Ultra Competitive Sellers Market: Determining ARV
Analyzing deals can be a moving target in normal markets, but the current seller's market presents a challenge. We continue to break records with decreasing supply and red hot demand. According to DMAR, February 2021 inventory was down 58%, days on market (DOM) was down 41%, and prices were up over 19% compared to February 2020. This makes investors' job of predicting the After Repair Value (ARV) of a property a tricky situation, especially for larger projects which require more capital and longer rehab timelines. Here are a few "Flip Tips" to help determine ARV:
- Two Minute Math: One of the keys to finding a good investment is sorting through as much data as possible in an efficient manner. Our first guideline is to find a $90k-$100k spread for condos & townhomes and a $130k-$140k+ spread for single-family homes. The spread is the difference between the acquisition and the sales price. This will get you close enough to dive into adding a rehab budget number yielding a net profit of between $25k-$45k. This first level of quick analysis allows us to sift through 30-40 properties each day.
- Two Tier Approach: Analyzing comps using the primary metrics- beds/baths, square footage, property style & age, neighborhood (¼, ½, 1-mile radius), garages, and overall layout are the top tier indicators when looking at what a property is worth before and after renovations. We then look at the second tier comp analysis- property condition, major systems, school districts, major intersections, unique usage (ADU, commercial space), above & below grade layouts, building amenities for condos/townhomes. We have a scale that ranges from $3k-$25k in value to help determine the final ARV.
- Property Condition: We break property condition into five major categories:
- As-Is: Properties in need of significant repairs on both interior and exterior have not been updated in 20+ years.
- Homeowner (+/-): Properties that are still in move-in condition but need updates to achieve maximum returns. Typically, these properties need some major system (roof, windows, sewer, electrical panel, structural issues) updates but can be done by the homeowner and don't need to be done before buying a home. The plus and minus designation help to further narrow in on ARV.
- Flip (+/-): Properties that have been completely updated in the last 0-2 years. Think HGTV updates, including new kitchens, bathrooms, finished basements, new/upgraded systems, and nicely landscaped properties. These are key to determining what your maximum ARV is when selling your flip.
While the current market is red hot, it's still essential to underwriting deals realistically. We never factor in an appreciation premium or projected sales price to finalize our ARV. It's better to be happy if your property sells above asking than squeezing profit margins. At ELEVATION, we're continually Raising The Flipping Bar, giving us a call or shooting us a message to talk shop.
Derek Marlin, CEO