Knowing where you will exit a property is a huge part of the real estate investment game when it comes to “Flipping” Property. It is a well known adage that you are supposed to “Buy low and Sell High,” simple concept to follow… if you know the value of the market place you are in. So how do you figure this out?
First you need to get an understanding of the basics of the property.
- How many bedrooms
- How many bathrooms
- How many square feet
- How big of lot
- View or no view
All of these items are important in creating the comparables “Comps” to your property, and comps are what drive your property end value with the appraisal when you go to sell the property when you are done with your rehab. Here are some key factors in finding your comps in your geographical region.
- Must be in same city
- Must be in same zip Code
- Can not cross major roads or freeways
- Conforming development
- School district is the same or similar
- Within 1/2 Mile (If required within 1 mile, but not the best practice
So you have the properties in the region with the same physical features and geographically they match as well. That is great, but there is more to be done here to get an accurate valuation. Next you need to take only the SALES for the region, not Active listings or Pending listings only the Sold properties. Your VERY best comps are going to be 3 months old and your second level comps will be 6 months old.
Now some areas are sparse and hard to get a lot of sales information, this is a pro and a con at the same time. Low sales in an area means you will have less competition when you go to sale, which is a PRO. However, it will be difficult for your buyers and the eventual lender to value the property when you go to sell it or are in escrow. This leads me back to my last paragraph, 3 month comps are best because the appraiser for your property will be able to use them when you go to sell the property because they should be less than 6 months old at that point. If they are between 3-6 months old when you buy the house they will likely be over 6 months old when you go to sell and the appraiser will not be able to use them for their report.
Next, you must be able to envision the property when it will be complete. You have to establish what amenities you have and what amenities you will be adding. It can be very hard to envision what the product will be but it is important to create that vision, which you can do in an executive summary (Don’t know what this is, join or free challenge to learn) for the project. To give a quick example, this is a video of the patio in the photo above, crazy transformation huh! If I didn’t know what we were going to create I wouldn’t have been able to create an appropriate ARV for the property and may have missed the opportunity.
So you have similar houses in your geographical area that meet all of these criteria, so now what? Now you need to see which houses are highest and best value for the end buyer. Now what this means here is what houses have been “Flipped” or have been taken care of and updated by the previous owner. Why is this so important? Well, the reasoning behind this is quite simple. Once you purchase the property you are looking at it will be a COMP for the neighborhood, correct? The answer is Yes and No, Yes it will be in the neighborhood and meet many of the criteria. No it will not be a comp because it is a distressed property and is not comparable to a home that has been Rehabbed/ Flipped.
Once you have these properties taken out of the mix you can start assessing what it will require to reach the value you will need to reach the ARV you are predicting. This means you need to look at what the house “Must Have” in order to reach the value you are coming up with. This could be
- Brand new Kitchen with new counter tops
- Master bathroom with complete remodel
- Clean landscaping
- New Paint
- New flooring throughout home
Every neighborhood is different in what they consider a requirement for hitting a price point. Just because you have done a project that had an amazing kitchen and all the upgrades you could want, doesn’t mean that is what you need to do at the current property. The name of the game is to do the least amount possible to achieve the highest return. That does not mean you skimp on everything what that means is if you don’t need it you don’t add it, or if you can use a cheaper item and achieve a similar sales price you use the cheaper item.
Lastly, be warned never use PRICE PER SQUARE FOOT to evaluate a comp and value for an area. Here are a few reasons why
- PPSF for a neighborhood includes the distressed properties
- Properties with pools or large lots will have a higher PPSF because of this, not because of square footage
- Conversely homes without this will have a lower value and skew the comps
There are many reasons to avoid this but the main reason is because it is lazy and you are about to make an investment of Thousands of dollars. You need to know like the back of your hand what sales and why and the only way to do that is to look at the comps and see exactly what made each one sale. Taking PPSF as your metric does not protect you or your investors hard earned money from going into a losing property. Take the time and get it right and reap the rewards!
Andrew T Greer
CEO Better Tomorrow Group
Andrew is an active investor, speaker, Realtor, serial entrepreneur, and educator in all that is Residential Real Estate. If you would like a copy of his book for free follow this LINK. If you would like to follow him on Social media you can find him on Instagram @beastmoderealestate and @bettertomorrowgroup on Twitter/Periscope @TheBTGRoup and Facebook at Better Tomorrow Group.