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Updated over 9 years ago, 03/28/2015
This may be my first deal - need help with ARV
Ok, so I might have my first deal. The seller #1 is out of state and spouse lives in the home. #2 They are getting a divorce. #3 The house is fsbo & has been listed for 9 months. #4 She is "willing to work with me". HELP ME!!! went to Zillow for the comp the zestimate was $41K cheaper than asking. So I tried to do a comp with recent homes and came up with $200k so the arv is $210k because its really turn key aside from cosmetics. Then minus $6k for me, and the investor will profit $15k so I should offer her $179k right? I don't know if my numbers are right and I don't know if there is equity in the house (paid for). If there is equity, what does this mean. And lastly, how do you close when the potential buyer is not local, shes in FL and the soon to be ex hubby is in the home? None of my books break this down. Please advise and thank you. I told her I will call her tomorrow Friday 03/2/15.
- Realtor, General Contractor, and Developer
- Redding, CA & Bend OR
- 4,154
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@Dottie W. You need to look around and find some actual comps. The ones you get online from Zillow, etc. aren't accurate. Call a real estate agent and ask them what they'd charge you to run comps. You also can contact the title company and ask them if they have a service where they can give you a list of sales in the area, etc. The house didn't sell, so obviously it was overpriced.
- Karen Margrave
The first mistake you're making is paying any attention to the Zillow estimate. It is a meaningless number. Figuring a reliable ARV is the most critical step before making any offer. Getting it right can be the difference between making a profit and losing money. If you don't already have one, develop a relationship with a good broker and get real comps and CMA's and learn how to interpret them. I'm not clear how you came up with an ARV of $210K. If the comps say it's worth $200K then it's ARV is $200K, Not $210K, How does the fact that it doesn't need much work make it worth more than market value. Am I missing something? I'm presuming your exit strategy is to sell to a buy and hold investor. There's no margin in it for a fix and flip.
Originally posted by @Dottie W.:
and came up with $200k so the arv is $210k because its really turn key aside from cosmetics. Then minus $6k for me, and the investor will profit $15k so I should offer her $179k right?
No, those numbers mean the investor will probably lose money after paying closing costs.
Both the Husband and Wife typically need to sign off on any sale.
Offer as low as you can! Take the number she wants and drop 10 percent from it. That is how you will make a living is when you buy the property at the right price!
You would be well served to find a local active investor to partner with on your first 5 to 10 deals so you will learn how to properly research property values, learn acquisition and exit strategies, learn how to draft a proper contract, etc.
It appears you're very new to this and it's like learning to fly after you're in the plane...seldom works out well.
I read a book and now I'm a real estate investor. No, you're not. And, unless you learn the basics...
- calculating ARV
- Estimating rehab costs
- Understanding & calculating acquisition, sells & holding costs
- Analyzing deals for suitability to various exit strategies
- among others
You will continue to struggle with what to do next and how to do it. Best case, you will lose money. Worse case, you and others will lose money. Absolute worst case, you will develop a reputation that no one will come near.
It's great you're taking action. However, you aren't prepared for the outcome of those actions. My intent is not to be harsh, but wholesaling is not the easy path the gurus make it out to be. It's probably the hardest path in REI, because you have to understand every aspect of a deal...acquisition, rehab, and all the various exit strategies. Additionally, you have to be an expert marketer & negotiator and contract expert.
you can do this, but you've got to make sure you have the tools you need in your toolbox.
You are right, the house is very over priced. I called a real estate agent just now to see how much she would charge and she said she would run comps if I referred people to her. I said sounds good to me. She told me the house I'm looking at is Contemporary & hard to sell. I told her I'm not looking for a person who is financing but a cash buyer. She wants to meet next week & teach me about the mls & comps. But what about my deal tho? Is she about to sneak it away from me? I'm looking for an investor who wants to buy & hold a sfh that's practically move in ready. Who wouldn't want a 3b 2b 1800 sqft property in a subdivision in a nice family community. The agent was no help & I owe this person a call. It purely sucks being new. Sorry for the rant Karen.
Hahahah, I told you I didn't know what I was doing. I figured to get the ARV I had to first find the value of the house and not what the seller was asking. Then figure out how much it would cost to fix up the house $10k and add that to what the house is worth. I'm really struggling with this ARV vocabulary. So this is what I'm thinking - find the house, ask what the seller wants for it, go to my agent, have her run comps, what ever she says the house is worth --> that is the ARV or no? If I can get that part, I'm good. Its tough because I know 2 investors that use the Zillow for the ARV & did wholesale deals, so I was listening to them, but I want to do things the right way, so now I got a agent. And yes, I was looking for a buyer who wanted to flip & hold. Last week I found a $15k house that needed to be sold from an estate. Agent says it needs $15k in work & should be a rental because the entire neighborhood was bad. The houses I'm finding are either too nice or way to crappy. I need a mentor. Thanks for your help Mike & sorry for the book I just wrote Lol!
You are right about the investor loosing money. I didn't think about him having to pay closing cost. I just thought I find the deal, get the price right, investor profits after the repairs & I get my finders fee. Totally forgot about the title/attorney part. I might just write my own book one day for people like me who literally need step by step scenarios. Lol I will figure this thing out. If I can't wholesale my way in, I will buy a duplex this Dec and go from there to fixing & flipping. Thanks for your time Patrick!
