Estimating ARV... Factor out distressed sales?

[Asher Anthes]

When estimating the approximate retail value that I should get when the house is fully fixed up, isn't it necessary to not use the "distressed sales" in my comps? Obviously, in today's market there are a good many foreclosures that will bring down the price. Should I try to weed these out and only use comps that were sold in similar condition to the potential house when it will be all fixed up?

I want to get my estimated ARV as close as possible on my first flip, it seems like that is probably one of the most important parts of making a profitable deal, correct?

[J Scott]

There are two ARVs you need to be concerned with:

1. The amount your house will get under contract for (what someone will be willing to pay); and

2. The amount your house will appraise for.

If your buyer is not paying cash, the lower of these two numbers is what the house is likely to sell for.

In terms of #1, you certainly don't want to use houses that aren't as nice as your as comparables, unless there is some reason to think your house won't sell for more than those properties (an example would be a bad neighborhood where even a nice house won't sell for much more than a distressed sale, as the buyer pool is small).

In terms of #2, you generally don't want to use distressed sales, though in some areas where the are essentially no retail comps, an appraiser may use one or more distressed sales as part of the appraisal and you need to be prepared for it.

But, in general, you will ignore the distressed sales when determining either ARV.