HOW TO UNDERWRITE A DEAL IN REAL ESTATE

All right. So, today we're going to make an underwriting video. And if you copy us, you'll never make mistakes. You'll always make money. You'll buy and sell a lot of deals. And let's start right now.

"That's all you do all day is underwrite." "That's all I do." "We're currently going back 90 days. Walk it. We're going to show you what we think it's going to cost to rehab it. Biggest mistakes that we see even from people that like really know what they're doing. If you're really committed to really learning our process, you will get really accurate really quickly."

All right, so today we're going to make an underwriting video. That's one that we promised everybody. We had lots of requests for. So Nitton here, that's all you do all day is underwrite. Yes, "that's all I do every single day." "What does underwriting mean?"

"So underwriting is determining the value of a property and what we're willing to either pay or lend on it." Yes. So we're going to show you exactly how we do it. And if you copy us, you'll never make mistakes. You'll always make money. You'll buy and sell a lot of deals. And let's start right now.

So, first off, to underwrite a deal, what information do you need to underwrite a deal? "100%." All right, so let's go and grab the whiteboard and let's write down everything we need and let's break it down.

All right, so to underwrite a deal, there's certain elements that we need for us to be even able to continue the process. And what do we need? So, we need obviously we need the address. You'd be surprised how many people send us emails without an address. How can we possibly determine what something's worth without the address? Well, they tell you it's in Atlanta. Just as obvious, it's in Atlanta. I mean, you need the exact address.

"On top of the address, we also need the photos. Why do we need the photos? Well, one of the main elements to underwriting is determining the rehab cost. How could I possibly determine what something's going to cost me to fix if I don't know its beginning point? It could be burnt down. It could be to the studs. It could be perfect and turnkey and ready for someone to move in tomorrow. Without pictures, we have no idea. So, we obviously wouldn't be able to determine anything without them. And the last thing we need is the asking price. Now, why do we need the asking price? Does it change our underwriting process? No. But we get over a hundred emails a day having to go through and see what makes sense. If someone's asking double what we think it's worth paying, is it even worth negotiating or talking about?"

"So, how how long does it take to go through from start to finish to underwrite a deal?" "So, I'd say the average deal is less than 5 minutes. It's like if it's like a cut and clear underwrite. There are some exceptions where it may take 10 15 minutes if it's like zero comps, which is very very rare and I think most people when they say there's no comps don't really know what they're doing. But there are instances where they're not perfect comps, but there's always a way to find out what something is worth. But I'd say on the low end, 5 minutes, sometimes 30 seconds if the asking price is ridiculous."

"Yeah, that's that's why you want the ask." "Exactly. That that'll just automatically filter out what I'm not going to look at. On the average, I'd say five minutes. On the on the higher side, 10 15 minutes at the most."

"Okay. So, let's just say it's one that's like a little bit tricky, but not super tricky. It's 15 minutes. If we do not get the asking price, we might spend 15 minutes on a deal that if we got the asking price, and we know it just doesn't make any sense. Guess what? We spend two seconds. So, literally getting an asking price could save us 15 minutes. I mean, minimum five minutes at the fast deals, 15 minutes on the slower deals on every single property. Now we get over a 100 properties a day. So 100 properties times 5 to 15 minutes. That's literally all day. So if we didn't get asking prices, we would be wasting a ton of time. We have so much more time because we could eliminate 95% of the deals within less than a minute instead of 5 to 15 minutes."

"Exactly."

"So these are the three things we need when we underwrite a deal. If we're going to buy a deal, is there anything different that we need when we're going to underwrite a deal to loan money on it?"

"Yeah. So there the two main variables in addition to this that we need is one, what is their purchase price. Why does this matter? Well, especially when we're dealing with a borrower that we've never dealt with before, we want to know that they have skin in the game. We don't want to give them all the money or else they may not have a vested interest to make sure that the project does well and that we're protected. Now, the last thing that we need in addition when we're underwriting for a loan as opposed to a purchase is the COE or the close of escrow. Now, this is the date that the property is going to close. Why do we necessarily need this? Well, some deals have investors. Some deals Abraham is funding himself. And logistically, we need to know how to plan and make sure that we're going to be funding that day so that we're not keeping the borrower waiting, that we make sure that we're communicating with the investor or with Abraham correctly so that they can deploy their funds on time."

"Yeah. And then when we're underwriting to uh loan money, we actually don't even need this anymore. But instead of this what we need is what we need is how much they want to borrow right how much they want to borrow. So that would be the thing that uh exchange changes. Why do we need to know how much they want to borrow? Why why don't don't they want to borrow the whole purchase price or most of the purchase price? What what could be different? What else would they want to borrow? Or maybe they want to borrow less. Maybe they want to borrow more."

