Real Estate Terms Archives - Flipping Houses

In house flipping, ARV or After Repair Value is the most important number. You base all your decisions on after repair value, including purchase costs, repair costs, closing costs, and potential profit.

Your ARV is essentially an appraisal value of what the property will realistically sell for quickly after it is renovated and beautified. Just like a real estate appraisal that a bank requires before they lend money on a property.

ARV - After Repair Value | Flipping-Houses.org — ARV – After Repair Value

Only in the fix & flip house world, you need a firm after repair valuation number before you buy the property. It’s very similar to a CMA, or Comparative Market Analysis.

After Repair Value Factors

Neighborhood – How nice are the other homes nearby. Schools, shopping, etc.
Location – How attractive and convenient is the location. Roads, power lines, trees, etc.
Square footage – How much heated square footage will be in your renovated home.
Curb appeal – How much wow factor is visible from the street.
Size, layout, and type of house – Certain home styles and layouts are more appealing than others.
Interior quality – Flooring, paint, lighting, carpeting, walls, doors, windows, etc.
Kitchen upgrade – Cabinets, counter tops, layout, breakfast bar, quality of materials.
Master suite – Size, layout, master bath enhancements
Number of bedrooms – More bedrooms means more value per square foot.
Number of baths – More bathrooms (updated ones) means higher prices.
Get 3 comps of sold properties in this neighborhood (not one a mile away)
Get 3 comps of nearby listings for similar upgraded properties

In a house flip, you never want to exceed 70% of ARV for all your costs – purchase, repair, carrying costs, and sales.

In fact, most lenders will only loan you 80% of the 70% of the ARV number. Many will also require a Comparative Market Analysis to compare with the after repair value number.

Why? Because they know that operating on skinny margins is bad business and if something goes wrong – and something ALWAYS goes wrong – then you will quickly be faced with losing money on the deal.

Tried & True After Repair Values

Purchase Costs – Your fixer upper should cost 40% to 60% of potential ARV.
Renovation Costs – Your repairs and upgrades should be 20% to 30% of ARV.
Carrying Costs – Your loan costs should be no more than 8% of ARV.
Selling & Closing Costs – Your real estate fees and closing costs are roughly 7% of ARV.
Total Costs – Your total expenditures should not exceed 70% of ARV.

The lower the house cost as a percentage of ARV, the higher the repair costs will be. If you are buying a house to flip at 60% of ARV, then it should be mostly cosmetic repairs and upgrades, not a full kitchen & bath gut job.

So, pay close attention to your ARV numbers going in on the purchase and during the renovation phase. Don’t think that you can make it up elsewhere because you may end up overpricing your house flip and end up incurring substantial carrying costs instead.

A BPO or Broker’s Price Opinion is the process used by financial institutions to determine the potential selling price or estimated value of a real estate property. A BPO is generated by a hired real estate sales agent working for the bank or mortgage holding company and is most often used in short sale situations to establish an initial sale price range.

BPO real estate terms

When a BPO is used to assess a property’s value to establish a selling price, there is usually a preliminary BPO and an interior BPO. The interior BPO is the most important because it evaluates the living space, not the exterior appearance or the neighborhood comps.

Banks can dictate in their BPO order what comps can be used and establish a proximity range where the comparable properties may be located. Finding the right comps can be a problem in a lot of areas and those choices greatly impact what the lender thinks the property should sell for price-wise.

The second part of the BPO, the interior evaluation, is usually more favorable to the bargain hunter, aka house flipper, because a property can be greatly reduced in price by a low score here. Haphazard paint jobs, incomplete renovations, substandard living conditions, non-working appliances, low-quality kitchen cabinets and outdated baths will all drive the BPO price down.

A broker’s price opinion is an informed opinion of value prepared by a licensed real estate agent who has valuation knowledge about the area in which the property is located. Banks use this info for the purposes of placing value on foreclosures, resales, and loan modifications.

They do it because the cost of a BPO to the financial institution is $50 to $75 vs. $350 to $400 for an appraisal. Banks are required to use a licensed appraiser when underwriting a mortgage loan. Appraisers are also licensed by the state in which they operate, have ongoing educational requirements, and also undergo additional scrutiny if they are doing appraisals for government-backed loans.

The overall quality of a broker’s price opinion should be thought of as a ballpark range. It depends on the competency of the person performing the analysis. A real estate broker with many years of experience can certainly be as accurate as a certified appraiser.

It’s important to note that a BPO is not acceptable for underwriting a loan. It’s a selling evaluation tool, not a purchase requirement.

As a house flipper seeking a bargain price on a short sale deal, you need to understand that everything is negotiable up to a point. Never offer asking price. Start low and don’t overspend just to get the property. Walk away if you can’t get it for a price where the numbers work for you.