Busting the Comps

Rehabbing & House Flipping
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Busting the Comps

Joseph Zerfoss
Rehabber · Everett, WA · Member since 2012 · 8 posts · 0 votes

My question has to do with how much more you can realistically get for a house with "wow" factor.

Say you buy a super-trashed house and plan to do a complete rehab. New siding, windows, paint, carpet, kitchens, baths, doors, trim, etc. The surrounding area is well-kept, low crime, good schools, etc.

Now, let's say that the average house of comparable size in that neighborhood, in decent condition but nothing special, is going for around $125k. If you make your house really stand out, i.e. custom cabinets, granite, all tile in the bathrooms, nice doors and trim, you get the picture, something that is a real cut above the other houses in the neighborhood; how much more can you realistically get for it? I guess the real question is; how much more can you get it to appraise for? If you want it to sell quickly you need your buyer to get their financing.

I am new to the game, although I have been doing rehabs for years...just not on my own properties. Any input from my more experienced friends out there in BP land would be awesome!

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Steve L.
Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
14y

Joseph -

Appraisals are allowed to do about a 10% adjustment on condition. So if a property in poor condition sold for 125,000, if they cannot find other fixed up comps they are supposed to add 10%.

In this market, most of the properties that you can buy at wholesale prices will be trashed and not qualify for cheap financing. So you will be making all the repairs anyways.

DO NOT OVER FIX A HOUSE. Thinking you are going to get very much "extra" for a high-end remodel compared to a typical fixed product would be a huge mistake that the Buyer will be the only beneficiary of. It will move faster.

I'd suggest you walk properties in your market. Finished product and non-finished product and see what works and what doesn't.

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  • Stinson Bland
    Wholesaler · Dallas, TX · Member since 2011 · 294 posts · 152 votes
    14y

    I wouldn't bet on "busting the comps" or getting it to appraise... But you should be able to shorten your DOM if you're competitive with your pricing.

    I'm not saying it can't be done, I simply wouldn't bank on it appraising for much more than the comps.

    1Reply
  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    14y

    Joseph -

    Appraisals are allowed to do about a 10% adjustment on condition. So if a property in poor condition sold for 125,000, if they cannot find other fixed up comps they are supposed to add 10%.

    In this market, most of the properties that you can buy at wholesale prices will be trashed and not qualify for cheap financing. So you will be making all the repairs anyways.

    DO NOT OVER FIX A HOUSE. Thinking you are going to get very much "extra" for a high-end remodel compared to a typical fixed product would be a huge mistake that the Buyer will be the only beneficiary of. It will move faster.

    I'd suggest you walk properties in your market. Finished product and non-finished product and see what works and what doesn't.

    5Reply
  • Don Hines
    Investor · Little Rock, AR · Member since 2010 · 628 posts · 251 votes
    14y

    Joseph has already gave you good advice. That being said, I accepted an offer on a house that I priced about 10% over the market last night. It is in the price range you have mentioned. Everything is new with ss appliances. I put laminate counter tops in though. It has a double whammy WOW factor over the competition. Now let's see if it appraises.
    Don

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y

    Steve L hit the nail on the head...in my market there's about a 5% bump in appraisal for condition. So, in your example, if the other comps are around $125K, you'll probably appraise in the $130K range.

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  • Kevin Kinton
    Real Estate Investor · san jose, CA · Member since 2008 · 14 posts · 1 vote
    14y

    Just to clear up any possible confusion: An appraiser is not confined to only a 10% adjustment for condition. The underwriting guidelines reference 10% adjustments and anything above that will require substantial support.

    Ideally that support should be other recent comps in similar condition. If they are not available, adjustments above 10% should be supported by "paired sales analysis". Yes, it's more work for the appraiser and not all will go to the trouble, particularly these days of minimal fees, but the good appraiser's will.
    It's all about finding evidence of market reaction to the condition of the subject. (Hint: appraiser's can make time adjustments in order to use older sales with similar condition in a paired sales analysis)

    1Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    The benefits to adding "wow factor" to your flips is that you will have the nicest home on the market for that area which should generate a quick sale (quick sale = more money in your pocket due to less holding costs and future opportunity costs).

    Now you have to be careful not to ver rehab as you can overspend and not get it back. I have found in my experience that your wow factors should be focused on curb appeal, kitchen, and master bath.