"Yeah. You'd be surprised. There there are some of the times where they'll say, 'Hey, I actually only need this amount of money.' And then it's like a no-brainer loan. So, it's a really low LTV and we're happy to do that. And then some of the times, not all of the money that we're loaning may go to the purchase of the property. Some may be requesting a rehab, right? So, we will do the rehab loan and give some of that in draws and that does change, you know, the amount we're willing to give them. So, we could someone could be buying this property for $150,000 and we can loan them $200,000."

"Yep."

"Because we're loaning them on the rehab. And the only way we know how much we're going to loan on the rehab is because we got the pictures and because they give us a scope of work. So tell us what a scope of work is because that's what we need to loan them money on the rehab. We can't loan anybody money on a rehab without scope of work and we don't know how much to give them in draw. So for a scope of work, what what does that look like?"

"Yeah. So what a scope of work looks like is a very generalized list of items that are being done to the property. For example, you could say something like flooring, interior paint, exterior paint, roof, new HVAC. And what I'm looking for in that scope of work is one, does what they're doing make sense? If it has a brand new HVAC unit and they're saying they're going to get a new HVAC, I'm like, 'All right, this guy's like trying to pull one or something and try to get a job for something that he really isn't going to do.' The second thing that we require on that scope of work is that each item is correlated to a price. Now, why do we do that? Well, it's really simple. Imagine someone said, 'All right, new HVAC, 25 grand for a,200t house.' you'd be like, 'Okay, there's not an HVAC in the world that cost $25,000 for a,200 foot house.' So, we're making sure that where they're going to spend their money makes sense and it checks out. Once we have the itemized scope of work, what it also allows us to do is when they request a draw from us, we can say, 'What did you complete?' And whenever they say what they completed, it's really easy for me to reference back to that scope of work and be like, 'All right, perfect. They did the interior paint, which they said was 2,000. They did the HVAC, which they said was 5,000. All right, their draw for this is the sum of those, right? So that's basically why it's so important to get a really accurate scope of work before we, you know, complete and we get to the close of escrow."

Okay, so now we just told you everything we need to underwrite a deal as far as to buy a property and to loan on a property. Now let's get into the real nitty-gritty part of the underwriting. So let's delete all this and get into how we underwrite a deal.

Okay, so now let's write down all the things that we need to underwrite a deal. So, first off, we need to know what the ARV is, the after repair value, the price that we're going to actually sell the property for and get after it's fixed up. That's the first thing you need when you're under uh a deal. The second thing you need to know is how much is the rehab? How much is the rehab? And if you take the ARV and you minus the rehab, you now get the ASIS value. Again, people always ask, what's the ARV? What's the ASIS value? The ARV is what's going to be worth after the rehab. The ASIS value is what it's worth right now. We always buy it based on what it's worth right now. We always buy it or lend on it based on what it's worth right now. So that's how you get it.

Now, what's the next thing that you need to underwrite a deal once you have the ARV and the repair cost? It's just a formula. It's very, very simple. So N's going to go through the formula. I don't care how bad you are at math. It's a very easy formula. You can use a calculator. A lot of times you don't even need one. What's the formula to figure out what it's worth paying for a property? And then on top of that, once you give me that formula, I'm going to ask you a few questions. Why are you using certain numbers?

"Sure. So, the formula that we use is the ARV after repair value times by and this again is a variable, but I'm going to just tell you um what generally is our is our percentage, which is 80%. And 80%'s about as high as people will pay. I see a lot of people trying to buy it for 70 75%. If it's a good market or it's in a good area, it's going to be very hard to buy stuff for much less than 80%. But, you know, in weaker areas or if the market's really bad, you could definitely get stuff for a little bit less. So, we always want to buy stuff for as close to 70% as possible, but we do pay up to 80% for a good amount of stuff that we buy."

"So, where's the 20% going?"

"The 20%. So, the 20% goes to First off, you can write this down so everyone can see it. I would say the first 10% goes toward profit. I'm not going to just do a whole fix and flip and make no money on it. I need to make money on it. Do you think I'm going to spend all my time in a month or up to 6 months on a project without making anything? So 10% is the minimum amount of profit that I want to make. I love to make closer to 15%. But 10% and that's 10% of what I think it's going to go for. So if I'm selling it for 300,000, I want to make at least $30,000. 15% is always great, but 10% minimum, right? So, that's 10%. The other 10% is going to go to realtor costs when we sell it. Holding cost, that's includes insurance, that includes taxes, uh, utilities, and then, of course, all the closing costs. So, we're paying the closing cost when we buy it. When we sell it, we also pay some closing cost. And the other thing you could add to holding cost is if you have a loan on it and you're paying some amount of money. Now, we don't take loans on any properties we buy. We pay cash for everything. But even though we're paying cash, our money is worth something. If I wasn't using my money to buy this property, I would use my money to make money on other things, right? We do lots of loans. I could loan that money out and make money, but my money is dead. So, all that is part of the holding cost. So, typically, you're going to have at least around 10% in these types of cost. And then you want to make at least 10% profit. So 80% is about as high as you could pay and actually make some money. The other thing is sometimes you think you're making 10%, but then sometimes uh the rehab goes over if you don't do it correctly and then you end up making less. So you got to have a little bit of leeway there. So in case something goes bad, you're still making money on the property."

