How is the ARV determined on a pre-rehab house?
ARV = after repair value… You should know what the home will be worth after if is rehabbed using area comps
Ok, I have a question about this. Lets say there is a 4bd/3ba/2ga 2000sq ft house selling for $130k in average condition. The comps in the neighborhood reveal the highest sold house sold for $135k. So I want to knock down a wall or two to really open up the living/dining/kitchen. And then everything else is pretty standard and I put $10-20k into it. That puts my investment at about $150k. Is that pretty stupid to do because the comps were all selling for 10-15k less than I put into the house, let alone building in for profit? Or can I ask $185k, $50k above everything else because the house will no longer be in “average” condition, but immaculate. Plus the house that sold for $135k was a 3/2/2 not a 4/3/2 like mine…
This is purely hypothetical. I passed on a house because of this situation, but I really liked the potential of opening up to a huge great room. Oh yeah, I was going to put in vaulted ceilings too because of the hip style roof…
It doesn’t matter how nice your house is, all areas have a ceiling - so be careful not to go above that.
Instead of thinking in terms of raising the asking price - you should work to buy the house for a lower cost so that you can do those things to sell the house quickly.
Purchasing a home for too much, and expecting buyers to pay way over area comps because a house is redone is one reason rehabbers fail.
If the most expensive house in the neighborhood was a 3BR at $135K, you could probably make the argument that your 4BR is worth more, but it wouldn’t be an additional $50K, even if your house has a more modern layout and shows brand new.
There are three things to remember.
Most buyers are going to be represented by a Realtor (assuming that you’re doing a traditional sale), and the Realtor will run comps on the neighborhood. If the limit for the neighborhood has been $135K, the Realtor will have a hard time advising that his/her buy pay $50K more.
Also, just about every neighborhood or subdivision has a price ceiling that, no matter what you do to the house, you can not break. If the most expensive house has been $135K, I’m not sure you can get anywhere near $185K. (People with $185K to spend will be looking in the $200K neighborhoods, anyway.)
Lastly, even if you found a buyer who was willing to pay that price, you might have a hard time getting it to appraise given the comps in the neighborhood. This is probably not a major concern, though, as in my experience it’s possible to get an appraisal for just about any semi-reasonable number that you need. This is why I never, ever trust someone else’s appraisal, especially if it’s being used to facilitate a loan.
It sounds to me like, in your scenario, you’re paying retail ($130K) for a house that is not a fixer-upper. You make your money in this business when you buy the property, and paying retail is not buying it “right.”
If you look hard enough, you’ll find that you can buy what would normally be a $130K house for about $100K, or maybe even less depending on the circumstances (and a lot less if it’s in disrepair). If you buy the house right, you won’t need to push the envelope on the value to get your money out.
That puts my investment at about $150k. Is that pretty stupid to do because the comps were all selling for 10-15k less than I put into the house, let alone building in for profit?
No, that would not be “pretty stupid”, it would be REALLY STUPID! Under the circumstances you described, you shouldn’t pay more than $71,000 to $81,000. Paying $130,000 for a $130,000 investment property is pointless and will put you on the fast track to financial ruin.
Never over do a rehab for the neighborhood unless you really plan to live in the home for awhile. If all the homes a single story, do not add a 2nd story and try to flip and except to get a return on that investment.
Ex. A guy in Tampa area been trying to sell a incredible home made with alot of limestone (expensive). The house is over 8000 sq ft and sits on 2.5aces. Custom built. Nothing else in area goes over .5 acre lot and 3500 sq ft. His comps used by 3 guys were all done in areas with similar size homes more than 15-26miles away. Horrible comps. Tough to pass them with bank and tells you house is over built for area. Trying to sell for 1.7mil with comps at 2.9mil. House in that area not worth more than 900K since the top end of smaller homes are around 600K and you can get the extra for size and lot since you can sell of the land easily where it is built and on corner.
This is over built and in fact on market for close to 1 1/2yrs…
Thanks for the advice guys. I was really excited about some of the house’s potential to be a nice house, but I knew the neighborhood would/could not support a higher priced home. The only way I would have been able to make something like that work was if I bought one of the 2bd/3bd homes in the neighborhood that was in disrepair and then MAYBE did all that work to it to get the asking price up to $140k or so. Am I right? That is why I am not jumping into this yet. My plan was to jump right away into flipping a home and live in it while rehabbing it. Then after a couple of months, sell it for a profit. If I could not sell it, I could live in it for a while until I could sell it…