@Account Closed
I kind of figured that both of them would have to sign. Did I mention she is in FL? Let me find out this first deal I'm trying to do is way over my head Lol! Thanks for your help.
You hit the nail on the head. The only investors I know personally just had a death in the family. I want to be respectful of that. I met an investor online who is 2 hrs away and he gave me some advice but we really don't know each other it's a little you know... he's new but he attends the investment club events, has mentors and buyers. He probably is skeptical of me. I don't blame him. I offered to split the deal with him but I don't want to be a pest. Guy, I think I will just chalk this one up to practice and attend an REI next month. Thanks for your help!
The simple formula is to take 65% of arv which would be $21000 x .65= $136500 -$10000 in repairs you would have to buy it for $126000 If you look at the analyze tab on go to calculators it gives you all the formulas
You are right. Reading all the real estate books doesn't make you an investor. Your also right about learning the basics, with out a clear understanding of them, you will struggle. From what I understand, everyone that starts out struggles, no one comes in this as a super star. I remember when I graduated nursing school as a Licensed Practical Nurse. We studied 7 days a week for 2 years and when we finished, we were book smart but not nurses. We didn't become nurses until we actually took the steps to apply what we learned and with the help and patients of those before us that helped hold our hands, we made it. So that is where I am, I'm looking for compassion. As some one helps me, I help others. Most people start with wholesaling because financially its all they can do & that is where I am for now. By Dec if wholesaling hasn't worked for me like it does for many, I will have enough money saved and higher credit to purchase my duplex. I truly don't mind crawling before I walk. Thanks for your help.
The first steps to success in a relationship intensive business like real estate investing is to educate yourself and build the team (partners) you need to monetize leads. You should attend every available REI MeetUp or networking meeting available to you. This is where you will begin the learning process and the building of relationships necessary to have someone available to partner with by simply making a phone or two. Right now, the cart is before the horse.
Don't throw this opportunity away just yet. Post it here on BP and ask for a portion of the profits if the investor makes a deal from it. It might just work. If not, understand that you skipped some steps in the process and make corrections so you are able monetize every valuable lead you obtain.
@Account Closed
Thank you so much for that formula but my $210k is all wrong Lol. The asking price is $232,000 & according to the agent, the seller will never get that. The agent didn't run comps because she said it was hard to sell this type of house. Honestly, I'm going to call another agent at a different office and get a second opinion. This deal my not work because I'm in the dark about some things but one thing I will do is see it to the end. I want that ARV! When I get it, I will do your formula & give that number to the seller and when she hangs up in my face, I will be ok with that because I followed through. If she says yes.....I will message you Lol. Thanks for taking time out of your busy day to talk to someone that is literally starting from the bottom.
I appreciate you for that. I live 2 hours away for the meetings and they are at 6:30pm. I'm a little nervous being a woman going but I obviously need to make it to these meetings. I have been reading since Oct. of last year and you know....its a lot. I won't give up, I see too many people having great success from this so if it takes me a little longer, better late than never. There's enough out here for everyone Lol. So, I just called a different agent at a different office who said she will do the comps for free and get them to me this afternoon. When I get the numbers, I will do the math. About the partnering, the guy I mentioned locally said he may have a buyer. If his buyer buys, I agreed to split with him 50/50. What I will do is not get antsy. I will tell him if he can find a buyer in a week, we will do the deal, if not I will tell him I will put the offer here on BP. That sounds fair, what do you think? If he doesn't get the deal, would you like to connect? If not, it's ok. I will keep everyone posted. Am I too transparent on here or is this about right? I just want to be honest, I believe what goes around comes around. Thanks Guy, I appreciate you! I'm not on facebook but I am on Instagram @tkettleproperties
"I figured to get the ARV I had to first find the value of the house and not what the seller was asking. Then figure out how much it would cost to fix up the house $10k and add that to what the house is worth. I'm really struggling with this ARV vocabulary"
@Dottie W. - Since you're trying to learn, I wanted to point out that your statement above is backwards. If a house is worth $200k at retail, and it needs $10k in repairs, you subtract the repair cost from the value of the property, not add it to the value.
I posted a version of the below info elsewhere. Sharing here for your convenience:
The formula posted above by @Account Closed is widely used for determining your max offer: 65% (or 70% as shown on the example below) of ARV, minus repair costs, minus your assignment fee = your max offer.
The After Repair Value (ARV) is the estimated full retail price of the property after it is repaired and in "tip top" condition and ready for sale, and you would need to plug that number into the formula above.
For example, if you determine a property would retail for $100k, you could use that as your ARV. If the property needs $20k in repairs and you want to make a $2k assignment fee, your formula would be:
1. $100k (ARV) times 70% = $70k
2. $70k minus $20k (repairs) minus $2k (assignment fee) = $48k
Thus, you might use $48k as your max offer for the property*.
*Even this varies a lot from market to market, and you may find with a lot of competition from other investors, you'd be wasting your time making offers at this level (too low)...or overpaying (too high) if your market is depressed...bottom line, get to know your market.
