Mary writes: I purchased a home a few months ago with solid comps showing $350 ARV. Yesterday my realtor told me the ARV is looking more like $315. I’m really freaking out – what should I do?
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Welcome to the Real Investing Show with Tim Herriage. Each day, we’ll provide real investing for everyday investors. Tim is a nationally recognized real estate investing expert, podcast host and public speaker. He built his businesses from the ground up, and is here to help you do the same. Here is your host, Tim Herriage.
Welcome back to Real Investing. I’m Tim Herriage. I appreciate you coming back. Today, Mary writes, I purchased a home a few months ago with solid comps showing a $350,000 ARV, after repair value. Yesterday my realtor told me it’s looking more like $315,000. I’m really freaking out. What should I do? All right, this is a [inaudible [00:00]:4]. The thing here is, oh wow. Look, in markets like this you have to understand there is going to be some overreaction. Recently, a friend of mine, he shut down one of his companies, and was going to move and take a different job. Put his house on the market at $489,000. Didn’t get any offers, dropped it to 475, didn’t get any offers, dropped it to 450, now he is at 439. I have a bit of a problem accepting that you’ve seen a 10% decline in a couple of months. Now, you may have used the average of the one high comp to set your ARV, and now your realtor may be looking at the three most recent sold.
But, so far, Mary, you got to be honest with yourself. Go back and look at the comps you used when you established 350. Did you really have three sold comps in the last 90 to 180 days of a comparable property, or were you simply looking at it thinking, heck, everybody else is selling for higher than they asked, or that one house sold for this much a foot? I guess, what I’m saying is, first and foremost in times like this, discipline and skill are going to outweigh luck, number one. Number two, my question is, what were you planning on doing with the home? If you were planning on refinancing it and keeping it long term as a rental property, I would imagine, I can almost guarantee, but I can’t guarantee that the rental comps haven’t gone down 10%, though the cash flow would still be the same, what you’re probably looking at is you have to put more money down.
You have to put more money down, it’s not always a bad deal. If you were going to flip it and you’ve lost 10%, it depends. If you bought it looking to make 20% and you’re going to make 10% gross margin, go ahead. And, when you say you purchased it, I don’t know if you already own it or not, I will tell you this, lessons from previous cycles. Number one, if you feel like you’ve made a mistake, acknowledge your mistake and get out of the mistake. Number two, you cannot rehab your way out of a bad buy. You got to remember this, you cannot rehab your way out of a bad buy. What that means is, just because you want to sell it for 350, if the comp say 315, the comp say 315.
Remodel a home the way a 315 house is being sold in that neighborhood right now, sell it, move on. If you really feel like you’re that upside down and you’re going to lose say 20 or $30,000, you may want to simply put the house on MLS right now at a number that would get you the 20 or $30,000 loss. What you can’t do is sit on a vacant home and not be working towards the exit. So, the thing is, you got to work towards getting the thing gone. If you feel like you were going to fix and flip it and [inaudible [00:03:49], you’re going to lose money, I always say lose money now, don’t drag it out for six months. If you really believe in your scope of work and you feel like you’re actually using good numbers now, then I say, go ahead and rehab it.
If you’re going to keep it as a rental, well, the odds are, it still makes sense on a cashflow basis, you just may have to leave a little bit more money in it. So, that’s by answers, knowing what I know, but Mary and everybody else listening, this time in the market cycle, hone your skills, run good comps, use averages, not singular points of data. Ultimately, I think you’re going to be okay. Mary, I appreciate you taking the time to write in. I really, I hope everything works out for you. If you’re listening and you have questions hop on over to, Ihavelunchmoney.com. Submit your question. I’ll do my best to get to you, and I’ll see you tomorrow.
Thank you for hanging out with us today on Real Investing. If you have questions, comments or feedback, please visit Ihavelunchmoney.com. Tim, can’t wait to hear from you. We’re always grateful for your reviews. And if you enjoyed this episode, please subscribe and share it with your friends. Remember, the business is the vehicle, not the dream. See you next time. The preceding program is provided for general education purposes only, and does not constitute legal, tax, financial investment or other professional advice. No information contained in this program should be construed as financial, investment or legal advice from any individual author, or post or guest. You should always consult a financial advisor before investing.