All forms of real estate investing are built on buying properties at a discount. Unfortunately, getting a seller to agree to a low price is often difficult. No matter how developed your sales skills are, the odds are stacked against you: a low number on someone’s home or real estate property can be a tricky offer to navigate.
However, while it’s tricky, it’s not impossible. There’s a little-known tactic that’s highly effective when it comes to negotiating with motivated sellers, and it involves real estate’s most basic concept: after repair value (ARV).
If you’re looking for a way to transform your negotiations and show sellers why your numbers make sense, then this is the strategy you’ve been waiting on. Here’s how you can put it into practice right now.
ARV real estate: Setting price limits
ARV in real estate is usually treated as the best way to determine whether or not a property is worth buying. But in reality, the ARV of a property is a great way to set and explain your maximum purchase price when negotiating with a seller.
ARV is a numerical estimate that real estate investors calculate to discover how much a property will be worth once it’s been renovated or repaired. Calculating the ARV of a property is fairly straightforward. All you need to do is find several comparable properties, which are recently sold houses close to your deal that share similar floor plans, measurements, lot sizes, and features.
To find comps, you can work with a real estate agent or leverage a comping tool that pulls recently sold data from the multiple listings service (MLS). Once you have enough comps (the more you can find, the better), you can average their recent sale price per square foot and multiply that number by the square footage of your deal. The ARV formula is: Average Price Per Square Foot X Square Footage of the Deal.
Because ARV is a basic real estate concept, many investors only use it to estimate repair costs and evaluate the potential of a real estate investment. Unfortunately, they don’t usually return to this vital number once they’ve decided to make an offer on a house. However, if you leverage the after repair value of a home to set an upper limit for what you’re willing to pay, negotiating with sellers will suddenly become much easier.
Simply put, ARV in real estate provides context for your offer. Without it, a seller may feel like you’re low-balling them. But when you show them your repair costs and how much the property will be worth after you make repairs to it, your low offer will make sense.
If you want to take this strategy even further, you can bring up the 70% rule, which states that when you’re buying an investment project, you should never pay more than 70% of its ARV. This allows you to renovate the property without worrying about going over budget and sinking your profit on the flip.
This is an invaluable rule of thumb in the world of real estate. To calculate it, you can use this simple formula:
(ARV X 70%) – Repair Cost = Highest Offer Amount
Once you’re armed with this number, you’ll find that explaining your maximum purchase price to sellers is easy. Now you have a built-in reason for the numbers you’re quoting: “I’m an investor, and if I’m going to make money on this property, this is the price I need to buy it at.”
Other ways to use ARV in real estate negotiations
Setting a hard and transparent upper limit isn’t the only way to use ARV when you’re negotiating with sellers. There are several other ways you can use your estimate of a property’s value to your benefit.
The first method is to share the comps. If someone isn’t happy with the price you’re offering on their property, you can explain to them that you wish you could pay more. However, the price of real estate in the area shows that the house will be worth X amount once it’s renovated.
Since it’s not currently renovated, you’ll have to buy it at a lower price. Once again, this is a great time to use the 70% rule and explain that since you have to make room for repair costs, you can’t afford to raise your offer.
Another great way to leverage ARV when you’re talking to a motivated seller is to compare your purchase price to their mortgage balance. This strategy works best when the owner has a lot of equity in the property. You can show them that they’ll be walking away with cash even though they’re selling for less than the property could be worth.
If you want to turn on the heat with this method, you can explain the repairs and renovations they’ll need to make in order to raise the property’s value and sell it at full price. In light of all the effort and money this will take, a seller will be more likely to accept your offer.
You can use the after repair value of a property to your advantage in a handful of scenarios. Not only is it a great way to determine whether or not a property is a worthwhile investment, but it’s also a great way to show a seller why you need to buy the property at a discount. If you use it the right way, you can easily level up your negotiation strategy and ditch the sales techniques that often annoy sellers.
However, it’s important that you always remember your professional ethics. When you use ARV to negotiate, you have information that the seller doesn’t. It can be tempting to misrepresent the numbers and tell a seller that their home is worth far less than it actually is. You should remember that if you engage in this behavior, you’re not negotiating anymore, you’re lying, which is highly unethical and also illegal.
If you want to succeed in real estate, always remember that part of your job is helping sellers who need financial assistance. You may greatly benefit from buying their houses, but if you manipulate and scam them in the process, you’ll eventually hurt your own business and open yourself up to legal action. However, if you use ARV honestly and transparently, you’ll undoubtedly reap the rewards in time.
Of course, ARV isn’t the only tool you can leverage when negotiating with motivated sellers. Check out our real estate investing e-book to see how real estate pro Tonny Romero approaches these difficult conversations. In addition, you’ll get personal advice and insights from 15 leading real estate investors and wholesalers.