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4 Steps for Evaluating House Flipping Deals to Ensure a Killer Profit

Proven methods and essential skills to help you analyze properties, make offers and flip houses like a pro!

I’ve said it before and I’ll say it again: knowing how to evaluate a deal is the key to success in this business! Yet very few in the industry (investors, realtors, appraisers, etc.) ever truly master this valuable skill. Believe it or not, after reading this post, you will probably understand this skill even better than most appraisers!

You could “find” all the houses in the world but it wouldn’t do you any good unless you know how to properly evaluate them and make offers that will help you ensure an House Flipping profit. In fact, if you don’t know how to properly evaluate and make offers on properties, you could get yourself into a LOT of trouble!

Unfortunately if you watch any of the house flipping shows on television they do not teach you how to do this! In fact they leave out many of the expenses which can cost you BIG time if you are not taking them into account upon your initial property analysis.

Understanding this principle separates you from being a “speculator” — someone who is just buying a house in the hopes that it will go up in value — to a true “investor” — someone who understands expenses involved in real estate and doesn’t just make wild guesses about the future. The true investor takes very calculated and accurate “risks” and understand exactly how to create a pretty significant return on their investment.

Step 1: Determine the ARV (After Repaired Value)

ARV is an acronym commonly used amongst real estate investors. It stands for “After Repaired Value” and is basically what the property will be worth after repairs and upgrades have been completed. Determining the amount of money the property will be worth once you finish rehabbing it, is always your #1 step in the deal evaluation process.

Once you know the amount people will pay for your property, then you can determine all your other expenses, figuring out the optimal place to start to make a decent profit. If you don’t know your ARV then you have no place to work back from.

You can think of the ARV as the finished picture for a jigsaw puzzle. When you know what the puzzle is supposed MJS Property Investments - property restorations to look like you can put the pieces in the correct places which creates a picture of profit. Otherwise you might spend time and energy just to end up with something you don’t want to see!

In order to accurately determine the ARV you will need to look at Comparables or “Comps“. Comps are recently sold (or are up for sale) houses similar to your subject property, in the same general area. These are used to determine the “going rate” for houses in that area and are a really good indication of what your house will sell for.

To access data for comparable properties you can use a paid or free service such as Zillow or Redfin, but to really get the most detailed information you will probably want access to the Multiple Listing Service, or MLS — a service which provides almost every detail on a property that is up for sale or has recently sold.

In order to access the MLS you will either need to work with an agent, become an agent yourself, or work with someone who can get you access to the MLS.

The first step with the MLS is to look for rehabbed “standard” sold comps which are similar to what your home will be like when it is complete. These comps are very easy to spot. They will have upgrades, nice pictures and will shine above other homes. These comps should be given the most consideration when determining your ARV.

Next, depending on how many “standard” sold comps you find, you may also want to take into consideration other recently sold comps, such as short sales or bank-owned properties (REOs) which have been renovated or are in good condition.

As a general rule look for homes that have the following criteria:

• They sold in the last 90 – 120 days.

• They are within ½ mile to ¾ mile from your subject property

• They are close in size, square footage, bed/bath count and age.

• They are in a similar neighborhood.

After looking at recently sold comps, then you can expand your search to comps which are listed (up for sale) or pending (under contract with a buyer but has yet to close).

Listed properties will let you know what you will be competing against, so if you see rehabbed houses that are not selling you wouldn’t want to value your home for more than those listed.

Pending properties might give you an idea of future values, but keep in mind that these might not actually sell for the stated price.

I would give little to no consideration to listed or pending short sales (a house being sold for less than the owner owes to their lender). This is just a number an agent threw out in an attempt to get an offer on a property. Often times the bank hasn’t even done their analysis on the property and there is a good chance the short sale lender will never approve the sale of the property at the listed price.

Although you want to focus primarily on properties that have been fixed up, also pay attention to those in a similar condition to your subject property. If there are several comparable properties which have recently sold or are listed for less than your calculated offer, this might indicate you are overpaying and you might want to reduce your offer accordingly.

It is also a good idea to check the tax records to see what other investors paid for the homes they purchased in that area.

different city, school district or across a major barrier such as a freeway, river or railroad tracks. Also take into consideration swimming pools, garage size, lot size, views and other upgrades so you can adjust your value accordingly.

Finally you can consider current market trends and seasonal price changes for indications on both the resale value of your property, as well as the best time of years to buy or sell.

Now, these are a lot of things to keep in mind when determining your ARV! And although there is no exact formula for value determination, here are some scenarios that may help.