What does after-repair value (ARV) mean?

What the house should sell for once fixed up, based on comparable sales

What the buyer paid for the house

What the house should sell for once fixed up, based on comparable sales

Why is one percentage rule not the price of a house?

It ignores each house's own repairs, holding time, risk, and neighborhood, so it is too high for some houses and too low for others

Because percentage rules are illegal

It ignores each house's own repairs, holding time, risk, and neighborhood, so it is too high for some houses and too low for others

Because buyers never use percentages in any form

Because the rule only works for expensive houses

Which of these is NOT a fact specific to the house being priced?

A percentage that another investor told you works in your town

Its bedrooms and square footage

How quickly similar homes sell in its neighborhood

A percentage that another investor told you works in your town

Two houses have the same ARV and the same repair cost. House A sells in three weeks. House B takes eight months and needs a larger profit cushion. Which is correct?

House B's maximum offer is lower, because holding costs and needed profit are higher

Both have the same maximum offer

House A's maximum offer is lower

House B's maximum offer is lower, because holding costs and needed profit are higher

The maximum offer depends only on ARV

Where does your fee fit in the numbers?

In the gap between the seller's price and the buyer's maximum offer

On top of the buyer's maximum offer

What is the honest way to use a percentage rule?

As a first screen to skip houses that are clearly far apart, then price the house from its own facts

As the final price when you are busy

As a way to explain the price to a seller

As a first screen to skip houses that are clearly far apart, then price the house from its own facts

As the number you tell a buyer to accept

What are holding costs?

Costs of owning the house during work and sale, such as taxes, insurance, utilities and interest, which grow each month

Wholesaling Real Estate in Colorado, Legally: Free Course

Cash buyers and the spread

Wholesaling the legal way · 1 study hours

Bottom line: A cash buyer's maximum price is built house by house from what it will sell for, what it needs, what it costs to hold and sell, and the profit the buyer wants; your fee has to fit inside that gap, and one percentage rule is only a first screen.

Bottom line first. Every offer is per house, from that house's own facts: bedrooms, size, condition, and neighborhood. A cash buyer works backward from what the finished house will sell for, subtracts every cost and the profit they need, and what is left is the most they can pay. Your fee has to come out of that same gap. A percentage rule can be a quick first screen, but it is not the price. This lesson is general education, not legal or tax advice, and the numbers are all made up.

Who the cash buyer is

A cash buyer is someone who buys without a bank loan on the purchase, so they can close quickly. Many are investors who fix a house and resell it, called a flip, or keep it as a rental. This lesson uses the flipper, because the math is easiest to see.

How a buyer builds the maximum offer

The maximum offer is the most a buyer can pay and still make the profit they need. It is built from these pieces, each for that specific house:

After-repair value (ARV): what the house should sell for once fixed up. It comes from recent sales of similar homes nearby, called comparables or comps. Similar means similar bedrooms, size, age, condition and neighborhood. Two homes on the same street can differ by a lot.
Repairs: the cost to bring the house to that condition. This comes from looking at the house: roof, foundation, systems, finishes.
Holding costs: what it costs to own the house while the work and the sale happen, such as taxes, insurance, utilities and loan interest if there is any. It grows with every month, so a house that sells slowly costs more to hold.
Selling costs: what the buyer pays to sell, such as agent fees and closing costs.
Buying costs: closing costs when the buyer purchases from you.
Profit: what the buyer needs to make for the work and the risk. A riskier house usually needs a bigger cushion.

Then: maximum offer = ARV − repairs − holding − selling − buying costs − profit.

Where your fee fits

Your fee is the difference between what you agree to pay the seller and what your buyer agrees to pay. The buyer's maximum offer is the ceiling. Your price to the seller must be low enough that the seller's number plus your fee stays at or under that ceiling. If the seller needs more than the ceiling minus your fee, there is no deal at your fee, and the honest answer is to pass or to lower your fee. Never hide a problem or push a seller to a number the numbers do not support; misleading a seller can be a deceptive trade practice (C.R.S. 6-1-105). The rules on honesty and on licensing are in earlier lessons.

Why one rule of thumb is not the price

You will hear rules like “pay 70% of the value minus repairs.” Treat any rule like that as a first screen: a quick way to skip houses that are obviously far apart. It cannot be the price, because it uses one percentage for every house. The real costs change house by house. A house that sells in three weeks costs less to hold than one that sits for eight months. A house with a bad foundation is riskier than one that needs paint. A small percentage on a cheap house is a different dollar amount than on an expensive one. This course states no market percentage as fact, because the right number is whatever that house's facts produce.

