Should I follow comps or higher $/sqft for flip design?

Question

Usually, and I’ve been taught by my mentors, to base my finishes on the available comps (sold in last 6 months), some of which are super poorly designed and not selling for the higher ARV I want. I can’t shake the idea that I could get top dollar if I design my flips based on the *finishes* of the homes sold in the neighborhood with way higher price per square foot, regardless of comp design. For example: I have a 3/2 with 4-5 comps rehabbed with minimal effort sold for an average of $210/sqft. But just down the street a 4/2 sold for $300/sq ft (similar overall square footage, nowhere near year built 🫣). The glaring difference? Beautiful finishes and thoughtful design. My gut tells me to try it, the veterans say I’ll spend too much on rehab for minimal gain. In my last example, if I pull off a $300/sqft on my ARV, my profit quadruples. I’m too new to be brave and try without hearing from you guys first - investors, rehabbers, realtors and contractors to comment!

James Hamling · Answer

@Emily Haase I have a flipper friend who we are the opposite sides of the coin. He has exclusively flipped on math. He does minimal reno, nothing creative ever, just all about livable and minimum to get sold. He has done well, but he has never hit any big hits, he is base hit after base hit and sometimes it's a bunt just barely getting to plate in time. Myself, I flip very little now but for a time I was one of the "big-boys" pumping volume. I have always been the opposite side of things. I only did flips where i could be creative, drastic changes, total redesigns, move walls, pop-tops, I was doing built-in custom entries before they became a hot-button item. And over and over every time people said I was nuts, I was over-building, doing it too nice, why so much tile, why wainscoting, why craftsman style vs cheap off the shelf builder grade. And over and over again I was in multiples in first 24hrs, getting new market high prices. There was a science behind my art, I knew the market had capacity for the upward price and I identified markets and demographics that would pay for nicer. And in a % based game, perceptual value is more profitable than utilitarian. Yes, I had some base-hits, but every once in a while I hit a grand-slam. There is very few playing at that level, but yes it's totally possible. It's niche though, so gotta know that and have a team that is niche as well. An average agent won't do, on buy or sell side. Same with reno team, design etc.. It's where art meets science. And when a person can combine the 2, fireworks! I used comp's to set my basis, identify market capacity, and identify areas of buyer interest. And than, I never fought fair, I wanted to blow the competition out of the water, and having reno in-house I could, and did, repeatedly. basic has it's place, but so does amazing. Don't expect affordable housing to ever "get" luxury, know what I mean, it's just different worlds. So basic won't "get" amazing. Just gotta choose you're-jam, be strategic and swing for the fences.

Ricardo Fernandez · Answer

my point of view is that depends on the area. if you over budget on a neighborhood that cares more about how close the walmart is rather than an Italian hand crafted crown molding you will loose money. Another thing I see a lot being a contractor is that new flippers try to design "their dream house" and not for the general market. sometimes a $2k toilet may be your dream come true but not for the home buyers interested in your house.

Account Closed · Answer

The reason they want you to go with the lower comps, is because the high end comps take time to analyze and longer times to sell. There are a lot of things to consider when comping, the street, the reputation of the neighborhood, in some cities one street over makes a lot of difference, floor plan, style of property, near water, has a view, has a wine cellar or theater room, high end finishes, how it was marketed and so on. Sometimes, it's someone who simply overpaid because of emotion. Comps: The biggest challenge when you sell, will be finding 3 comps that have sold in the last 3 to 6 months within half a mile, that aren't across a major road or greenbelt or body of water, that support your asking price. Comping by sqft is not rcommended. It's not a definite, It's a guideline. I would first follow the above definition of "comps" and see what the top 3 properties that have actually sold look like. Follow their example for curb appeal, floor plan and finishes. Keep in mind that in some neighborhoods prices are on a slight decline so factor that in. And you won’t be selling it for 4 -5 months after you buy it to fix it up, so you take that pricing into consideration too.

Alan F. · Answer

3/2 doesn't comp with 4/2, are you sure that doesn't have something to do sq ft $? As the poster above noted comps are our way to tighten up the WAG. Typically $/sq ft is for new construction. It's kinda fun to back the numbers in but it doesn't really mean much. I've seen 2mil "designer" houses with high DOM, while the vanilla unit sold immediately. Residential is the ultimate form over function environment. It's just a bunch of sticks with poorly designed infrastructur. I'm way more passionate about an efficient tilt up than a house. FWIW Resi is the low end of the building world. Its about making $, the lady that buys it is gonna change it anyway. What really matters is a clean, safe, efficient build.

Bill J Fay · Answer

I would just add, be careful using comps across the street, with newer builds. These usually won't compare with a fixed-up property in an older neighborhood. You may attract a buyer that can't afford in the newer neighborhood, but you'll need to price it accordingly. Happy to take a look if you want to shoot me the address.

Andy Sabisch · Answer

As you found out, any part of the equation being off can make things look totally different. If the reno costs are more than expected or the ARV is less than expected, you can wind up barely breaking even or worse.ARV - (Purchase Price + Reno Costs + Holding Costs + Sales Costs) = ProfitKeep it simple and do not try to force numbers to make a deal look better than it should. We tried that initially and found that the profit went the way of the dodo bird so to speak. The calculators here are great to see where you are and if you are honest, you will be able to discount supposed deals and let someone else learn the lesson. We have seen properties that on the surface look good but either the reno costs were too high or the ARV too low to make sense and passed. Twice we have seen the property go up for sale partially rehabbed and the seller taking a loss just to get out of the deal . . . you do not want to be that person . . of course, you might be able to get a deal from one that found themselves drowning

Emily Haase · Answer

Thank you so much for this input. You’re right. I thought I found a heck of a deal and my realtor said its ARV is much lower than the comps because of the tiny nature of the bedrooms. One thing can throw it all off balance. I’ll stick to the basics for now!

Andy Sabisch · Answer

Comps and ARVs in many cases are SWAGs (scientific wild A&* guess). The flow of a property, the exterior appeal of a property, what is next door or across the street to a property and yes, the finishes all factor into a comp. Many of those that we have worked with over the years have reiterated the old saying "Something is only worth what someone is willing to pay you for it" and it holds true for real estate in spades. I have seen properties that are done with high end finishes in top notch areas sit on the market for months taking price drop after price drop yet another property not too dissimilar sells almost immediately. You only need one buyer but you need to find that one buyer. As the market cools and interest rates stay elevated, buyers are starting to be more selective.When we are flipping a property, we want to turn our funds. If we invest in higher end finishes yet then have to hold it for say 3-4 months after we list it, the carrying costs and funds tied up are a negative to the business.I would lean towards what the veterans are telling you and provide quality finishes, sell and move on to the next. As you get more experience and become a veteran, you can determine if your proposed approach is one worth trying.