If you are a rehabber, one of the skills you need is to be able to estimate your rehab’s after-repair value accurately. It’s essential in understanding your deal’s profit potential. Make a mistake, rely on wishful thinking or count on appreciation and – poof! – you are lucky to get out by the skin of your teeth. If you are planning to work with a hard money lender, your rehab’s after-repair value (ARV) becomes a part of underwriting. Hard money lenders base their loans on the after-repair value and not on its purchase price or as-is value. So another reason to know how to estimate your rehab’s ARV correctly is to know how much of a loan you can qualify for.
after repair value
Let’s not beat around the bush. The best source of real estate information is the Multiple Listing System (MLS). Fortunately for the licensed real estate agents and unfortunately for the real estate investors who are not licensed, only realtors have access to it. The good news is that today you have more information than ever floating around. It might be not as nuanced as MLS’s, however, if used correctly, it can help you determine your rehab’s after repair value without a realtor.
As a hard money lender, I have deep respect for the hard work and hundreds of hours our borrowers put into each of their rehabs. Some of that work is exhilarating – think about getting that contract signed, especially when the price is right! Some of it is tedious – pushing through the county bureaucracy and dealing with inspectors. Some of it is downright maddening like when your contractor is dragging his feet or slams you with a change order. When all this hard work is done and your property is about to go on a market, we know you feel like breathing a sigh of relief. But wait. You’re now facing your final challenge – pricing your property right.
Investing in real estate is a fantastic way to supplement your income or to build long-term wealth. Like with every other business though you’ve got to keep your eyes on the profit. When estimating rehab costs you need to account for three major components: the price you’ve paid, the costs you’ve incurred during the renovation process and the sales price that your property fetches on the market. Our previous blog installment highlighted common pitfalls in evaluating the after-repair value of the property. Today’s article is focusing on major mistakes in evaluating the costs of owning and rehabbing your investment property.
In real estate your make money when you buy. What it means that you need to put a property under contract at a price that will allow you to make a reasonable profit after the costs of owning, renovating and selling that property. The process of estimating these moving parts might be better described by the former Secretary of Defense Donald Rumsfeld: “There are known knowns; things we know we know… There are known unknowns – things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know.” I’m sure he wasn’t referring to the real estate rehab business, but you get my drift.