Brand new and seeking AVR help!

9 Replies

I'm brand new to the game and a potential buyer I had been in contact with told me that he likes investing in and flipping houses with "70% AVR or less minus restoration costs". What exactly does he mean by that in easy to understand terms?

Thanks!

I think you mean "ARV", or after repaired value. This is the assessed value of the property after all repairs are done. If the ARV is $100k, your total investment, including your purchase price, materials and labor for the repairs, should be no more than $70k. That would allow you to pull out $30k at resale (or at refinance if you are holding it), minus closing costs of course. Make sense?

He means that he finds the After Repair Value of the house using the price of comparable houses that have sold within say a 1 mile radius and within a short time-span and estimates the cost of repairs and works that into his offer. 

I believe so, Joseph! Just to make sure though:

So if Zillow estimates that the house is worth $100k (given that there's nothing wrong with the house), he's saying that he wouldn't want to pay more than $70k? (Which would include purchase price and all restoration costs)

@Kyle Brown I wouldn't go off of Zillow to estimate the retail value of the house.  You want to look at comps which are the properties nearby that have sold, that's a better estimate of the resale value + look at how long it took those homes to sell.

Also the most important part of flipping and wholesaling is being able to estimate repair costs correctly.  You'll hear a lot that "you make your money when you buy" meaning that you need to negotiate a good deal.  The podcasts on Bigger Pockets and J Scott's book on Flipping Houses are both excellent resources.  I hope that helps!

Originally posted by @Kyle Brown :

I believe so, Joseph! Just to make sure though:

So if Zillow estimates that the house is worth $100k (given that there's nothing wrong with the house), he's saying that he wouldn't want to pay more than $70k? (Which would include purchase price and all restoration costs)

 70% is the rule of thumb, and that's taking into account repairs.  It should be 70% of market value - the cost of expected repairs.  So if comparable houses are worth $100k, you want to purchase the house for $70k.  If you have to put in $10k worth of capital into it, then you want the purchase price to be closer to $60k.

Remember, the 70% rule is a rule of thumb, not a solid you must pick it up.  If the deal is good then something closer to 80% would be fine, I imagine (but I'm a new investor, so 70% is where I'm shooting at).

Originally posted by @Kyle Brown :

I believe so, Joseph! Just to make sure though:

So if Zillow estimates that the house is worth $100k (given that there's nothing wrong with the house), he's saying that he wouldn't want to pay more than $70k? (Which would include purchase price and all restoration costs)

First, don't trust Zillow when it comes to value -- learn to estimate ARV yourself or work with a good, local real estate agent.

Second, the 70% rule says that if you purchase at 70% of ARV minus rehab costs, you should generally make a reasonable profit. This is because the assumption is that the 30% remaining will cover your "fixed costs" (purchase costs, holding costs, selling costs) and your profit.

There are some caveats though:

- This typically works best for houses in the $100-300K range.  Lower-end houses you may see too thin margins or elevated risk and higher-end houses your profit margins will end up considerably higher than your competitors and you'll likely close fewer deals.

- This assumes that your financing costs aren't tremendously high, as they sometimes are with hard money lenders.

- This assumes your happy with about 12-18% ROI on your invested capital (for an all-cash deal).

In my opinion, there are better ways to evaluate a deal.  Do a search for "The Flip Formula" to see what I recommend...

@Kyle Brown I wouldn't go off of Zillow to estimate the retail value of the house.  You want to look at comps which are the properties nearby that have sold, that's a better estimate of the resale value + look at how long it took those homes to sell.

Also the most important part of flipping and wholesaling is being able to estimate repair costs correctly.  You'll hear a lot that "you make your money when you buy" meaning that you need to negotiate a good deal.  The podcasts on Bigger Pockets and J Scott's book on Flipping Houses are both excellent resources.  I hope that helps!

Dannielle, thank you for that addition. That's a great point. There is no greater data to determine a properties value than the compatibles in the neighborhood. If you have an appraisal done on your house, your appraiser is going to look at what has recently sold in your neighborhood that is comparable to your home. Zillow's not a good helper for that at all.

Also, great plug for all looking to grow. I'll be looking into your information,

"The podcasts on Bigger Pockets and J Scott's book on Flipping Houses"

As I'm new to flipping houses as well...

J Scott, thank you for the information regarding the

"The Flip Formula" I think we can all get better with these processes and formulas that have been been used for success.

Thank you