Estimating ARV Through Comparables - Dos and Don’ts

It seems like everyone wants to be a flipper these days. Even during the pandemic, there are still many opportunities to flip. There is a lot of capital out there and no shortage of TV shows on flipping. In this post we are going to focus on the importance of estimating ARV (After Repair Value) through comparables. Using comparables correctly to estimate our ARV is important because if you are off on this number you could lose money on your flip, or not get a potential flip under contract.

After Repair Value (ARV)

The ARV of your potential flip investment will depend on how much, or how little you plan to rehab the property. Are you doing a full gut makeover, or just small cosmetic touchups? Will it be in “like new” condition or just move-in ready, with nothing fancy? The Dos and Don’ts below are assuming you are doing a full rehab. The comparables, or comps, you use to determine the ARV of your property are important to your bottom-line profit. If you use comps that overestimate the ARV, you could end up paying too much to buy the flip and then lose money on the sale. If you used comps that underestimate the ARV, your offer for a property might be too low and get rejected.

Dos

1. Do try and find at least 3 comparable properties (comps).

2. Do try to find comps that have similar upgrades and finishes you plan to put in your flip.

3. Do try to find comps that are close in square footage and bed/bath count to your flip.

4. Do try to find comps in the same neighborhood. (Ask an experience realtor how far out you can go in your target area).

5. Do try to find comps sold in the last 90 days. We typically have to go out 6 months, and in some areas, a year, but the more recent, the better.

6. Some people say to find comps built within 10 years of the year your flip was built, but we don't worry so much about the build year as our flips are comprehensive rehabs so most everything is new. (However, we don't use a new   build as a comp)

Don’ts

1. Don't use Zillow's Zestimate. It's OK to use Zillow to find recent sale comps, but don't rely on the Zestimate of a property as an ARV.

2. Don't blindly trust the comps a wholesaler provides (if buying a property from a wholesaler).

3. Don’t look at Assessed Value. This value has nothing to do with retail sale value and is used by local jurisdictions for tax calculations.

4. Don’t assume every other rehabber has priced their newly-on-the-market-flip correctly. Sometimes, there will be comps in your neighborhood that are also newly completed flips. If the price seems out of whack compared to other recent sales or listings; don’t worry. They may have over-rehabbed or overpaid for their property and set some exorbitant price to try and make a profit. If the comp is out of line with everything else your seeing, don’t use it.

Estimating ARV just takes practice. If you are seriously looking to get into a flip. Contact some wholesalers in your desired area and get on their email list. They will provide comparables and you always look for your own comparables. In no time you can get up to speed on “comping” properties. If you aren’t ready to get into a flip yet, look for a newly listed home in your area that looks like it has been rehabbed. Then look for similar comparables in the neighborhood. Compare the final sale price against your estimated sale price from when you looked at comparables.