Positively knowing the ARV of an REO

[Phil M.]

Okay..I've come to a point where I believe I've definitley found some good deals, and I'm about to make offers on them.
But before I do, I need to be positive on the most important aspect of a supposed "deal": knowing the After Repair Value of a home. I feel this is the most important aspect because If I get a deal for a home for even $500.00, If the ARV Isn't significantly more than that price, than it isn't really a good deal at all! So, obviously, this is key. In fact, from what I can understand, the most important thing about fixing and flipping.

That being said, I need to know the ARV for me to make offers on REO homes. Why? Because I need to Calculate what I can offer on the home for it to be profitable. For example:

Asking Price of REO: $200,000 (Irrelevant)

After Repair Value: $220,000
Closing Cost: - $10,000
Holding Cost: - $4,000
Misc. Expenses: - $3,000
Repair Cost: - $23,000
Profit: - $24,000
Max offer price: $156,000

As you can see, the ARV, is the defining factor in what I can offer, not anything else. That being said, and seeing how important it is, what's the best way to positively know what you can see the home for after you repair it?
I've looked at similar sales prices, and sales price of the home in the last few years, and what the county has in their records for the home market value (for taxable purposes), but nothing is perfect, and I need a written in stone value for me to be confident that I'm going to fix up a house that will be worth a certain amount of money, and not all of a sudden the home being worth say, $24,000 less than I thought the after repair value would be.

- So whats the best way to know the ARV?

- How accurate/expensive are BPO?

- Will the appraisal after my offer is accepted give me both as is values and after repair values?

- Is the ARV the exact same thing as the market or retail value of the home, and how much will the quality of repairs/upgrades (no serious remodeling of the home, just keeping it simple) dictate the ARV?

[Jon Holdman]

What you want does not exist. You can make your best stab at it by looking at current (< 90 days), nearby (< half a mile, same neighborhood), similar (same style, same beds, same baths, same finish levels, similar square footage, similar location) properties, and get an idea. An appraiser can use this to come up with an exact number. But no guarantees that another appraiser will come up with the same number.

Things could happen between now and when you sell. Congress could start a new "first time buyers" program. The Fed could jump up interest rates. Terrorists could bomb a major city. Any of these would significantly impact your value.

A few years ago you could be optimistic, and use the best possible comps. Now, you must be pessimistic, and use the worst possible comps. You need to consider that if there are tons and tons of REOs in an area, and only a few retail sales, they appraiser may well end up using some of those REOs as comps.

You've missed the money costs in this deal. If you're borrowing hard money, you need to allocate anther $15-18K into your deal. You've also underestimated your closing costs. On the buy they will be something like $3000. But on the sell you can figure something more like $22-25K depending on how much concessions you have to give. If you FSBO it or you're an agent, you can save about 3% of ARV, or about $6600 in this case. But don't expect to sell a property to a retail buyer and not pay for their buyer's agent.

The 70% rule is the simplest. 70% of ARV for the starting point. Subtract the repair costs. That's your max price. In your case, with a $220K ARV, 70$ is $154K. With fixup of $23K, the most you can pay is $131K. Assuming you fund the deal with hard money, and borrow $154K, 70% of ARV, you hold it for six months, and then sell at ARV, you should net about 15% of ARV, or $38K in profits. When things inevitably go wrong, it will eat into that profit.