The following is a guest post. If interested in submitting a guest post, please read my
guest posting policy and then contact me.
No doubt, one of the most exciting parts of house flipping is selling. It’s the culmination of months of work and many house flipping steps – 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. Or maybe you were lucky enough to get a loan from a bank. You bought the house and did the rehab and the home is ready for a buyer to plunk down some cash and make it theirs.
Now is the time for the big payback. Or is it?
The Importance of ARV in House Flipping
When you were first starting out in assessing the house flip, you determined the after repair value (or ARV) that the house could sell for when it’s all done. And 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. All those many months of hard work are finally coming to fruition and you are looking forward to leveraging your success to maybe quit your job, start your own business or go along to your next house flip.
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 important 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 put $50,000 in rehab into it and cannot even sell it for $160-170,000, even though you may have “bought right”, you’ll have a hard time making real money in this business. The margins are just way too slim.
That’s why setting a realistic ARV at the start of the project is so vitally important for increasing your chances of profitability.
After all the rehab has been done, with the house ready for sale, the real number as to what the actual “after repair value” is on the open market is found out now. This is the number of what you can sell the house for today.
Recommended House Flipping Posts:
Why a Realistic ARV Determines Your Profit
So let’s say that similar to the above scenario, you bought the house for $100,000, you put $50,000 in rehab costs into it and your real estate broker tells you that the house can sell for $200,000. If she’s right and the market holds, you’ll most likely make a nice profit, minus finance costs and broker fees.
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. She will do the same thing when it’s time to sell.
At 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 price. All you need now is a price and a buyer.
Now six months later, the broker has bad news for you. She tells you the price should be $190,000, as the market has shifted a bit and the $200,000 price is no longer realistic.
Do you ignore her and go out and list the house for $200,000? Not a chance.
If you do, you will lose money.
Why?
If the market has shifted, don’t fight it. If you do, you’ll end up holding the property longer. And when you hold the property longer you pay more in finance costs, soft costs and maintenance….poof go your profits.
Take your medicine and list it for what she says. Of course, don’t list it for exactly $190,000, we always add on 5% 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 tough medicine 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 the real estate broker on your team. Get their advice and ask their opinion. No one knows the market better than these experts do. If they don’t…well, you may need some new team members.
So when it comes to selling your house flip, if the market analysis comes back saying that the house needs to be listed 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…as well as live to flip another day.
Author Bio: Mike LaCava is a full time real estate investor, real estate investment coach and the President of Hold Em Realty located in Wareham, MA. Mike specializes in flipping houses with no money and runs the website House Flipping School to teach new real estate investors how to flip houses. He has also authored the book “How to Flip a House In 5 Simple Steps” available for Free at his website.
John S @ Frugal Rules says
October 15, 2012 at 6:05 amGood post. I can totally understand how the ARV would be key to know if you were to flip houses. I’ve thought about doing it in the past, but just lack the know how to do many repairs on my own which would put a serious dent in the profit.
mike says
October 15, 2012 at 7:54 amHi John,
The idea is you account for the repairs at what you would pay a general contractor to do the job. The model needs to work without you having to do the work. If you do decide to do some work then that just means more money (sometimes) on your bottom line.
I discuss this in more detail in my ebook if you want to check it out.
Rohit @ The Money Mail says
October 15, 2012 at 12:25 pmDo you take into account the lost rental income and add it to the cost of repairs? For example if you bought a house for $200K and could rent is for $1k/month without any repairs. You spent 3 months repairing it and spent $10K. What is the cost here $10K or $13K?
Veronica @ Pelican on Money says
October 15, 2012 at 7:11 pmGood point, I’d like to know the answer to this as well.
mike says
October 16, 2012 at 9:54 amNo I would not put in lost income for rent with the repairs. Once you stabilize and rent it out then you want to have % put in for vacancy typically 10% for income projections.
Lance @ Money Life and More says
October 15, 2012 at 8:09 amHouse flipping sounds fun but to risky for me. Icwould probably go the way of rental properties first and then move to flipping if I could get comfortable with rentals.