    As for appraising, it is helpful if you have other sold flips in the area for an appriaser to reference. if not, you can run the chance of it not appraising, even with an appriaser's adjustments so be careful.

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  • Joseph Zerfoss
    OP
    Rehabber · Everett, WA · Member since 2012 · 8 posts · 0 votes
    14y

    Thank you all for your input, it is very helpful. Since comps are so important...what are your suggestions for doing your own "comping?" I have been using Zillow and Yahoo! Real Estate, as well as getting input from my agent. What else do you guys do?

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    Comping properties is an artform and takes lots of practice. many RE agents can't even perform such a task for rehab flippers, even with all their access to MLS data.

    The key to evaluating your exit value (ARV) is to really know your market, know what it was doing and what it is doing. You do this through inventory levels and driving the neighborhoods.

    Second, you must know what comps to use, what comps to toss, and of the used comps, how to adjust for accuracy. This is where the artform comes in.

    When using sites like Zillow, make sure you only use the actual sold data and not the "zestimates". Use the filter crieria to filter down date, size, beds, baths. If your home is a 3+2 with 1400 sq. feet, you want to find other 3+2 homes with similar square feet in the same neighborhood and within the last 3 months.

    I would also suggest you speak to a few appraisers and pick their brain on how they comp, analyze, and adjust for value to come up with a subject property's value.

    Hope that helps.

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  • Joseph Zerfoss
    OP
    Rehabber · Everett, WA · Member since 2012 · 8 posts · 0 votes
    14y

    Will,

    Thanks much! Where can I find appraisers?

    0Reply
  • Hugh Hill
    Odenvill, AL · Member since 2008 · 25 posts · 0 votes
    14y

    Kinda hard to believe your a rehabber and don't know of of appraiser from your area..

    Anyways...Couple of suggestions.

    Try Google
    Yellow pages
    Ask a realtor
    Dial a friend.

    Hope this helps.

    Hugh

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    @ Hugh - As a rehabber myself (full-time) I do not think it is strange that one would not know an appraiser, after all, on each flip, it is the buyer's lender who hires the appraiser, not the flipper.

    That said, my suggestion is to ask some fellow investors in your area, or simply look in the phone book. I always prefer referrals and the name drop usually helps start the conversation off right.

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  • Sharon Vornholt
    Goshen, KY · Member since 2009 · 835 posts · 683 votes
    14y

    Joseph -

    You want your house to be really nice for the area; you want it to stand out from the rest. But don't over repair the property. You simply won't get your money out of it.

    You don't need custom cabinets at that price point. Just a fabulous counter top and hardware. I would concentate on "where can I get the nice finishes for less". Every dollar you put into that house is coming out of your profit. You can have a beautiful property to sell that is a cut above the others without breaking the bank.Remember that you aren't going to live there.

    0Reply
  • Eric M.
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    14y

    All the suggestions here are good, but I just hate the line below that is often quoted but it simply is not true.

    Originally posted by Sharon Vornholt:
    Every dollar you put into that house is coming out of your profit.

    If this were a true statement then you would make the most profit by spending $0 on improvements. That is typically not the case.

    I suppose you could say that every extra $ in over improvements is coming out of your profit but not every dollar of improvements.

    Quite the opposite, most of the dollars I put into a property are yielding more than a dollar in resale value, so many dollars are actually CREATING my profit.

    In additions some of the other dollars are put in not to improve resale value by 1 to 1, but to speed resale time.

    I would say that in a well-managed rehab, few dollars that are put in come straight out of your profit. (and many of those costs are unavoidable such as utilities, taxes, interest, etc)

    3Reply
  • Don Hines
    Investor · Little Rock, AR · Member since 2010 · 628 posts · 251 votes
    14y

    I agree more with Sharon's reply. I see those TV flippers say "these $5000 cabinets will raise my value up $10k".
    I just spent $5000 on cabinets because the original cabinets were crap. I don't think they added to the value of the property. Just brought it up to where it is supposed to be. Maybe they added over $100k in value because the house was not going to sell with the original ones. Either way I am subtracting $5000 from my price to figure my profits.
    Don

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    I am with Eric on this one. "Every dollar spent" is not coming out of your pocket (unless you are only technically speaking). Here is why: The property's market value at acquisition and the property's market value upon exit are two different numbers and they are only different because of the dollars you put in to make improvements.

