Making money investing in real estate really starts with determining the property’s value. There typically is much confusion, especially for new or budding real estate investors, on determining the actual value of a property for resale. This is particularly true for single-family homes. The maximum amount, one could be expected to receive for any given property, is referred to as the ARV or After Repair Value. As you embark on your real estate investing career, you will find that inaccurate property values could have multiple repercussions, none of which are desirable for long term success. This is even more true if you want to wholesale properties. Over-valuing a property makes you look inexperienced and eventually could lead to a loss of credibility with your buyers. Worse, your buyers could take advantage of your inexperience and exploit it or even worse yet, you could undervalue your deals so much you leave huge profits on the table.
As an example, my first wholesale deal was an older brick single-family house in Columbia, SC. A hot lead came in from an extremely motivated seller. They lived out of state, had been taken advantage of by several local contractors and decided to cut their losses. The sellers wanted $10,000 for the house, and agreed to pay the back taxes and closing costs also. Sure sounded like a great deal and figured if I couldn’t make this work, perhaps real estate investing wasn’t for me. Immediately after getting the contract signed I called an investor who did a lot of rehabs in the area. Now I had valued the house at $115,000 based on a few houses nearby that sold for $120,000 each. They were a little bigger in square footage and I found their sales prices on Zillow.com, so I felt pretty confident on my ARV. My house needed a lot of work in the kitchen and outside, but was in good shape for its age (old!).
My asking price was $45,000 for the deal and this investor immediately began negotiating the price down. Since another investor had already contacted me (there were quite a few after I placed some ads), we went to the house together. The second investor asked how I had determined the home’s value, and I showed him the other two houses on the same street. At that point, this investor informed me that those were new houses, built in an old style in keeping with the community. Whoops, it quickly became apparent the more realistic ARV of my house was around $95,000. Fortunately, my deal was so good I really couldn’t lose money. I ended up selling the house for $27,000- and then that investor resold it for $33,000. However, I quickly learned a valuable lesson.
In my next article, we will look at more accurate and reliable methods to determine the ARV or After Repair Value of Residential Real Estate. This is a must if you will become a successful RE investor.