After Repair Value (ARV)
If you're going to flip properties, you need to understand ARV.
Real estate investing, particularly flipping properties, frequently requires that a purchased property be rehabilitated in some way. Usually, it's cosmetic work and repairs, and other times it is an extensive rehab and remodeling job. The successful fix & flip or fix-to-rent investor must address several items carefully:
All these steps must be completed with accuracy. You'll not be investing and flipping long if your costs to refurbish the property run over estimates, or if your ARV is calculated incorrectly. Many investors know their area and markets well, have adequate home sales records similar to the subject property, and feel confident in their ability to calculate the value of the property once they've completed renovations.
For those who aren't sure, use a real estate professional to do a Competitive (Comparative) Market Analysis (CMA) on the home as if all work were completed. Of course you could also use an appraiser, but generally, you'll do just as well working with a real estate person that knows their business and the area. If you list with a realtor, then that's the person to ask.
Considerations in Fix & Flip Investing
The highest profit margin short-term real estate investment strategy is the fix & flip project. Of course, buying right at a deep discount is required on the front end. Also, knowing you will have a buyer at the price you need is essential for profit is on the back end, the ARV. In between those two ends, is the fixing stage, and it is where the profits get great, but the risks are higher too.
- Get the materials estimates right and buy at discounts. Work not only with the big box home stores, but also liquidators and rehab stores.
- Know your contractors and their capabilities. You need to supervise to the extent necessary to be sure that you're getting quality work that will be done on time and inside the budget.
- Budget based on your buyer. If you're going to be selling to a rental property investor, keep the materials in the "acceptable" range. If you're selling in the consumer retail market, upgrade to finishes that buyers want, as you're competing in the marketplace.
The good news is that this isn't rocket science. It just takes attention to detail and some negotiating skills.
As buyers are beginning to filter back into markets since the crash, there has been a lingering low inventory of suitable new and existing homes. New home builders have spent years concentrating on an apartment building, as that's where the demand has been; so fewer new homes available.
Existing homeowners have been holding on to their homes while values have been recovering. Many are still underwater on their mortgages, so they won't be selling soon. Others are out from under, but not enough to lure them to list their homes for sale yet; they will keep waiting with rising equity.
Baby Boomers who used to be big sellers to downsize after their children moved out haven't been selling at historic rates either. In many cases, it's because the economy and jobs situation has kept their children at home, even after college graduation. Others simply do not see good value in smaller homes with inventories down and prices up, so they stay put.
No matter what the reason, if you can make the right deal on a fixer and add in some of the new features buyers want, you can sell to a retail buyer at a higher margin that you would ever get from an investor.