Mike says
October 15, 2012 at 3:10 pmLots of people start out that way as did I, Lance. In fact, I still have some rental properties that are nice recurring income sources. However, house flipping is where the real action is in my opinion. It suits my personality and lifestyle and there are plenty of opportunities to make some very good money doing it. Thanks for you comment! Are you just starting out or have you done any real estate investing in the past?
Veronica @ Pelican on Money says
October 15, 2012 at 7:12 pmI have a friend who flips houses for a living, he’s doing really well.
Mrs Pop @ Planting Our Pennies says
October 15, 2012 at 9:16 amOur real estate investments are mostly ones that we are interested in holding for a long time, so we tend to be a lot more focused on cash flows than flipping. Actually I was looking at a DCF on our rental duplex last night since prices have gone up in the area to check and see what the. “we should consider selling” number would be. It’s still a good bit higher than how we value that income stream using the DCF.
Holly@ClubThrifty says
October 15, 2012 at 1:18 pmSame with us. I have never sold before and I am kind’ve terrified of it!
But since we plan on keeping our rentals for decades I am not too worried about it.
Mike says
October 15, 2012 at 3:13 pmWow, sounds great. With the recent price appreciation in the market, its a tough call to know what to do. For me, it all depends on how much cash flow the rental is bringing in, what kind of tenants I have in the units and whether I’d rather take the equity and use it for other things like flipping. As with anything, its really a balance of all those things, but sounds like you’re in a good situation to be in! Mike
My Money Design says
October 15, 2012 at 9:25 amMy wife and I were playfully trying to determine if we’d ever be able to flip a house successfully. I think it is much harder than the average person thinks. But knowing how to do most of the repairs yourself will certainly help.
Mike says
October 15, 2012 at 3:17 pmAgreed on that, nothing, no matter how many reality shows you watch is as easy as it looks. Especially on your first flip you feel that you should do all the rehab yourself. But coming form the trades, I did this on my first deals, but realized I could make more by doing less, believe it or not. Sure, I occasionally install a floor on my flips, but most of the work is handled by my GC. However, if you buy right, you can use other people’s brains to help you turn the house profitable for you, while you’re out hunting for your next profitable deal.
Kim@EyesontheDollar says
October 15, 2012 at 9:42 amThat’s important to consider the final selling price from the beginning. There’s no use to overdo if you won’t get a return on investment.This is a very interesting area to me. Thanks for the info.
Mike says
October 15, 2012 at 3:23 pmThe more you do it, the better you’ll get at predicting that ARV. Also you have to have a good team supporting you which includes real estate agents, general contractors and private money lenders to help you to analyze the deals. Its true it doesn’t hurt to have a mentor too, which I really wished I had when I first started, so I went out and taught it all to myself with some help of some other real estate investors I met at local REIA meetings and other networking events.
Ill tell you what though, I am having the time of my life doing it now as a full time investor. sure, there’s plenty of issues you gotta deal with, but when you sell a house in 2 days (just happened as a matter of fact in a property in Onset, MA) and make a tidy profit, there’s no better feeling.
Jason @ WorkSaveLive says
October 15, 2012 at 11:17 amI haven’t gotten into flipping houses yet but it was something I was intrigued with a few years ago (when it was first becoming majorly popular before the ’08 debacle). For me, I don’t think I could do the no-money down thing. It just does against a lot of what I believe in and I think it’s a great way to go broke. There are certainly a lot that thrive at it though and make a good living doing it.
Mike says
October 15, 2012 at 3:27 pmNo doubt Jason, its always better to have your own money for sure. In fact, some private money lenders require you to have a personal monetary stake in the property in order to lend to you. However, private money, when you factor it into your projections is absolutely possible, even though many would make you think its just one of those scammy techniques reserved for late night TV.
Every single flip we do now is all with “no money”…but what that really means is “other people’s money” and a very small percent which is your own. Have you done any real estate investing yourself?
