One of my favorite self-improvement gurus is Steven Covey.
As you may know, Covey wrote the 7 Habits of Highly Effective People – and although he’s no longer with us, his teachings taught millions of people how to achieve ultimate success in business and in life using seven simple principles.
His thoughts on thinking win/win, putting first things first, being proactive and sharpening the saw still resonate with me every time I pick up my old worn copy of 7 Habits.
But although all seven habits are very applicable to real estate investing, there’s one habit that’s particularly relevant when it comes to house flipping.
It’s the Second Habit: Begin With The End in Mind
When you begin a house flip with what you want to accomplish, although you may not realize it, you are using Covey’s second habit. And the end is determined by simple math and some in depth research on your part and research from your house flipping team.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
How to “Begin With The End in Mind” Flipping Houses
Although making a good profit flipping is not as easy as some would claim it to be, when it comes to the math involved in house flipping, all it takes is some simple multiplication, subtraction and addition. And when you know in the end what you want to accomplish, the entire project ends up having a laser-like focus that eventually ends with you making the maximum profit.
When all is said and done, it’s the numbers that make or break your house flips. And while the math itself may be extremely simple, knowing the correct numbers to use requires a fair bit of research and an assist or two from your house flipping team.
And when you learn how to flip houses with the end in mind, you’re on your way to a successful flip.
The Most Important Number in House Flipping
Most people think the most important number when learning how to flip houses is what you pay for the house. Although lots of real estate investing pros say “you make money when you buy” – I disagree. It’s not the most important.
Other people think the rehab cost is the most important number. This too is important, but not the most important either.
The most important number in house flipping drives all the other numbers – including the two mentioned above. It’s what’s called the After Repair Value – or ARV for short. It’s by far the most important number to get right.
That ARV is “the end” you have in mind and it drives everything you do in house flipping.
This is largely because what you pay for the property and how much you can pay for the rehab of the property is wholly driven by what you can sell the property for once it’s all fixed up.
Every single other projection you make will be based off the ARV. It is absolutely critical to get the ARV correct or every single other projection will be off – and your profit margin will suffer as a result.
If the ARV you work with is incorrect, you’ll be pushing water uphill for the rest of the house flip.
To get the ARV right – and to as Steven Covey says to “begin with the end in mind”, here’s how you do it.
Find the Best Real Estate Agent In The Market
To get a really accurate ARV, a real estate agent or real estate broker will conduct a comparative market analysis or CMA as it is commonly called. Because you are relying on someone else to determine this number (albeit a VERY important number!) you need to make sure that this person knows what they are doing. It is very important that you align yourself with the right real estate agent or broker.
Remember, just because this is their profession, it does not guarantee that they will nail down the ARV. What if they are new to the area, inexperienced or just don’t really care about doing a good job? Always remember that this is your house flip, your deal, and that you are responsible for everything that happens.
A good realtor or broker will look at properties that have sold in the area of your house flip. They should not pay attention to properties that are for sale, because these properties have not yet sold. A good realtor will only pay attention to properties that have recently sold – which will help them gauge how much your particular property may sell for.
Do whatever you can to align yourself with an expert and knowledgeable real estate agent/broker. I once worked with an agent that grew up in the town she was working in, and knew absolutely everything there was to know about the market. Low and behold we sold that particular house flip in just 1 day – much thanks to her exceptional projections.
Effectively Communicate your Plans to your Agent/Broker
Communication is so important in this business (and in any business for that matter). In last week’s blog post I stressed the importance of communicating effectively with your contractors. I’m a big believer in the Covey idea of “synergizing” and communicating well with lenders and investors to make sure everyone is rowing in the same direction.
The same theory holds true with real estate agents and brokers. Good communication is essential to making money flipping houses with any degree of consistency.
Once you align yourself with an expert agent, be sure to fully and explicitly communicate your plans for the property with your agent. Make sure that they are 100% on the same page with what you are trying to do. Communicate the importance of nailing down the ARV, and show them exactly how a wrong ARV will affect your bottom line.
I think it is always important that your house flipping team is on the same page. Don’t let the details get lost due to poor communication.
A few phone calls and emails won’t cut it. Get out there and meet face to face with any new members of your house flipping team. If you rely on a new agent to determine the ARV of a property, you want them to meet and get to know you.
Like Covey, meet them face to face and establish a “win-win” relationship.
Best of all, people will naturally do a better job if they know, like and understand their client. If your team members know you and understand who you are, that they will naturally put forth the extra effort and do the best job possible.
Do Your Own Due Diligence
In a best case scenario you will have aligned yourself with an expert agent, effectively communicated your plans to them, and received what at first glance seems to be an accurate ARV. Remember that you are the captain of your own house flipping ship, and that you are responsible for whether you sail off into the horizon, or sink at port. When you receive your comparative market analysis from your agent, your work has really just begun.
Other Covey-Like Tips on ARV
To ensure that the ARV your agent has provided you is accurate, consider the following:
Get a second or third opinion
Find another agent or broker and ask what they think. Then find another agent and ask them what they think. If this is your first flip, consider finding another. You really can’t take enough precautions here when you are determining ARV.
Get a paid appraisal
Consider hiring an expert appraiser to appraise the property. Yes this is another expense that you will pay for from your bottom line. However, the cost of the appraisal will be much less than gauging all your projections off an inaccurate ARV.
Do your own research
The internet can be a good resource for double checking after repair values. I would never recommend gauging your final ARV off information obtained through the internet; however it is a good tool for double checking.
More importantly, pull out a map of the area and make a list of questions to review 1 on 1 with your agent. Look for sold properties that they did not include in their comparative market analysis. Ask them why they did not include them. Look for things that you think may lower the value of the ARV, and ask your agent about it.
Steven Covey House Flipping Conclusion
If you think you are not getting the right ARV or the broker is inflating the ARV just to get your business, consider using other brokers. Many house flippers sell their own houses, which when you’re first starting to flip houses may seem like a good thing to do. I don’t do it. I’d rather hire professionals to help me in my flips so I can get moving on to the next one.
The point is that if you begin with the end in mind and exhaustively analyze and research the ARV, you set yourself up for success and can sustain many of the eventual problems and cost overruns that are bound to come up. If you nail the ARV, you can weather that storm.
And if you begin with the end in mind and use the tips above, you’ll be on your way to good profits and a highly successful house flipping career.
What do YOU think? Is ARV really the most important number in house flipping? Would Steven Covey have been an awesome house flipper? Please leave a comment below and let me know what you think?
Photo: Mr. T in DC