You may have heard of the over-under in sports gambling. That’s where you bet on whether the combined score of both teams will be either higher or lower than that number. But did you know there is an over-under in real estate investing? That’s where an investor overestimates the ARV, underestimates the scope of work required, and basically pays too much for the property.
You might be asking what’s the similarity here? The answer: Whether you are gambling on football or gambling on your deal, you can lose money doing both. And with real estate, the losses can be much greater than some insignificant football wager. Still many investors don’t even realize they are doing this, let alone think they are gambling. Let’s break down how this happens so we can understand how to avoid it.
Overestimating the ARV
Here are the most common things that contribute to inaccurate ARV’s:
- Taking the wholesaler’s word for the value without doing any due diligence.
- Looking at the comps and picking the highest one.
- Using the tax assessed value for the ARV.
- Thinking the appraisal is “too conservative” and this deal will actually sell for more.
If these sound familiar, beware that there are huge risks associated with these approaches that involve losing money.
Underestimating the Scope of Work
Even more than ARV, the scope of work required often falls short due to the following three reasons:
- Prior to purchase, major items were overlooked or unforeseen due to improper assessments. Things such as foundation work, roofing, HVAC, and plumbing, are the most common and have the most significant impact on increasing the overall costs.
- The investor believes they can get the work done for a much lower cost than is actually possible.
- Believing the wholesaler’s rehab estimate without doing your own due diligence.
Avoiding These Pitfalls
An accurate assessment of the value of the property starts with getting an appraisal. Using any other approach will only lead to problems. If you have been on the I.M. Blog section of our website, you know that this is something that has been emphasized since the beginning. The appraisers we use are experienced with investor deals and know how to evaluate a property that needs to be rehabbed. Also, they are never told to be conservative with their assessments.
If you are not experienced in determining the overall scope of work required to reach the ARV needed, get with an experienced contractor to help you understand the true cost of the project, so there are no expensive surprises. There’s always going to be something that pops up unexpectedly, but missing major items can be avoided. Be realistic and don’t gamble with your investment.