How to Calculate ARV for flips in a buy & hold town?

Question

I live in Tampa, which is a red hot market for buy and hold investors buying foreclosures for cheap and then renting them out.  The problem is that because of this dynamic, finding comps to calculate ARV for flips has been extremely difficult.  The only comps MLS finds are the "before" prices (as in a "before & after"), which don't tell me anything about ARV since they are only the foreclosure prices.  There are definitely people flipping, but for the most part I have no idea where they are getting ARV from (and they are outnumbered by buy & hold anyway).

Another problem with Tampa compounding my problem is how hit or miss so many of the neighborhoods are.  There are some nice neighborhoods with well taken care of homes, but then you could drive down 2 blocks and be in a real bad neighborhood.  This means I really can't expand my search radius very far when looking for comps because the area can generally change drastically from block to block.  This just makes finding comps even more difficult since the search radius has to be so small.

I'm trying to flip my first house (inability to get a mortgage means buy & hold isn't really a viable option for me).  However, everytime I see a listing, I can't find any comps and I don't wanna get stuck guessing on what a house could sell for.  Does anyone have any experience flipping in similar rental heavy markets?

Fred T. · Answer

Here are some options:

1) Locate a deal that does work for the Buy/Hold Strategy and sell it off (via Wholesaling) to those that have the ability to buy such properties if you can't. Over time, you can create your own piggy bank and not have to rely on a bank to give you money for your preferred strategy. This method is for the patient individual of course..lol

2) Control the property through a Master Lease Agreement and have your own Buy/Hold Property

3) Form an alliance or JV Agreement with someone who has better credit than you and do the Hold or Flip strategy together

4) Control the Property through an Option Agreement and "create" the market Values

5) Use Seller Financing or Subject To to acquire the property and either create the Market to Flip OR Hold the property

6) Control the property through an Option Agreement, Rehab it and Flip within the Option Period using Transactional Funding

The above are only a few examples of what you can do when the ARV is tough to come by and/or the Money says NO. The key is to think outside the box when the environment is trying to tape that box close.

Knowledge is the key to success...so as long you are familiar with the over 20+ ways and combinations thereof of controlling properties for a profit, you will never have to ask the ARV question and you will not be limited to your strategies.

Remember, Markets change frequently and your knowledge should afford you the opportunity to recognize the change and act upon it accordingly with a shift of Strategy. If your tool belt only contains limited strategies, then invest in more tools (knowledge).

Happy Investing in Tampa, FL!

J Scott · Answer

One of two things is true:

1.  There are existing sales that represent the value buyers would be willing to pay for the houses you intend to purchase and resell;

2.  There are NOT existing sales that represent the value buyers would be willing to pay for the houses you intend to purchase and resell.

If #1 is true, those are the sales that you use to calculate your ARV.  You may need to make adjustments to comps and rely on the intuition of those who know the market well, but it IS possible to determine a reasonably accurate ARV.

If #2 is true, you are most likely trying to flip houses for which there is little buyer demand.  In other words, you need to either find different types of houses for which there are buyers or you need to find a different market (or both).

Really that simple...

Dave Bingham · Answer

@Scott Le

Hi Scott. I'd find out who is buying the houses from the courthouse records. Contact them. Offer to help them out in exchange for information. I'd wager that at least 50% of them have refinanced. If they are willing to work with you then you can get the mortgage information from the bank. This will give you an idea of what the banks appraiser feels like it is worth anyway. Ask to speak with the appraiser, take them to lunch. Ask about how they reasoned through that valuation process. gaining this information can give you a decent baseline to determine if your own ARV and comps are reasonable.

Fred T. · Answer

@Scott Le Resources and Experience yes but I'm pretty sure I can't give you resource information on this platform./

Scott Le · Answer

Oh ok that's interesting.  I thought you were just saying it because you thought I wanted to get involved in renting as opposed to flipping (which like I said, I would in a perfect world).

Do you have any good resources for learning about buying with options?  Have you ever used them yourself?  I remember they mentioned it briefly during RE School, but I don't think it was on the test so I know next to nothing about the idea.

If you are looking for buy and hold, you should check out the Seminole Heights and Tampa Heights districts (area codes 33603 and 604).  Rents in the area are typically pulling in 9.5-10% net cap for the fund I work with, although you certainly need to be careful with the hit-or-miss nature of the neighborhoods.  Plus, in South Tampa you are competing with all of the new luxury apartments that have been/are being built.  A lot of the people who can't afford those are renting a few minutes away in the Heights area.

Just some food for thought.  Best of luck!

Fred T. · Answer

All the options I mentioned were methods to accomplish your goal without your own capital involved (or credit reviews)./

Scott Le · Answer

Hey Fred.  I appreciate the long, well thought out post.  Just to clarify why I'm looking to flip instead of just buy and hold myself: I'm in a situation where there is very little banks will give me for leveraging rental homes despite having a good amount of assets and excellent credit because I haven't had any income in 4 years (long story short: I went back to school after my previous career as a professional poker player ended due to the online poker shutdown. I have been unemployed ever since because telling HR managers you are a former online poker pro is apparently akin to telling them "I'm an A-list porn star who also sold drugs.").  I'm trying to turn real estate investing into a career.  Since I have been unable to find a paying job, I have spent the last 8 months as an unpaid intern with a local buy and hold investor and have been soaking up as much knowledge as I can (I also just recently got my sales associate license!).

Rather than siphon off all my liquid cash into 5 year mortgages on cash flowing rental houses leaving me with nothing more to invest and not enough cash flow to cover my cost of living expenses, I've decided the best route for me to go with is to focus on creating quicker returns through flipping.  Hence, how we got to this point.

In a perfect world, I'd have a paying job and could invest all my money into this burgeoning rental market.  Unfortunately, it's just not an option for me at this time.

Fred T. · Answer

Forgot to mention in previous post, you might want to valuate based on GRM and/or 3x Disposable Income if the more conventional ways aren't available./

Scott Le · Answer

There are definitely sales being made (at least in some areas).  My main intended farm area has about 10-12 houses per month being sold in the $100-180k range (many of which are clearly flips).  There are other potential surrounding areas that look intriguing, but are only getting action from renters (houses being bought at foreclosure but since they are never put back on the market, there's no base for comparison).

The problem it usually boils down to is how hard they are to compare sometimes.  There might be a few houses just like it with .25 mile radius that sold for $120/SF in the last 3 months, but the block the subject is on is much rougher and thus isn't an apples:apples comparison.

Or in many cases you'll just see a TON of foreclosures being snatched up <$70k, but they're mostly just being held as rentals (or homebuyers fixing them for themselves).  Like I said in the OP, the buy & hold investors are outnumbering the flippers in this area (but even so, there's still something to be said that the area is getting as much action as it has had one way or the other).  In this case, I know there's a lot of money coming into the area, but it tells me little about ARV.

PS - Just got your book in the mail today!  Have been catching up on your blog for the last few months.  Great content!

Aaron T. · Answer

I have been looking in the south tampa area. its very hit or miss.

How to Calculate ARV for flips in a buy & hold town?

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