How much profit should I price in to an asking price?

Question

My wife and I have a house in La Puente, California. We recently had it appraised for $475. This price, I'm told, includes factors such as it's current condition. (Zillow's Zestimate is $569k, but I have no idea how accurate that is.)  It's livable (we've had renters in it for about a decade), but it does need some work to get the best price, which is what flipping is all about, right?

We initially priced the house at a 40k discount from the appraisal (which, if you believe Zillow is $134k below what it will sell for once flipped). The real estate agents suggested pricing it low to "create a frenzy". (Ha!) Within the first week, we got two, identical cash offers for $400k. We countered to split the difference, but neither budged.

So, now I'm confused. Is my appraisal really that far off (is the Zesteimate?) or is this just part of the game? The property behind ours is bank owned and I've heard they're open to a short sale. (I think I got that from the agent representing that house. THAT house is probably a teardown.) Am I wrong to think this should make things more attractive? In theory, someone could buy both lots, tear them down and put up a triplex or fourplex. (Our lot is unusually large, 9800 sqft, and when you combine both, you have over 1/3 acre. Is that enough for a triplex/fourplex or is that really not even an option here?)

We live in Virginia, so our flipping the property ourselves is out of the question. Is it crazy to think that 40k discount off of the appraised value is fair, given that the improved price is could be as much as $600k for a house this size in Los Angeles or have I let the flipping shows cloud my vision of reality? The fact that two independent developers have settled on exactly the same price has me thinking that perhaps there's something I'm missing about this equation.

For reference, there's a house a few blocks away priced EXACTLY them same, but is 1300 square feet smaller and sits on a lot that is 3500 square feet smaller. It might or might not be in better condition, but seriously... our house is not in need of being condemned, its just been a rental for a while. There's a house that only slightly smaller within a few blocks that sold for $545k, so the Zestimate can't be THAT far off... can it?

Any and all advice is greatly appreciated!

Best regards,

--Tom

Manolo D. · Answer

Zestimate can't determine the condition of the house, only people can. Most of zestimate in my opinion are 80-90% newly renovated, so that factors a lot when their computer do the math.  Don't go with it, ask a comparable from your agent. 435k is not that bad, you could spend maybe 20-40k and get the 550k, you just need to do the reno or have someone do it for you.

With regards to the 4 plex, don't factor that in, it is much more harder to combine the lots, get approval for a 4 plex and rezone the property. If there is a sold house that is smaller in lot and house sq ft, then that gives you an idea to list them the same to compensate for the repairs, check the condition of the other house first.

Douglas Burns · Answer

Zillow reports how accurate Zestimates are compared with actual selling prices here: http://www.zillow.com/zestimate/ It varies by region. Based on my experience in Washington DC, Westchester County NY and Monroe County NY, they have been fairly accurate. I wouldn't rely on them solely, but if you take them into account with comps (from your agent or Redfin), plus some common sense, I think they provide pretty good guidance.

Michael S. Helton · Answer

@Thomas Dulaney I am going to disagree a bit with others and say that you should ALWAYS check zEstimate first.  Why?  Because that is what most buyers are going to be looking at to determine a starting point for price.

Then look at RealtyTrac or Redfin for a quick view of more information.

After that do a comprehensive market analysis.

Cornelius Charles · Answer

@Thomas Dulaney

Like people are saying, don't pay attention to Zestimates.  I read a study in which they concluded that Zestimates can be up to 40% off (up or down).  And without knowing the condition of the other homes, I'm not sure how well you can compare them to yours.  If you know the addresses, you can look on Redfin.com and you will be able to see any photos that the listing agent had on the MLS.

Jo-Ann Lapin · Answer

For the best result. you would have to rehab or be prepared to sell at par or below.

Wayne Brooks · Answer

To clarify a couple of things; flippers don't make money just by doing rehab, they have to buy at substantially (30% or so) below the end value minus the rehab costs.  Your property likely isn't zoned for multi family, no matter how many lots you combine, and $800k or so for a lot to build a fourplex makes no financial sense. Also, "bank owned" will not be a "short sale".  For the maximum value, you'd need to do the proper rehab, and sell at retail.

Larry Turowski · Answer

@Thomas Dulaney First, pay no attention to Zillow--it can be way off, high or low.  Second, appraisals are formulaic so while they can give you a rough idea, they can come in significantly lower or higher than what someone is willing to pay.

You really have to know your market.  You can ask whatever you want, but you can't expect to get what your asking just because you want to make a certain profit.  The market determines the value.

So, it sounds like your house is worth $400K to an investor, as-is.

I don't know what it is worth fixed up, but assuming it needs $50K worth of work, and being an investor myself, I'd guess it is worth in the neighborhood of $600K after repairs.  That may sound like a huge, but try taking the risks of flipping a property don't know the history of and you'll see that financing, buying, holding (taxes, insurance, utils, lawn care, etc.), repairs, the inevitable gotchas, selling (realtor, closing costs) eat most of that margin up.

How much profit should I price in to an asking price?

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