Making money investing in real estate really begins with determining the value of the property. There is often a lot of confusion, especially for new or budding real estate investors, about determining the true value of a property for resale. This is particularly true for single-family homes. The maximum amount that could be expected to be received for a given property is called the ARV or Post-Repair Value. As you embark on your real estate investment career, you will find that inaccurate property values can have multiple repercussions, none of which are desirable for long-term success. This is even more true if you want to wholesale properties. Overvaluing a property makes you look inexperienced and could eventually lead to a loss of credibility with your buyers. Worse, your buyers could take advantage of your inexperience and exploit it, or worse, you could undervalue your offers so much that you would leave huge profits on the table.
As an example, my first wholesale deal was an older brick single-family home in Columbia, South Carolina. A hot lead came from an extremely motivated salesperson. They lived out of state, had taken advantage of various local contractors, and decided to cut their losses. The sellers wanted $ 10,000 for the house and agreed to pay back taxes and closing costs as well. It sure sounded like a great deal and I figured if I couldn’t make this work maybe investing in real estate might not be for me. Immediately after signing the contract, I called an investor who did a lot of remodeling in the area. Now he had valued the house at $ 115,000 based on some nearby houses that sold for $ 120,000 each. They were a bit larger in square footage and I found their sale prices on Zillow.com so I felt pretty confident about my ARV. My house needed a lot of work in the kitchen and outside, but it was in good condition 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 me how I had determined the value of the house and I showed him the other two houses on the same street. At the time, this investor informed me that these were new homes, built in an older style befitting the community. Wow, it quickly became apparent that the most realistic ARV for my home was around $ 95,000. Fortunately, my deal was so good that I really couldn’t lose any 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 for determining the ARV or post-repair value of residential real estate. This is a must if you want to become a successful RE investor.