Are you considering investing in real estate? Read this article to learn about the current market trends and get expert tips and advice on how to make the most out of your investment.
The New Year is always a time of reflection, resolutions, and goal setting. Most are looking to do better and make strides in the life, health, relationships and especially finances. As a realtor, I am often asked how to get in to real estate. My response is always, “what area of real estate are you interested in?” There are so different careers in real estate, following are a few: Property management, real estate appraiser, leasing agent, mortgage broker, real estate developer, real estate consultant, real estate attorney, commercial real estate, and house flipper. All of these careers, may intersect, but have their own roles in the real estate industry.
My focus today is on, “House Flipping.” This topic comes up often as a new venture for those interested in investing in real estate. As a new investor or even experienced investor you should have a plan and a good eye to identify a potential good investment. There are TV shows, infomercials, podcast and social media post that make it seems like anyone could do it. Well, you can with the proper preparation, research and knowledge. Investors want to make sure they have the maximum potential to succeed on any deal and rely on the ARV (after-repair value) to help determine that the price and expenses justify the purchase of a property.
What is ARV in Real Estate?
ARV is the estimated value of a property after completed renovations, not in its current condition. House flippers commonly use ARV as a way to gauge the worth of a fixer-upper property, including how much it can be bought, and then resold for after repairs. To establish ARV you would take the average square foot price of comparable properties and multiply by your property square foot. It is important to know this number along with acquisition cost and cost of repairs, because it will help you decide whether to pursue the deal or not. Understanding ARV and how to apply the rule is key to your success.
There are three important factors you should consider when deciding on a property to flip. First, look at comparable properties to the subject. Homes that are similar in square footage and room count, homes that have sold within the last 90-120 days, homes in a similar neighborhood and located within a mile of the investment property. Next, it is important to know the potential cost of repairs. I would suggest that if you do not have a relationship with a contractor, obtain a minimum of 3 clearly itemized bids from licensed contractors. Also, calculate other expenses that may occur during the time it takes for renovation to include, loan payment, taxes, insurance, utilities and maintenance. Lastly, obey the 65% rule. When buying “as is,” property, this rule helps determine the acquisition cost (purchase price), by ARV and estimated repair cost.
Featured Home:
(Home sold “As Is” for $70k now on market for $239,900.)
Beautiful rehab for city dweller.
Following is how investors calculate price:
(Sale Price) + (Value of Repairs) = After Repair Value
After using the above ARV calculator, investors can then apply the 70 percent formula:
(ARV x .70) – Repair Cost and expenses = Maximum Purchase Price
In other words, this formula reflects that no property should be purchased over 70% of its future value.
Following is a real an example of how to calculate maximum purchase price:
*Purchase price $300,000 ARV
*Repair Cost /expenses $90,000
The maximum offer price is $120,000 the most the investor should pay for the property, so most will start with lower offer. The lower the offer, the more room for profit.
When flipping property, it is important to have a solid team that includes realtor and contractor. The decision to purchase is exclusively yours, but it is helpful to have input from professionals. Insure you have had inspections done to property prior to purchase and focus on costly repairs such as foundation, mold, water damage or pest. Those repairs found after renovation has started can be very costly and interfere with your profit. Make sure you obtain multiple bids from licensed contractors. Your bids should be itemized with cost and work associated with it. Keep open communication with contractors and positive relationship.
Do not over improve property. Knowing your market is vital. Knowing your market and what works is to your advantage. The needs of a home renovated in San Francisco, CA, would be different than those in St. Louis, MO. If you are not familiar with your market, determining value could be challenging. Finally, list your property with a realtor. Although you may be familiar with market a good realtor will give updated information on past and recent sales, what is currently on the market and ideas to market and sell your property, these are some of the things that buyers look at when they are looking to purchase. Although flipping houses may not be for everyone. It is a great opportunity to not only build wealth, but enhance your community.
If you want more information contact:
Janice “The Real” McCoy
Radius Realty
904 S. 4th St.
St. Louis, MO 63103
Cell: 314-337-9466
Email: janice@radiusrealty.com
