Gauging ARV And Comps The Right Way –...

Hi Moguls, Lex Levinrad back again with my follow-up lesson about ARV, comps and talking with sellers.

In Part 1, we learned the formula to calculate how much to offer a seller for their property. I gave you the formula below and walked through it explaining each step:

After Repair Value (ARV) x 65% - Repair Estimate (RE) = Maximum Offer Price (MOP)

So, head back and check that out so you’re up to speed for today’s lesson, which is about questions to ask the seller, comps and the difference between cash sales and retail sales.

Yay Me, I Understand ARV, Now What?

When a homeowner in foreclosure calls you, thanks to one of your marketing campaigns, the first thing you are going to need to do is simply gather relevant information from them, like:

Their name
Phone number
Email address
Property address,
Needed repairs, etc.

Then, you will need to calculate an estimated After Repair Value (ARV). It is very important to figure out what the house would be worth after repairs are made before you visit the homeowner. I see too many beginners making the mistake of wasting time with sellers who would never sell their house for a price that would make sense.

The 3 most important questions to ask the seller are:

How much do you think your house is worth?
How much are you looking to sell your house for?
Why do you want to sell your house?

Getting the answers to these questions will often let you know if you have a desperate seller on your hands.

If the seller is being vague, then you might have to probe deeper with questions like:

Do you have a mortgage?
Are you current on your mortgage?
How much do you owe?

After asking these sorts of questions, you should have a good idea if the seller is desperate or not and what their situation is.

Remember that your goal is to buy their house at a discount typically around 65% of what the house would be worth after it has been repaired. So, if their house is worth $100,000 and the seller is asking for $100,000, then you are not going to be purchasing their property.

Instead, they should call a Realtor and list their property for sale with the Realtor on the MLS. If you are also a Realtor, then you could offer to list it for them. This is one advantage of being an investor who also has a real estate license.

Know When to Hold ‘Em, Know When to Fold ‘Em

kenny If you want to make money, and they want you to buy their property for cash, then they are going to have to sell it to you at a substantial discount. If the most you are willing to pay is $55,000, like our example in Part 1, and they are asking for $100,000, then that lead is a waste of time (unless you are an agent and can turn it into a listing).

Remember you are looking for desperate sellers. My first two lessons here and here spoke about distressed sellers. Distressed sellers are desperate. They don’t want to sell. They have to sell. I encourage you to check out those lessons, too, to know how important it is to understand the foreclosure process and the foreclosure laws in your state. When you get a desperate seller calling you on the phone from one of your marketing campaigns, then you will need to know and understand what they are going through and how you can help them.

Here’s the thing…

listen Most leads will not be desperate (yet). Many people in foreclosure are in denial. And many leads will simply be curious sellers or agents who are trying to move their listing. But, some leads will be distressed sellers who will openly discuss their issues with you, like their foreclosure, how they got behind on their payments, etc. And it is at this point that you should be trying to figure out whether or not this lead can turn into a deal or not.

And it pays to be a good listener. The more you let them talk, the more they will like you. Part of the reason is because they simply want to be heard. Listening builds rapport. And while they are doing all that talking, you can be researching the property and looking at the comps.

And this is where having a subscription or access to a good comparable sales service that shows you comparable sales of similar properties will really help you.

Correct Comps: Retail vs. Cash Sales

With regard to comparable sales… after buying and selling $50-million worth of real estate over the past 13 years, the best advice I could give you is this: Don’t use free comparable sales services like Zillow, a property appraiser or your MLS for comps.

Why?

Because these services will not show you if the seller is an individual or a bank. And they will not show you if the buyer paid cash or obtained a mortgage.

And it is imperative for you to be able to separate the cash buyers from the retail buyers and the desperate sellers from the regular sellers. In order to calculate and estimate the After Repair Value, you are going to need to see what retail comparable sales are.

Retail sales are sales where the buyer obtained financing and a mortgage to buy the property. This means that there was an appraisal performed on the property. This is what is known as a retail sale. On a retail sale, there is a lender and a loan and a mortgage. You need to be able to separate these retail sales from cash sales.

cash Cash sales have no loan, no mortgage, no lender and no appraisal. (So if your comparable sales service does not show you this (most don’t), then the information is not very valuable.) Because there’s no mortgage, lender or loan in cash sales, the buyer pays - yep, you guessed it - all cash and the seller is always the bank (short sale or REO).

Why is this important? Because if you are trying to calculate how much to offer, wouldn’t you want to know what other cash investors paid for similar properties in the neighborhood?

You need to be able to separate the cash sales from the retail sales. This is VERY important. And so few investors do this or understand it.

I’m gonna wrap up this lesson about comparable sales here. In my next lesson, I will cover the other component of this ARV formula, which is the Repair Estimate.