You ran your first appointment, came up with a rehab budget and you are ready to calculate the offer. Hopefully you asked the seller about price and got something out of them. This will give you a baseline of where they want to be. The first step in calculating an offer is checking comps and coming up with the ARV.
Check “After Repair Value” (ARV) Comps
If you have access to the MLS, use that. If not, Zillow works well too. I’m not a licensed realtor and I don’t have access to the MLS so I use Zillow. Type in the city and state where the property is located and zoom in on the exact location. This is where it’s very important to “know the neighborhood.” This is especially true in urban areas where neighborhoods can change quickly from good to bad. In these areas, try to find comps as close as possible to the subject property. Preferably within a quarter mile. In rural areas, it’s okay to extend the radius out to 1-3 miles or more.
In the upper left corner, you will see a drop-down menu where you can change from “listed” to “sold” properties. That’s what we want.
Zillow Comps: Sold in Last 6 Months
From there, click on the “more” button and select “sold in last 6 months”. If you are in a larger market with more recent home sales, you can select “sold in last 3 months” for more accurate data. If you are in a smaller market with much less recent sales activity, you may have to go back a year. I would not suggest going back more than a year for recent sales since the market can change quite a bit in a year.
Find at Least 3 Good Comps
We want to find at least three solid comps. The more the better, but three is a good benchmark. Again, in more rural areas it will be harder to find comps that are similar to the subject property, so estimating the ARV on these properties will take more practice.
Try to find properties with similar characteristics. Look for houses that have the same number of bedrooms, bathrooms and similar square footage. If you can’t find anything that is an exact match, that’s okay; but we’ll need to consider those differences when calculating our final ARV.
Look for the nicest houses that sold for the highest price. Recently flipped houses are even better. Two giveaways that it was a recently flipped house are: 1) it was bought at a lower price within the past year and sold for a much higher price, and 2) you can tell the house was staged by looking at the pictures.
Let’s run through an example.
123 Main St.
1,500 sq. ft.
3 bed, 2 bath
1 stall garage, small basement (can’t be finished)
You determined it needs $30k in repairs.
555 Bridge St
1600 sq. ft.
4 bed, 1.5 bath
2 stall garage, small basement
Looks like it was recently renovated by a flipper. Looks really nice.
Sold three months ago for $245,000.
175 Main St.
1200 sq. ft.
3 bed, 2 bath
No garage, small basement
Looks like solid retail condition, very clean. Doesn’t appear to be a flip, but very well-maintained home.
Sold two months ago for $205,000.
600 Bridge St.
1800 sq. ft.
3 bed, 1.5 bath
2 stall garage, larger basement (partially finished)
Really nice home, looks like sellers or investors made some improvements recently, almost as nice as 555 Bridge and larger.
Sold last month for $250,000.
Compare the Comps and Determine ARV
Based on these three comps, what would you estimate the ARV to be?
Let’s take a closer look. Comp 1 has one additional bedroom and 100 more square feet, so we need to consider that. It also has a 2-stall garage versus a 1-stall garage. This was also the nicest house in the neighborhood that sold, so this is definitely the high end of the ARV.
Based on these factors, I would subtract 10-15k from the sold price because our subject is a little bit smaller with a smaller garage. ARV adjustment $230-235k, call it $232,500.
Comp 2 has the same number of bedrooms and baths, but it’s smaller (1200 sq. ft.) This one also has no garage and isn’t as updated as Comp 1. I would add 10-15k to this comp because it’s smaller and another 10k for the lack of updates. ARV adjustment $225-230k, call it $227,500 (notice a trend here?).
Comp 3 is the largest comp with 1800 sq. ft., has a half bath instead of a second full bath so maybe a slight adjustment there. Also has a 2-stall garage and larger, partially-finished basement. It’s also almost as nice as Comp 1 in terms of cosmetic appearance. Here’s how I would view this one.
Subtract 20k for additional square footage, larger garage and basement. Add back 3k for the half bath (since the subject property has a full bath). I probably wouldn’t adjust any further, even though this was not as updated as Comp 1. But it’s also larger so I want to be conservative here. ARV adjustment $233,000.
Now let’s take the mean average of all 3: $232,500+227,500+233,000= 693,000 / 3 = $231,000. This is your ARV.
This is the realistic after-repair value an investor should get if he/she takes on this flip and does a great job.
Write this down: The after-repair value is the most important factor in determining your offer. If you screw this up, your numbers won’t work. That’s why it’s so important to get really, really good at evaluating properties and checking comps.
I challenge you to spend a half hour each day for the next 30 days practicing this. Get on Zillow and make up a subject property in a specific area with a hypothetical repair estimate. Find three real comps in that area and practice estimating ARV.
Calculating the Offer
So, we have our ARV. Now what? Use this formula to calculate your offer:
ARV x .70 – Repairs = Offer Price
$231,000 x .70 = $161,700 – $30,000 repairs = $131,700
Remember, $131,700 is your offer price. If you think the seller will negotiate, you should start lower, at $120,000 or $125,000.
Now, if you are in a competitive market, you very well might be able to get away with using .75 as a multiplier. $231,000 x .75 – 30,000 = $143,250. This would give you a 12k buffer in case the seller won’t budge or is set on a number that’s higher.
Understanding the Multiplier
Watch the YouTube video for an in-depth explanation. In short, the multiplier can vary.
Why .70? This is a multiplier that includes profit/assignment fees, holding costs, closing costs, and other costs of doing business. Occasionally, you can get away with using .75 or even .8 on a flip that needs less work. Quick flips, as we like to call them, can get away with a higher multiplier because investors are ok with making less profit on a project with a shorter timeline.
Large projects / full gut jobs require a lower multiplier such as .65 or .7 to factor in more profit for the house flipper. These projects take time and resources and investors aim for at least 40-50k in profit.
It also depends on your market and how competitive it is. If you are in a large market with a lot of buyers, you’ll be able to get away with a higher multiplier more often. If you are in a smaller market with less buyers, you may need to use a lower multiplier.