Price point for rehabbing single family
Las vegas · Member since 2019 · 41 posts · 4 votes
hello. My confusion has to do with purchase price and after repair value eg price is 100,000 and arv 125000
would that spread put the property in an unsellable position? Should the purchase offer be discounted by that spread?
@George Knetzger the previous responses are correct.
Additionally, any strategy that requires hitting an ARV to pencil is extremely risky right now, given the state of the market. The market today is completely different than the market 6 months ago, and the market 6 months from now will likely be completely different than the market today --so how can anyone accurately estimate the ARV when the comps that the ARV is based on are potentially irrelevant?
For instance, imagine you buy a property today for 100k and you assume (based on comps of recent sales) that the ARV will be 150k after a $25k rehab. You do the rehab over the next 6 months--during which time the market continues to adjust to the rate hikes. When the rehab is done, the property only appraises for 120k (because the market is a different universe than the market was when those comps sold). So, now you have $125k into a property that's only worth $120k (could be worse--some people are missing their ARVS by hundreds of thousands!).
Even highly experienced pros are having difficulty hitting their ARVs right now--and that problem will probably only get worse as the market continues to adjust to the rate hikes. Unfortunately, a lot of people are losing their shirts on ARV-dependent strategies at the moment. Personally, I would not recommend any ARV-dependent strategy right now, and that's 100x more true for beginners--and anyone attempting an ARV-dependent strategy should definitely be very conservative with their financial models, and have multiple alternate exit strategies available, in case they fail to hit their ARV.
Fortunately, there are other, less risky REI strategies available.
Good luck out there!
yes. many properties are listed for sale such that purchase plus rehab is greater than ARV.
these properties are not good deals =)
but sellers generally don't care - it's not their job to worry about investor formulas.
It depends what the rehab costs are. If you can buy a property for $100,000 and its after repair value is $125,000, yes, you'd lose money when selling if your total costs were more than $25,000 (rehab costs plus closing costs plus holding costs like property taxes, financing and the like). If you're trying to flip and sell, you absolutely need to factor into your purchase offer all of those costs and the profit you want to make.
hello. My confusion has to do with purchase price and after repair value eg price is 100,000 and arv 125000
would that spread put the property in an unsellable position? Should the purchase offer be discounted by that spread?
Not sure what you have read or know, so will give some basics. (for anyone who reads this)
Depending on the market, the discount investors are looking for can be 15-30%+ of the after repaired value, - repair and holding costs. (less on more expensive, more on less expensive)
e. g. 200k retail house. Needs approx. 30k work. 200k - 30% (buying/selling costs, unforseen repairs, holding costs, profit) 140k - 30k (repairs) = 110k investor offer. (total)
This isn't appealing to many retail sellers. They see what finished properties are selling for, and don't see what repairs their property needs. They also don't see the buying and selling costs. (8-15% depending) or the risk or the cost of capital. Many sellers would want 200k - 30k repairs= 170k. That's unreasonable for investors, that's not what the seller will get no matter what.
If you are a wholesaler, then figure out ARV, the cost of repairs (estimated) your fee (~5k) and see if your can get sellers under contract (atleast open to) the investors price. (previous example 110k - your 5k finders fee, so 105k)
Good luck, Happy New Year!
Mark
Here is an example:
Purchase $100,000
Rehab $25,000
ARV $165,000
Your cost are $125,000 plus utilities, property taxes, cost of money, if applicable, and closing costs. If you figure closing cost at 12% your cost is $19,800 plus $2000 for utilities, property tax, etc, $21,800.
In theory your at $165,000 -146,800= $18,200 profit. Not a home run, but I’ve done these deals like this if you can turn it around in 90 - 120 days. It might be worth it. You need to be really accurate with these types of small profits.
@George Knetzger the previous responses are correct.
Additionally, any strategy that requires hitting an ARV to pencil is extremely risky right now, given the state of the market. The market today is completely different than the market 6 months ago, and the market 6 months from now will likely be completely different than the market today --so how can anyone accurately estimate the ARV when the comps that the ARV is based on are potentially irrelevant?
For instance, imagine you buy a property today for 100k and you assume (based on comps of recent sales) that the ARV will be 150k after a $25k rehab. You do the rehab over the next 6 months--during which time the market continues to adjust to the rate hikes. When the rehab is done, the property only appraises for 120k (because the market is a different universe than the market was when those comps sold). So, now you have $125k into a property that's only worth $120k (could be worse--some people are missing their ARVS by hundreds of thousands!).
Even highly experienced pros are having difficulty hitting their ARVs right now--and that problem will probably only get worse as the market continues to adjust to the rate hikes. Unfortunately, a lot of people are losing their shirts on ARV-dependent strategies at the moment. Personally, I would not recommend any ARV-dependent strategy right now, and that's 100x more true for beginners--and anyone attempting an ARV-dependent strategy should definitely be very conservative with their financial models, and have multiple alternate exit strategies available, in case they fail to hit their ARV.
Fortunately, there are other, less risky REI strategies available.
Good luck out there!
The purchase price and ARV are not enough to go off of to make decisions. You are missing the hard and soft costs and your profit. You could have a property with a purchase price of $1 and an ARV of $125K and it would still not be a good deal because it was a meth lab that blew up and will cost $150K to rebuild it, but it will never be worth that much because it's in a crappy area.
Also, I don't like the approach of using percentages when calculating costs or profit. I always use real numbers instead. The lower and the higher you get on price points, the less accurate and more skewed percentages are.
Ok thank OWEN. crystal ball investing with due diligence your factors were helpful to me
Ok thanks Leo..a numbers game for sure. You have opened my eyes with solid facts