Determining what a house is going to sell for when you put it on the market for sale is one of the most important skills an investor must master in order to succeed with flipping houses. Unfortunately, most house flippers rely simply on appraisals or feedback from listing agents and ignore several other very important factors that must be considered. You're about to discover a formula for predicting final sales prices developed over nearly 20 years and 1,000s of deals. When you apply this formula correctly, you will predict final sales prices better than ever before, which will make you more money and help you avoid making mistakes.
House Flipping Game Changer
Determining what your home will sell for when you put it on the market is one of the most important skills you will ever master as a real estate investor. Predicting correctly is what makes or breaks you in house flipping because it enables you to make the right decisions, basing your decisions on the foundation of the correct prediction. However, when you do this wrong, you can lose a fortune.
I've had the privilege to be a part of thousands of deals predicting final sales price. My entire financial fortune has been based primarily on the fact that I predict correctly almost all the time, because that's the only way that a house flipper can make money. When I make the wrong move, I lose a lot of money. So, as house flippers we must predict wisely.
Misconception: Value vs Final Sales Price
People often ask themselves the question, “What's my home worth?” They try to figure out the after repaired value, otherwise known as the ARV. This is not always the same as the final sales price. That means you need to stop using language like ARV and instead use the term final sales price; think in terms of what it will sell for.
Even though some of my older videos use the language of value, I've tried to discipline myself not to because what we're talking about here is final sales price. Don't ask yourself what the house is worth. Ask yourself what it will sell for.
Formula for Predicting Final Sales Price
I've developed a powerful formula that I use to determine what a property will sell for when it goes on the market, whether it's fully fixed up or it's as is. This formula for predicting final sales price is about putting on five different hats or looking at a deal from five different perspectives.
Hat #1: Detective
The first perspective you need to have when looking at a property is that of a detective. You will need to look at the public records on the property and research everything about the property:
- Closed Comparatives
- Active Comps
- Withdrawn and Expired Comps
- The Purchase Price
- When it was purchased
- What kind of loan did was used?
- Did they even use a loan?
- Where did that purchase come from?
- Look at previous MLS listings: did they buy it as a foreclosure seven years ago, or was it as a retail sale?
You need to dig deep inside the property so that you know more about it than anyone ever has, including the original owners. A helpful tool and shortcut in this process is to use a software called PropStream. I’m a huge proponent of this. In fact, I have a video that details all the benefits this software has for real estate investors. If you do not have direct MLS access, PropStream can sometimes help you with that. However, you still need to have direct MLS access to get the comparables directly from your local MLS where that property's located.
Becoming a detective also means investigating the property itself. Ensure you have the correct square footage, the correct number of bedrooms and bathrooms, and all the other details that come with reviewing a property. This is important because often the public records are wrong. Sometimes a previous MLS listing is also wrong because the seller made some additions to the property that were un-permitted. So, the first hat you’re putting on is that of a detective.
Hat #2: Appraiser
The second role you need to play is that of an appraiser. You need take the closed comps (and in some instances active comps), and clearly understand the difference between your property (which is called the subject property) and those comparables. You need to put together what would be considered an appraisal report.
Some of you can pay for an appraiser to do this. However, I would argue that the best real estate investors in America are those that can be as good of an appraiser. That said whether you buy it or do it yourself, you put on that appraiser's hat.
What does this do for you when trying to predict final sales price? It tells you what it will possibly appraise for and that plays a key role if you're selling to someone who's getting a loan.
- Selling to a Retail Buyer. Even if the property can sell for more, if it can only appraise for $180,000, it's going to be tough to sell for more. If all your buyers are FHA or other loan buyers, they will need to go through an appraisal.
- Flipping an as-is property to an all-cash investor. This is not as applicable. That said, you still want to do it.
Drawbacks of Appraisals
There are weaknesses in appraisals as to why this is not the end all of what it's going to sell for. In fact, I have a video called 3 Myths of Real Estate Appraisals that talks about three weaknesses of appraisals that you need to be aware of. These are lessons learned from the real world of real estate investing.
Lesson #1: If you are buying an appraisal for a deal you're going to flip, DO NOT tell the appraiser the sales price. If you tell them what the sales price is on the contract, it’s going to carry a lot of weight when they’re making their adjustments and selecting comps.
You see, the appraisal is based on both comparable sales and the adjustments they make. These can vary widely. If you add a sales price to the appraiser's file, they will adjust to get closer to that sales price. This doesn’t apply if you're getting a loan. The lender will require an appraisal and they're going to report the contract sales price. But appraisals do not always predict final sales price because they're based on closed comps.
Lesson #2: Not only can appraisers be biased by the contract sales price, they don't always include all of the other things that are important when selling a property. For example, you will never see on an appraisal report anything related to landscape. They don't give any value for gorgeous trees with a huge canopy, or fruit trees, or any other long-established landscape. Established landscape can be of great value to a prospective buyer. To purchase a large Oak tree, can be $4,000, and that is just the cost to have it planted. It doesn't mean that it will survive. There's huge potential value in gorgeous trees for perspective buyers, but that value is not always reflected in an appraisal.