Example with real numbers

All numbers are made up, including the rule. Suppose a screening rule says: pay 70% of ARV, minus repairs. Marcus and Priya each look at a house. Both have an ARV of $300,000 and need $40,000 of repairs. The rule gives the same answer for both: 0.70 × $300,000 = $210,000, minus $40,000 = $170,000.

House 1: four bedrooms, 2,000 square feet, cosmetic work only, in a neighborhood where homes sell in about three weeks. The buyer builds the real number:

Repairs $40,000
Holding: 3 months at $1,500 = $4,500
Selling costs: $18,000
Buying costs: $5,000
Profit needed: $30,000
Total = $97,500

Maximum offer = $300,000 − $97,500 = $202,500. With a $10,000 fee, the price to the seller can go up to $192,500. The rule said $170,000, so it was $22,500 too low. A seller who would have taken $185,000 gets lowballed and the deal is lost.

House 2: two bedrooms, 1,000 square feet, older roof and drains, in a slow area where homes sit for about eight months, and the buyer wants a larger cushion:

Repairs $40,000
Holding: 8 months at $2,000 = $16,000
Selling costs: $18,000
Buying costs: $5,000
Profit needed: $60,000
Total = $139,000

Maximum offer = $300,000 − $139,000 = $161,000. With the same $10,000 fee, the price to the seller can go up to $151,000. The rule said $170,000, so it was $19,000 too high. If you signed at $170,000, you could not resell it to this buyer, and you would be stuck.

Same rule, same ARV, same repairs, two wrong answers in opposite directions. That is why the price is per house.

A practical workflow

Use a rule only to decide which houses deserve a closer look.
Pull comps that match the house's bedrooms, size, condition and neighborhood.
Get a repair estimate from someone who has seen the house.
Ask the buyer how long and how much they expect to hold and sell, instead of guessing.
Work backward to a price, then check your fee fits.
If it does not fit, pass.

Law cited

C.R.S. 6-1-105

Key terms

Cash buyer: A buyer who purchases without a bank loan on the purchase and can close quickly.
Flip: Buying a house, fixing it up, and reselling it.
After-repair value (ARV): What a house should sell for once it has been fixed up.
Comparables (comps): Recent sales of similar nearby homes used to estimate value.
Holding costs: What it costs to own a house while work and sale happen, such as taxes, insurance, utilities and interest.
Selling costs: What the buyer pays to sell the finished house, such as agent fees and closing costs.
Maximum offer: The most a buyer can pay and still make the profit they need.
Spread: The gap between what you pay the seller and what your buyer pays you.
First screen: A quick rule used only to skip houses that are clearly far apart, not to set a price.

Flashcards

What is a buyer's maximum offer?

ARV minus repairs, holding, selling and buying costs, and the profit the buyer needs.

What is ARV?

After-repair value: what the house should sell for once fixed up, from comparable sales.

Where does your fee come from?

From the gap under the buyer's maximum offer; the seller's price plus your fee must fit under it.

Is a percentage rule the price?

No. It is a first screen only. The price is built from that house's own facts.

What facts make up a house's facts?

Beds, size, condition, neighborhood, plus how long it takes to sell and what repairs it needs.

Why do holding costs differ by house?

They grow every month, so a house that sells slowly costs more to hold.

What if the seller needs more than the ceiling minus your fee?

No deal at that fee. Pass or lower your fee; never hide a problem.

What did the two made-up houses show?

The same rule gave $170,000 for both, but true prices were $192,500 and $151,000 to the seller.

What are comps?

Recent sales of similar nearby homes used to estimate ARV.

Does this course state market percentages as fact?

No. The right number is whatever that house's facts produce.

Quiz: 10 questions

Tap an answer. It shows right or wrong and opens the reason. Your score is saved in this browser and counts in the study app.

