No doubt, one of the most exciting parts of a house flip is selling. It’s the combination of months of hard work, dedicated most of your free time, and closely following steps for success, some which went as planned and some that didn’t go quite the way you wanted them to. Either way, all your work is finally going to pay off for you – provide you get the right price.
You most likely financed the deal by getting money from other people, be it investors or private equity. Maybe you were lucky enough to get a loan from a bank. You bought the house and did the work, and now the home is ready for a buyer to drop some cash and make it theirs.
It’s time for that hefty paycheque, right?
The Importance of ARV in House Flipping
When you were first starting in assessing the house flip, you likely (or should have) determined the after repair value (or ARV) that the house could sell for upon completion. Now with the house done, you are ready to list it with a real estate broker. It’s a super exciting time in your life for sure. Hopefully, you can get enough of a return that you could make house flipping a business.
I have long advocated ARV as a standard number to set your sights on when house flipping. ARV is an especially important number for you to know, as it’s the basis for all your work and costs associated with the house flip.
If you stop and think for a moment, the price you sell for is the most significant number to crunch when you flip. That number sets the tone for the entire project.
For example, if you buy a house for $160,000 or $170, 000, did minimal rehab but you can’t sell it for even $180,000 or $190,000, chances are slim you’ll have a long career flipping houses.
Also, if you buy the house for $100,000 and put $50,000 worth of renovations into it, and the max you can sell it for is $170,000, the margins are just way too slim. Even if you may have “bought right,” you’ll have a hard time making real money in this business.
That’s why setting a realistic ARV at the start of the project is so vitally important for increasing your chances of profitability. What you make all comes down to that one number.
Why a Realistic ARV Determines Your Profit
Let’s continue with our example of the $100,000 house with $50,000 worth of renovations. You take your hard work to your real estate broker, and he or she tells you that the house can sell for $200,000. If right and the market holds, you’ll most likely make a nice profit, minus finance costs and broker fees.
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To arrive at the $200,000 figure, chances are that your real estate broker got the pricing from using comparative houses, or “comps,” which have sold in your area. Your broker will do the same thing when it’s time to sell.
So, you buy the house and get to work. Six months after the start of the house flipping project, the house is looking great, and you’re feeling confident that you can get your $200,000 asking price. All you need now is a buyer.
Except now the broker has terrible news – the new price according to the market is $190,000, and your original asking price is no longer realistic. However, you have your heart set on that $200,000, so should you ignore your broker’s advice and list it at that anyway?
Not a chance.
If you do, you’re more likely to lose money.
If the market shifts, don’t fight it. Otherwise, you’ll end up holding the property longer. Hanging onto your house flip in hopes of reaching your asking price will only cost you more in finance costs, soft costs, and maintenance. Basically, you can kiss your profit goodbye.
In this situation, it’s imperative that you take a moment to compose yourself and listen to the broker. Of course, you shouldn’t list it for exactly $190,000, as we always add on five percent to account for negotiation when the property is first listed. We would do the same thing if the comps came back at $200,000 as well.
Teamwork Is the Key Ingredient In House Flipping
Although it may be a tough pill to swallow, especially when you’re first learning how to flip a house, always seek and listen to the counsel of your team. When you sell, ask the advice of your house flipping team – especially your real estate broker. Get their input and ask for their opinion. No one knows the market better than these experts do.
So when it comes to selling your house flip, if the market analysis comes back and tells you to list your property lower than your ARV, bite your tongue and do what the market dictates. You may not think it’s the right decision at the time, but believe me, you’ll reap the dividends later, and will live to flip another day.