In summary, your role as appraiser is to determine what you think the property will appraise for based on the most reasonable and rational comps, and based on the most reasonable and rational adjustments that most appraisers in your area would make.
Hat #3: Listing Agent
You also need to look at your property through the lens of a listing agent. There are two things they focus on that an appraiser doesn't:
1. Active Comparables
These are properties already on the market that you must compete with and that ultimately play a role in what yours sells for, even if it would appraise for more. If you put that property on the market, do you have fourteen houses just like yours to compete with or are you the only one on the block?
Right now, during COVID 2020, we have the lowest inventory levels in recorded history. So basically, there is no competition. Buying a house right now is kind of like getting toilet paper was a couple of months ago. One of my apprentice program graduates texted me that he had 80 showings in 72 hours on one of his flips. He had 32 offers and ended up selling it for $30,000 above list price.
Marketability refers to a property’s ability to be sold at its highest and best. Your property may be in beautiful condition and be perfect from an appraisal report perspective, but if you have a marketability problem then you can't sell it for full value. Here are some factors to consider when thinking about how marketable your property is.
Tenant Occupied: A perfect example of this right now is if you have a property with a tenant, but its best use is as an owner-occupied single-family home. The tenant has decided they aren’t willing to move out until at least 2021 because there's an eviction moratorium. If you put that property on the market while it is tenant occupied, you will have a lot of trouble selling it to a retail buyer. So even though it may be appraised high because it’s in beautiful condition, you can’t sell it for full value because you have a marketability problem.
Staged vs Not Staged: I have another teaching on this topic of marketability. I'm a huge fan of digital staging as opposed to actual physical staging.
Showings: Is the house easy to show? Are the showings convenient or can you only set up showings on Saturdays? That's a marketability issue and it's something you need to consider.
While wearing the hat as a listing agent, every potential marketability issue needs to be considered because this also plays a major role. When you're studying active comps, there will be one or two that are puzzling you because it hasn't sold yet. Listing agents will sometimes drive over to those active listing to see why they haven’t sold yet. So, put on your listing agent hat and go check it out.
You can get feedback from listing agents, but they can be biased because they’re trying to get your contract. They will usually shoot the number a little high because that's what they think you want to hear. You need to be brutally honest when you're looking at this from a marketability and an active comps perspective. We've always been a huge fan of doing flat fee listings when we list properties. So, we're not getting feedback directly from a listing agent who's going to potentially list our property.
Hat #4: Real Estate Investor
This is who you are, and you need to put on your real estate investing hat at this point in the process. However, you need to put it on from a slightly different perspective and look at the downside.
- What could go wrong?
- How could things not go as planned?
As a real estate investor, you need to be constantly thinking about what could go wrong. Yes, you have optimism and hope for the best, but you look at what the worst-case scenario could be as well. How do you do that?
Study the Withdrawn and Expired Listings
I can't tell you the number of people who never do that in house flipping. You need to look at expired and withdraws to see what went wrong. Which listings didn't sell and why? If all you do is study the active and the closed properties, you're missing out on this huge body of knowledge that can tell you what could go wrong.
For example, if a property was listed for 200 days at $199,000 and it is basically identical to what your property will be when you fix it up, you need to know why it didn’t sell. To find out you could call the listing agents that handle those expired withdrawn listings and ask them what happened. I've received calls like that before. “Hey, you listed a property about six months ago. It never sold. Could you give me some feedback on that?” It's so intelligent. Your money is on the line here. You need to face the truth that something could go wrong with your prediction.
This is also when you can catch problems that may have been missed as an appraiser or listing agent. Where are the potential holes? What didn't work out? How do you find that out? By studying the expired and withdrawn listings.
Hat #5: Judge
The most difficult perspective for most real estate professionals to have is that of a judge. What is a judge supposed to be? Unemotional and impartial. Now you need to take all the information from all the different hats you've already worn and bring that information together.
- Remove all emotions so that you're not attached to the outcome. You can’t have any emotion related to wanting to do a deal because you really need to do a deal.
- Remove all bias and partiality. Such as a bad string of luck the last three deals and your predictions were way off. Or perhaps your last three predictions were perfect and now you have an arrogance about you. You must set all that aside and be right in the middle; neither pessimistic nor optimistic.
As judge you need to take all this information and finalize what your prediction is going to be. Take all that you've learned and make a decision. This includes writing down your prediction and why you think it will sell for that amount. That way, when you put it on the market and it doesn't sell for that amount, you can look back at what your thinking was. Then you can determine if you made a mistake on missed some things.
I've been doing this for almost 20 years now, and I have learned and learned from my mistakes. And each one of those gets cataloged in my brain and in my external memory system, so that I'm able to go back to it. Each new experience is compounded on the next one. But if you don't make the decision and then write down why you made the decision, it's a lot harder for you to grow from those mistakes.