hough the housing market MAO = ARV – Renovation Costs –
is shifting towards the BSH – profit margin
buyer, the shifts are
moving slowly and many investors The ARV
continue to make good profits by
flipping real estate. Flipping is The after-repair value (ARV) is
a relative new term for buying the value or worth of the homes
homes that are “fixer-uppers”, for sale after renovation. It is
renovating them, and then selling the “possible price” you may
them at a profit. With flipping receive on the sale of the
still bringing in decent profits, property.
though not as high as they once
were, beginners are still To determine this value, you must
entering this investment arena. determine what prices comparable
homes for sale have sold for
The one question that is most within the last 6-to-12 months
often asked of realtors (your realtor may be able to
concerning such property is: “How assist you). The other homes for
much should I pay for it?” The sale should be located within one
answer is not an exact science mile of the property in which you
and is different for all homes are interested.
for sale.
The previous homes for sale are
The most common formula used is comparable only if they have
the Maximum Allowable Offer similar characteristics to the
(MAO), which gives you what the property you wish to purchase.
homes for sale are worth after They should have the same or
renovation. It is calculated as closely similar square footage,
follows: similar features in the number
and types of rooms offered, the
age of the buildings, the style to the other homes for sale?
of architecture, and similar
neighborhoods. View the recently Before you even begin looking at
sold homes for sale as a homes for sale, you should have
homeowner. For instance, no researched the going cost ranges
matter how beautiful the home and for the most common renovations
surrounding environment, if the (big and small) in your area, as
neighborhood has a high crime well as the most common but
rate, the property will not sell unexpected renovation costs. You
for as much as another home in a do not have time, in many cases,
lower crime area — even if it is to get bids on all renovations
located less than a mile away. before making an offer. Having
most of these costs beforehand
At this point, ignore the means you only need call for
difference in the conditions of costs on a few renovation needs.
the homes for sale. After all,
you will be renovating the Apply the highest and/or most
property you purchase to bring it probable cost range to each
up to similar conditions as those renovation requirement, total the
already sold. costs, and you have your
renovation costs.
Renovation Costs
BSH Costs
These are the costs to renovate
the property in order to turn a The buy, sell and hold (BSH)
profit. Carefully look at the costs are many. After you have
property as you view it with your flipped a few homes for sale, you
realtor and take notes. What will be able to use a percentage
needs to be done to make this of the ARV to determine these
property comparable in condition expenses.
on your investment. Remember, the
For buying and/or selling, you MAO is the maximum amount that
will incur fees for appraisers, you will offer on homes for sale.
attorneys, title search and That does not mean you will make
insurance, realtor commissions, that offer; it only means that
loan origination fees, closing you will not make a higher offer
costs, debt collection (if you than the MAO — no matter what.
sell on contract and a buyer
defaults), and so on. Holding Your goal is to offer the lowest
costs include utilities, amount that the seller will take.
insurance, taxes, lawn care and This should be far below the MAO,
such that you incur between the ensuring you a higher profit
time you purchase the homes for margin. The MAO is the deal
sale and the time you close on breaker. If you must offer more
the properties. to purchase the property, then
walk away from it and look for
Profit Margin other homes for sale for your
investment.
This is the least amount of
profit you are willing to accept
About the Author:
John Harris is an expert researcher and writer on real estate topics such as economics, credit improvement tips, home selling advice and home buying preparations. For more information please visit San Diego Homes for Sale
Read more articles by:
J Harris
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