You can “find” all the houses in the world but it won’t do you any good unless you properly evaluate them and make offers that ensure a House Flipping profit. In fact, if you don’t know how to properly evaluate and make offers on properties, you can run into A LOT of trouble.

There is a great deal of misinformation in sources such as house flipping shows on television. These shows often leave out expenses which can cost you BIG time if you don’t take them into account upon your initial property analysis.

Understanding how to accurately assess costs to ensure profit separates you from being a “speculator” — someone who is just buying a house in the hopes that it will go up in value — to a true “investor” — someone who understands expenses involved in real estate and doesn’t make wild guesses about the future.

The true investor takes calculated and accurate “risks” and understands precisely how to create a significant return on their investment.

We will cover these expenses and hidden costs in a series of blog posts. First and foremost, we are going to help you estimate the After Repair Value of your property with comparative properties by accurately estimating repair costs.

Let’s get down to it!

Determining the ARV (After Repaired Value)

ARV is an acronym commonly used amongst real estate investors. It stands for "After Repaired Value" and is what the property will be worth after repairs and upgrades have been completed.

Determining the amount of money the property will be worth once you finish rehabbing it, is always the first step in the deal evaluation process.

Once you know the amount people will pay for your property, you can determine all your other expenses, and calculate the optimal place to make a decent profit. If you don't know your ARV, you have no place to work back from.

Beginning with the End.

Think of the ARV as the finished picture for a jigsaw puzzle. When you know what the puzzle is supposed to look like you can put the pieces in the correct places which creates a picture of profit.

We’ve told you why it’s Important, here is how to do it.

In order to accurately determine the ARV you will need to look at Comparables or “Comps.” Comps are recently sold (or up for sale) houses similar to your subject property, in the same general area. These are used to determine the “going rate” for houses in that area and are a really good indication of what your house will sell for.

To access data for comparable properties you can use a paid or free service such as Zillow or Redfin, but for the most accurate and detailed information we recommend the Multiple Listing Service, or MLS — a service which provides extensive detail on properties up for sale or recently sold.

In order to access the MLS, you will either need to work with an agent, become an agent yourself, or work with someone who can get you access to the MLS.

The first step with the MLS is to look for rehabbed "standard" sold comps which are similar to what your home will be like when it is sale ready. These comps are easy to spot. They will have upgrades, nice pictures and shine above other homes. These comps are what you consider most when determining your ARV.

Next, depending on how many “standard” sold comps you find, you may also want to take into consideration other recently sold comps, such as short sales or bank-owned properties (REOs) which have been renovated or are in good condition.

As a general rule look for homes that have the following criteria:

Sold in the last 90 – 120 days.
Are within ½ mile to ¾ mile from your subject property
Are close in size, square footage, bed/bath count and age.
Are in a similar neighborhood.

After looking at recently sold comps, expand your search to comps which are listed (up for sale) or pending (under contract with a buyer but has yet to close).

Listed properties are your competition, so if you see rehabbed houses that are not selling you know not to value your home for more than those listed.

Pending properties can give an idea of future values, but keep watching them and keep in mind that they may not sell for the stated price.

You want to focus primarily on properties that have been fixed up, but also pay attention to those in a similar condition to your subject property. If there are several comparable properties which have recently sold or are listed for less than your calculated offer, this can indicate you are overpaying and you may want to reduce your offer.

Extra Tip: You can also check tax records to see what other investors paid for the homes they purchased in that area.

Reminder: Don’t cross the tracks! Avoid using comps from a different city, school district, or across a major barrier such as a freeway, river or railroad tracks.

Also take into consideration swimming pools, garage size, lot size, views and other upgrades so you can adjust your value accordingly.

Finally, consider current market trends and seasonal price changes for indications on both the resale value of your property, and the best time to buy or sell.

Keeping all these important pointers in mind, realize there is no exact formula for value determination, you have to take each property on a case by case basis.

Estimating Repair Costs

The next step in being able to determine an offer price is to accurately estimate the cost of repairs. In my company, we have become so good at this with pictures, a description and the age and size of the house, we can guess the repair costs within 1-2% without ever seeing the house!

The “$20 per sq. ft.” rule is a guideline we use to give us an idea of what it will cost us to fix up a house. This rule comes from our experience that most houses requiring a full “standard” cosmetic rehab will cost around $20 per square foot.

What is a ‘standard’ cosmetic rehab?

A “standard” cosmetic rehab usually includes all new flooring (carpet and hard surface floors), paint (inside and outside), baseboards, electrical and plumbing fixtures, new kitchen/bathrooms (including cabinets, granite, appliances), blinds and window treatments, new doors and a little bit of landscaping.

For example, if you are buying a house that is around 1,500 sq. ft., you can plan on spending $30,000 for the rehab (1,500 x $20 = $30,000).

This rule assumes you are rehabbing an entry or mid-entry house. If you are rehabbing a higher-end house and using higher quality materials and finishes, you are going to adjust the rate closer to $25 or $30 per square foot. For your standard basic rehab, the $20 per sq. ft. rule is a solid and reliable estimate.

From this baseline, you can adjust cost up or down based on additional needs (or things you don’t need). Over time you will develop a better understanding of these expenses and can easily calculate the rehab costs, up or down. We will continue to revisit this topic in more detail in future posts as we discuss rehabbing and working with contractors.

Pro-Tip: You will probably only use this $20 per sq. ft. formula when you are coming up with your initial offer price. Once you get an “acceptance” on an offer, go through the property with a licensed contractor and for a detailed “scope of work” and repair estimate to ensure you didn’t miss anything major with your first estimate.

Understanding what your property can potentially sell for and accurately assessing repair costs are fundamental first steps to successfully turning a profit.

Look out for upcoming blog posts where we will address Hidden Costs and Closing Expenses and give you the best formulas to determine your offer on a property!

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