What does after-repair value (ARV) mean?
1. A What the buyer paid for the house
2. B The county's tax value
3. C What the house should sell for once fixed up, based on comparable sales
4. D The cost of repairs
Show answer and why
Answer: C. What the house should sell for once fixed up, based on comparable sales
ARV is the expected sale price after repairs, estimated from similar nearby sales. The purchase price and the repair cost are inputs or results, not the ARV.
This lesson (pricing arithmetic, made-up numbers)
ARV is $250,000. Repairs $30,000, holding $6,000, selling $15,000, buying costs $4,000, profit needed $25,000. What is the buyer's maximum offer?
1. A $170,000
2. B $145,000
3. C $195,000
4. D $220,000
Show answer and why
Answer: A. $170,000
Costs and profit total 30,000 + 6,000 + 15,000 + 4,000 + 25,000 = 80,000. 250,000 minus 80,000 = 170,000. The $220,000 choice subtracts only the repairs.
This lesson (pricing arithmetic, made-up numbers)
A buyer's maximum offer is $170,000 and you want an $8,000 fee. What is the highest price you can agree to with the seller and still fit?
1. A $170,000
2. B $178,000
3. C $172,000
4. D $162,000
Show answer and why
Answer: D. $162,000
The seller's price plus your fee must stay at or under the buyer's ceiling: 170,000 minus 8,000 = 162,000. Adding the fee instead gives $178,000, which exceeds what the buyer can pay.
This lesson (pricing arithmetic, made-up numbers)
Why is one percentage rule not the price of a house?
1. A Because percentage rules are illegal
2. B It ignores each house's own repairs, holding time, risk, and neighborhood, so it is too high for some houses and too low for others
3. C Because buyers never use percentages in any form
4. D Because the rule only works for expensive houses
Show answer and why
Answer: B. It ignores each house's own repairs, holding time, risk, and neighborhood, so it is too high for some houses and too low for others
The real costs change house by house, as the two made-up houses showed. The rule is not illegal; it is just not a price.
This lesson (pricing arithmetic, made-up numbers)
Which of these is NOT a fact specific to the house being priced?
1. A Its bedrooms and square footage
2. B The repairs it needs
3. C How quickly similar homes sell in its neighborhood
4. D A percentage that another investor told you works in your town
Show answer and why
Answer: D. A percentage that another investor told you works in your town
A borrowed percentage is general, not about this house. Size, repairs and neighborhood sale speed all come from this house's facts.
This lesson (pricing arithmetic, made-up numbers)
Two houses have the same ARV and the same repair cost. House A sells in three weeks. House B takes eight months and needs a larger profit cushion. Which is correct?
1. A Both have the same maximum offer
2. B House A's maximum offer is lower
3. C House B's maximum offer is lower, because holding costs and needed profit are higher
4. D The maximum offer depends only on ARV
Show answer and why
Answer: C. House B's maximum offer is lower, because holding costs and needed profit are higher
More months of holding cost and a bigger required profit both reduce what a buyer can pay. Same ARV and repairs do not mean the same price.
This lesson (pricing arithmetic, made-up numbers)
Where does your fee fit in the numbers?
1. A In the gap between the seller's price and the buyer's maximum offer
2. B On top of the buyer's maximum offer
3. C Inside the repair estimate
4. D In the ARV
Show answer and why
Answer: A. In the gap between the seller's price and the buyer's maximum offer
The buyer's maximum offer is the ceiling, so your fee must come out of the space under it. Putting it on top would mean the buyer pays more than they can afford.
This lesson (pricing arithmetic, made-up numbers)
In the lesson, the rule gave $170,000 for House 2, but its true seller price with a $10,000 fee was $151,000. How much too high was the rule?
1. A $9,000
2. B $19,000
3. C $22,500
4. D $21,000
Show answer and why
Answer: B. $19,000
$170,000 minus $151,000 = $19,000. The $22,500 figure is the shortfall for House 1, where the rule was too low, not too high.
This lesson (pricing arithmetic, made-up numbers)
What is the honest way to use a percentage rule?
1. A As the final price when you are busy
2. B As a way to explain the price to a seller
3. C As a first screen to skip houses that are clearly far apart, then price the house from its own facts
4. D As the number you tell a buyer to accept
Show answer and why
Answer: C. As a first screen to skip houses that are clearly far apart, then price the house from its own facts
A rule can sort houses quickly but cannot replace the per-house build. Using it as the price is how the made-up House 2 overpaid by $19,000.
This lesson (pricing arithmetic, made-up numbers)
What are holding costs?
1. A The buyer's profit
2. B The cost of repairs
3. C Agent fees when selling
4. D Costs of owning the house during work and sale, such as taxes, insurance, utilities and interest, which grow each month
Show answer and why
Answer: D. Costs of owning the house during work and sale, such as taxes, insurance, utilities and interest, which grow each month
Holding costs are the carrying costs of ownership and grow with time. Repairs, profit and selling fees are separate pieces of the maximum-offer math.
This lesson (pricing arithmetic, made-up numbers)