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No doubt, one of the most exciting parts of house flipping is selling. It’s the culmination of months of work and many house flipping steps – some which went as planned and some that didn’t go quite the way you wanted them to. Either way, all your work is finally going to pay off for you…provide you get the right price.
You most likely financed the deal by getting money from other people, be it investors or private equity. Or maybe you were lucky enough to get a loan from a bank. You bought the house and did the rehab and the home is ready for a buyer to plunk down some cash and make it theirs.
Now is the time for the big payback. Or is it?
The Importance of ARV in House Flipping
When you were first starting out in assessing the house flip, you determined the after repair value (or ARV) that the house could sell for when it’s all done. And now with the house done, you are ready to list it with a real estate broker. It’s a super exciting time in your life for sure. All those many months of hard work are finally coming to fruition and you are looking forward to leveraging your success to maybe quit your job, start your own business or go along to your next house flip.
I have long advocated ARV as a standard number to set your sights on when house flipping. ARV is an especially important number for you to know as it’s the basis for all your work and costs associated with the house flip.
If you stop and think for a moment, the price you sell for is the most important number to crunch when you flip. That number sets the tone for the entire project.
For example, if you buy a house for $160,000 or $170, 000, did minimal rehab but you can’t sell it for even $180,000 or $190,000, chances are slim you’ll have a long career flipping houses.
Also, if you buy the house for $100,000 put $50,000 in rehab into it and cannot even sell it for $160-170,000, even though you may have “bought right”, you’ll have a hard time making real money in this business. The margins are just way too slim.
That’s why setting a realistic ARV at the start of the project is so vitally important for increasing your chances of profitability.
After all the rehab has been done, with the house ready for sale, the real number as to what the actual “after repair value” is on the open market is found out now. This is the number of what you can sell the house for today.
Why a Realistic ARV Determines Your Profit
So let’s say that similar to the above scenario, you bought the house for $100,000, you put $50,000 in rehab costs into it and your real estate broker tells you that the house can sell for $200,000. If she’s right and the market holds, you’ll most likely make a nice profit, minus finance costs and broker fees.
To arrive at the $200,000 figure, chances are that your real estate broker got the pricing from using comparative houses or “comps” which have sold in your area. She will do the same thing when it’s time to sell.
At six months after the start of the house flipping project, the house is looking great and you’re feeling confident that you can get your price. All you need now is a price and a buyer.
Now six months later, the broker has bad news for you. She tells you the price should be $190,000, as the market has shifted a bit and the $200,000 price is no longer realistic.
Do you ignore her and go out and list the house for $200,000? Not a chance.
If you do, you will lose money.
Why?
If the market has shifted, don’t fight it. If you do, you’ll end up holding the property longer. And when you hold the property longer you pay more in finance costs, soft costs and maintenance….poof go your profits.
Take your medicine and list it for what she says. Of course, don’t list it for exactly $190,000, we always add on 5% to account for negotiation when the property is first listed. We would do the same thing if the comps came back at $200,000 as well.
Teamwork Is the Key Ingredient In House Flipping
Although it may be tough medicine to swallow, especially when you’re first learning how to flip a house, always seek and listen to the counsel of your team. When you sell, ask the advice of your house flipping team – especially the real estate broker on your team. Get their advice and ask their opinion. No one knows the market better than these experts do. If they don’t…well, you may need some new team members.
So when it comes to selling your house flip, if the market analysis comes back saying that the house needs to be listed lower than your ARV, bite your tongue and do what the market dictates. You may not think it’s the right decision at the time, but believe me you’ll reap the dividends later…as well as live to flip another day.
Author Bio: Mike LaCava is a full time real estate investor, real estate investment coach and the President of Hold Em Realty located in Wareham, MA. Mike specializes in flipping houses with no money and runs the website House Flipping School to teach new real estate investors how to flip houses. He has also authored the book “How to Flip a House In 5 Simple Steps” available for Free at his website.