $400,000 ARV drops to $300,000, AND you $100,000 rehab turns into $150,000, now you own house that is worth $300,000 and are in it $350,000, so you are set to lose $50,000 if you sell.