Also be careful with your fee, that is the one variable that you control completely, and it's better to do six deals at $1k each that zero deals at $6k!
Then on the exit end of the deal, an investor pays $50k (net) for the house, spends $20k on repairs, and potentially profits (or holds equity) the remaining $30k (that also allows a margin for error in the rehab costs for bad estimates and/or surprises). Like many comments above state - you need to work the deal all the way through to the exit strategies for the buyer/investor, so you understand how the numbers work.
It also makes a lot more sense to start from the end and work your way backwards - find a few local investors who are rehabbing, flipping, or doing buy/holds, and figure out exactly what they're looking for, then go out and look for that (rather than putting a property under contract and then scrambling to fund a buyer). More on that here.
ARV can be tricky to determine, especially without access to the MLS - and I'd be very cautious about using zestimates, property appraiser estimates, or other mass appraisal tools, because these can vary wildly. Also note that you can't use list prices, you need to look at actual sold prices - usually within the last six months, within as narrow a radius as possible to the property you're trying to value, on very similar properties - in other words, Comparable Sales, or "Comps".
A realtor should be able to run this search for you in about five minutes when they're logged into the MLS, and they can exclude REOs and Short Sales (or include them) - depending on how you want the comps to be run.
I recommend getting your hands on some old appraisals from a professional appraiser (and/or broker price opinions), so you can see the process they use to determine market value of a particular property.
I also recommend making friends with a realtor who will "run comps" for you occasionally. Also beware that some realtors are in the habit of just looking at an automated CMA (comparative market analysis) that spits out a number - these too can be way off, especially now that the market is heating up in many areas. Anything that is automated tends to lag behind reality.
Bottom line, learn your market, and learn how to evaluate comps yourself, then you have no one else to blame if you under or over price a property.
One final note - you don't actually have to buy properties (or even make offers) in your market to evaluate and monitor their list price, days on market, and sale price - pick several representative properties in your area to monitor and evaluate as test cases so you can learn by doing, but without risking any money or wasting anyone's time.
- Jeff Copeland
that is EXACTLY what I needed!!! I was like you said doing the numbers wrong and trying to collect $6k in the process. Talk about ambitious Lol. Thank you for this. It was the missing puzzle piece I needed.
Pay $400 +/- and get an appraisal or pay a full-time Realtor for their time, could save you $1,000's in the long run...don't put faith in Zillow...just my opinion !
First, I'm fairly new also, so take anything I say with a grain of salt.
The 70% ARV rule that was laid is really good. The only thing I would add to it is: if you're going to assign to a flipper, you would probably want to subtract her profit AND non-rehab expenses from your offer.
In the example above, the maximum offer was $48,000 leaving the flipper with $30,000 after rehab. However, the flipper is going to pay closing costs, twice, and another 6% to an agent when she sells. So, that only leaves about $20,000 for profit AND expenses, which is usually too low for a flipper because you could easily eat up $10,000 on unexpected rehab costs. You could also get stuck holding the property for longer than anticipated which incurs more holding costs. Also, if a flipper is using hard money, that's a hefty chunk - could be $5000-$10,000 on the example property.
These are the things that the wholesalers I've talked to haven't taken into account. It's also been my experience that those deals really take some work to find.
However, it sounds like you are on the right track and willing to learn and do things right. I wish you all the best in your new career.
@Bill Fennelly it sounds like i need to spend some money to make some money. I called 2 agents today & one didnt understand my request & the other said she will email me the comps this evening...(still waiting). One said she wil do it in exchange for referrals & the other for free. If the deal goes through, i plan to surprise the helpful agent with $100 & my business card. This is crazy, I told the seller I would call her today but i didn't have any information for her. I called anyway to keep my word & she didn't answer. I left a message saying I haven't heard from my agent and I will call her next week if she hasn't sold the house by then. As im talking to you Bill, she has called me twice ( the seller). She just left a message saying she didnt know i was working with a realtor & the agent will want 3% & she is willing to pay that and she is willing to help me in anyway. What is happening here!
@Jennifer Talcott I didn't think about theses numbers. Also, doesn't the buyer investor have to give me a good faith deposit or no? This property wouldn't really be flipped because it's turn key. The work needed is for the cedar siding in the front of the house, its just worn. Everything else is flawless. If I could get her to owner finance, I would love to move in myself. It's in the school district I need, her asking price is emotional tho. Can you do a owner finance deal with out an agent? My goodness, am learning a lot on this case. Thanks for the well wishes!
As a newbie, I've not done an assignment yet, so I really don't know when the end buyer pays you.
Regarding "turnkey", I'd suggest a more seasoned set of eyes to look at the place. Unless you have a lot of experience in remodeling/rehabbing, there may be issues lurking that you might not have noticed. For instance, what does the roof look like? how are the plumbing, electrical and HVAC? Are there termites?
If the seller's price is emotional, this house may not be a good deal. Most houses aren't good deals....
I wanted to give so many votes away on this post... Shame on BP for stopping me :-(
It's ok @Chaz Reid - I appreciate it anyway.