Who Knows?

Disclaimer: We hate long, wordy blogs, but sometimes it’s necessary. If you’re not interested in knowing what to expect in selling and/or buying real estate, you can stop here. We’ll have plenty of short blogs with reno photos in the near future.

Our last flip is complete and sold! But, the selling and closing process didn’t go as planned. In pricing the townhouse, we consulted our realtor. The list of relevant comps was small. Ultimately, we settled on a list price of $179,900 considering the average price-per-square-foot of comparable homes paired with our complete home renovation, including a new HVAC.

We received a full-price offer with exceptional terms. And, the renovated townhouse right next door also went under contract for above their asking price of $174,000 (a property with one less bedroom).

To make a very long story short, neither of the properties appraised for agreed price. Our property appraised at $12,000 less than asking at $168,000! And, the smaller property next door appraised at $167,000 (only $1000 less than ours).

So, who knows what’s realistic in determining an ARV (after renovation value)? Determining the ARV is key in our business, because this number determines what we can bid at the property auction considering the desired renovations.

Here’s what we learned:

  • Cash buyers are gold! If no loan is needed to buy the property, both buyer and seller can proceed with the price that they both agree is fair.
  • If a buyer needs a bank loan to purchase the property, why wouldn’t the bank give a loan on the mutually agreed price? Well, the bottom line is that the bank is technically buying the property. The bank is taking the risk. Considering the housing-market disaster around 2007, financing has never been tighter.
  • With tons of new regulation in home financing and tight Fannie Mae (Federal National Mortgage Association) requirements, completing the loan process is a pain in the ass. For example, just recently Fannie Mae began providing its own comps to appraisers, and appraisers must use those comps or provide solid reason not to.
  • Banks use qualified and unaffiliated appraisers to determine the value of each property needing a mortgage. With new regulations, appraisers have even less subjective criteria to judge a property. Appraisers find themselves under the microscope with these federal regulations.
  • Here’s the disappointment for a flipper…sometimes it’s more profitable to not renovate!
    • Even though we provide buyers with a beautifully designed, move-in ready home, we may lose money to a low appraisal.
    • Beautiful upgrades help a home stand out and entice someone to buy. But those updates don’t translate into a higher appraised value.
    • Appraisers look at the condition of the home, not the high-end countertops or stainless-steel appliances. A newly renovated home will score a higher quality rating over a home with holes in the sheetrock, but that higher quality rating translates into only hundreds of dollars in increased value (not thousands).
    • Even though we replaced the HVAC, it does not add to the appraised amount. A new HVAC system, new roof, new paint are all considered home maintenance. An old air conditioner that works has the same value in appraisal as a brand new system.
    • In an attached home, like a condo or townhouse, price-per-square-foot should not be used in calculating your home’s value — even if you’re comparing your townhouse to your neighbor next door. For example, appraisers consider bedroom square footage as “dead space.” In other words, the cost to build a three-bedroom townhouse isn’t that much more than a two-bedroom. Just some electrical, sheetrock, and flooring. This explains why our property only appraised $1000 higher than the smaller town house next door.

The foundation of our business model is “more than a basic flip.” We want to incorporate beautiful design choices in the homes we renovate. But, we must consider the impact those choices have on our bottom line. We will continue with an acute focus on the front end: Acquire each property at a price low enough to allow a renovation that delivers the high quality and high design for which we’re known.

Blog note: Our posts represent our experiences and opinions only. If you choose to do your own renovation, buy or sell a house, definitely consult the advice of an expert including licensed contractors and/or realtors.