Jacob @ iheartbudgets says
October 15, 2012 at 11:36 amI really want to flip a house, but probably because I watched WAY TOO MUCH HGTV a long time ago. I think doing arehab is a great idea, but even better if you turn a single lot into multiple lots, or create a 3 or 4-plex for renting. Have you done any of those before?
mike says
October 16, 2012 at 10:04 amHi Jacob,
That is an idea if you can do that. You would want to check the zoning in your area to see if you can turn a single into a mult-family. If you can & no one else knows that then you may find the diamond in the ruff. I have not done it yet but have been exploring that
possibility. I have a great contact that specializes in land development and turing land that is unbuildable to buildable or getting zoning to accept his proposals.
John says
October 15, 2012 at 1:55 pmI don’t flip houses but I’ve always been curious. The ARV is something to keep in mind and glad I now know how it works. Such a simple concept that makes sense but I can see how one would go against it when getting greedy.
Mike says
October 15, 2012 at 3:31 pmHey John, its deceptively simple, but you do have to have a lot of smart people helping you to arrive at that number. No doubt a really knowledgable real estate agent with a good eye for comps and markets is a huge asset to any house flipper. Every market is different, but when you have people to help you, it makes all the difference. So true on the greed thing as well, its hard to keep your emotions in check with those projections, but as long as you don’t fudge the numbers, you’ll be just fine. Do you invest in real estate yourself?
Pauline says
October 15, 2012 at 1:56 pmFlipping would not work for me, I am too worried about ending with an empty property for months. Like Jacob suggests, I would much rather look for a property where I can convert the basement and split the levels to get a high rental income, while putting it on the market for investors since day one. Dreaming of flipping but preparing for the worse.
Mike says
October 15, 2012 at 3:37 pmHey Pauline, house flipping is surely not for everyone, it really does depend a lot on your tolerance for risk, your personality and some other factors. We just have a system in place to really minimize the downside risk and its worked well for years. But controlling fear and tolerating risk is the very first step without a doubt.
In fact, for the coaching clients I teach, we don’t even touch on the nuts and bolts of house flipping until we are in the third or fourth week! The entire first part is all on what you discuss here.
Having said all that, subdividing and renting is a very sweet way to make a steady stream of income. I just prefer the fast paced tempo of house flipping, it just suits me. But I have rental properties as well. Do you rent houses right now?
Adam Hathaway says
October 15, 2012 at 4:16 pmIn the housing market that we just left can you reasonably predict ARV. It almost appeared as if flipping was no longer a viable option with all the foreclosures. Then again I do recognize the players know how to play and the pretenders get sent home during the hard times.
mike says
October 16, 2012 at 10:11 amYou can never predict with 100% certainty any outcome. You need to equip yourself with as much knowledge possibly to make the best educated decision you can and try to minimize risk as much as possible at the same time.
For example if you look at the last 6 months & determine that the market value is dropping 1% a month & you determine the arv of a property is $200,000 in the current market. You may want to adjust your arv for 6 months out based on the previous 6 months of decline. So that may mean you are basing your offer with an arv of $188,000 instead.
Savvy Scot says
October 16, 2012 at 1:58 amWhen deciding if you can flip a house I think you have to consider your own skill set. A joiner / plumber / electrician might see it as a nice side-project and cut the project costs dramatically!
mike says
October 16, 2012 at 10:15 amGreat point! However you want to still carry those costs if you were to hire someone to do that portion of the work. The numbers still need to make sense. If you do some of the work yourself then you are adding more profit on your bottom line possibly.
There are many ways to look at & depends on the time you have as well. For instance if you borrowed the money to do the rehab & lost 2 months doing some of the work yourself you may have not saved much if you have to pay a high interest rate on the money borrowed. Always have a plan going in and most definitely always have an exit strategy.
Terry says
October 16, 2012 at 12:38 pmMike,
Great article!
Where do you go to find people to loan you the money to purchase the houses that you flip?
Jeremy says
April 5, 2013 at 3:20 pmLooks like Mike isn’t checking this post for comments anymore, but you can reach out to him through his website. I would assume he gets bank financing, but I guess some people would have other financing sources too.
Mr Parker says
June 14, 2014 at 4:36 amI dont think there is any kind of the requirements of the property agents while dealing with the ARV before selling your property at high rate.