    As in Eric's example, if such a thing were true, nobody would put any money into the deal and sell for profits on a rehab.

    Don Hines I would have to disagree with your assessment as well. While it is true that the flip show numbers are so full of crap it always makes me laugh, it is not true that your $5k in kitchen cabintes did not add at least that amount into the exit value of your property. Think of it this way, if you had sold the home without a completed kitchen, you would have only been able to sell to cash buyers as lenders would not finance a home without a complete kitchen and therefore, your exit value would have been much less (well below the $5k u put in).

    When I rehab a home, I do top quality for the area and my curb appeal and ammenities sell the home fast. The speed at which my homes sell and my ability to get all the nice things done at prices well below retail, I am adding value with each dollar.
    Of course there are always some things that really do not go dollar for dollar such as putting in the light bulbs - such items cost yo money but really did not improve the value of the home, however, without them, it would be much harder to sell the house without any lighting in the fixtures aqnd would come up on the buyers inspection report.

    I typically get at least double for every dollar I spen in rehab. I make a good chunck of money at acquisition by getting a good deal, then the choice of rehab quality I do at the lower prices I get add even more value to the home upon exit. The combination of the two is what makes a good rehabber!

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  • Joseph Zerfoss
    OP
    Rehabber · Everett, WA · Member since 2012 · 8 posts · 0 votes
    14y

    This whole discussion has been very helpful for me, thanks to all who participated :)

    Let me see if I can sum up the various view points in a way we can all agree with (not likely, I know, but I'll give it a try).

    Let's say I buy a house for $50k. It is non-financable and non-livable in its present condition. If I want to make a profit, I have to fix this. There is a minimum amount of work I need to do to be able to retail it to a new home owner. (I assume this is always our goal since we are rehabbers and not wholesalers.) The cost of this minimal rehab is never going to be part of my potential profit. Let's say the cost for this work is $20k. The first question is, what is the ARV on the house if I just do the minimum? For our example say I can sell it for $110k in that condition. So, less closing/selling costs and the cost of borrowing the money (just for round numbers say another $20k), I can expect to see $20k profit.

    The second question is, what is the maximum ARV on the house I could reasonable expect to get? Again, for our example, say the max. ARV in this neighborhood is $140k. That means there is another $30k possible profit left in the deal. So, here's the rub: every dollar I spend above the minimum repairs had better either return more than dollar for dollar or reduce DOM. If not, it's coming our of my profit. So, if I can spend another $5k and increase the ARV by $10k, I should do it. But if spending another $5k only increases the ARV by the same amount, maybe I shouldn't, unless of course it has a good effect on DOM.

    I would guess that it will always pay to do somewhat more than the minimum if only to increase the curb appeal and sell it faster.

    Does this make any sense? If so, would you agree/disagree/don't care?

    0Reply
  • Charles Bradford
    Rental Property Investor · Indianapolis, IN · Member since 2009 · 11 posts · 11 votes
    14y

    I agree with the replies you've gotten so far. In our rehabs, I concentrate my "wow" factor to the front door/entrance and the kitchen. In kitchens, lighting is critical. We install can lights for added drama in almost every house we do. The kitchen is probably the most expensive room to redo. At the same time, it's the one room people don't want to "do themselves" once they purchase a house. And, as others have shared: the temptation is to overspend for the neighborhood. Scout the competition. Look at photos of nearby listings online. You can do an awful lot with paint and an accent wall and still be sure you're getting your investment dollars back.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    Joseph, I am not sure why you are intent on breaking the rehab down into your two sections, but here are my thoughts:
    To make the most profit on a flip, u need to sell to retail owner occupants who are willing to pay full retail. To get to full retail value, u can not just put in the minimums to make the home financable. U must do all the trimmings as well. In your scenario, I would disagree. Doing the minimum only brings the market value up a minimum amount, the real gravy comes from the finishing touches, and that is not just the literal finish touches, sometimes, that includes moving an interior wall or two to improve the layout, flow, or functionality of the home. This and other things like it can drastically improve your exit value.
    I have analyzed this very thing in the past and have always concluded that doing the full complete rehab will deliver the best profit margin.

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