"Yeah. One thing I want to mention too is I actually use this amount here. It's another variable, right? We start at 80% when it fits everything in our criteria that we love, right? If it's the zip codes that we really really like or that we know really well. If it's an area that we know we can get a crew there to easily. If it's our desirable bed and bath count. If it's certain year built. But what I also use it for is what if it's not? What if it's in a zip code that we don't really love? Maybe it's hard to get uh you know, permitting done there or maybe our crews don't like to go out that far. Well, it becomes less convenient. So maybe we have to make a little bit more money or we have to account for those additional costs and headaches that we might experience."

"the older the house too. So, remember I said earlier that this potentially that we you might think it's going to cost $50,000, but we might made a mistake and it cost 60,000. Does that typically happen on newer homes?"

"No, it usually happens on the older" "older homes cuz there's so many things that happen in older homes. There's so many crazy things that come up. So, the older the home you got to be a little bit safer on. So, as homes get older, we lower our percentage of what we want to pay. I mean, once you get like 100 years old, 80 years old, I mean, we get down to 70 75% on a lot of properties, but um our typical properties that we buy are probably within 35 to 50 years old or newer. And those properties usually fit into here, especially in the right areas. If they're in the wrong areas, we're going to take a little bit less off that 80%."

"Yeah. You know, there's actually a decent amount of stuff that could affect that percentage. I think it's probably worth going through writing them down so everybody can see. So I'm going to go and erase where that 20% is going and instead what I'm going to do is what can adjust that price or adjust that percentage rather. So the first thing that we just mentioned is age of the house. What year would you say is where we start dropping it?"

"I would say once you get under the 1980s uh it it becomes more problematic. So there's more stuff that happens to a house. Perfect. "Obviously the 2000s are great. So, I mean, I would say the first drop is 2000, then 1980, and then every 10 years, it gets worse."

"Perfect. The next one that I can think of is the undesirable bed and bath counts, right? Imagine it's a 2-1 that doesn't really fit a conventional family, right? Or what if it's a 4-1 and there's no master bedroom. Those are things that are kind of undesirable and is definitely something that would affect um, you know, the percentage in which you'd pay. Another another thing that can affect the ARV that is just a random thing is how many comps are there in the area? How many comps are in the area? If this is a very hard property to comp because it's different than all the other properties or there just hasn't been much stuff sold in that area, that might be something that can affect paying less."

"Yeah. The way that I put that in my head is my confidence rate. If I'm really confident, I'm good at 80%. I'm not that confident. I'm I'm 75 70. It might even be less if I'm if there's just no comps, nothing that's guiding my thought process, just my intuition. Well, I'm not that confident, so I'm going to drop that so I'm on the safer side."

"Let's talk about Let's talk about a few things that could drop your confidence level as far as being confident of what your ARV is. So, tell me one thing."

"So, one is just the lack of comps. Nothing is sold in the area. Nothing that is sold with similar curb appeal or similar zip code or, you know, similar a lot of things, right? Like basically just there's no really good comps. Um, another thing could be that um, it has a ton of land, right? If something has a whole lot of land, the land's worth something, but it's hard to know if there's nothing else that's sold with a lot of land. So, some people are like, 'Oh, no, but it's worth an extra 100,000 cuz it's got this many more acres.' "Is it really worth that much more?" I mean, sometimes it is, sometimes it's not. I'm not going to say they're lying, but like there's just no comp for it, so I'm not like super confident it's going to be worth a whole lot more. Yeah."

"So, the amount of land the other thing that I'd say that kind of going off that is just the uniqueness of the property. Imagine you have a property that's just an outlier of everything near it, right? It's either significantly larger than everything else or it looks completely different or it has a weird layout or it has an ADU and nothing else has an ADU, you know, small details that are just unique to this property. Well, it makes it hard for me to understand what it's worth if nothing around it is similar."

"Yeah, for sure. So, what else could uh affect affect the confidence level? So maybe there are comps, but maybe they sold a long time ago and nothing has sold recently. That would also drop down, you know, how confident I feel."

"Yeah. So I'll just put older older comps. How about how about the comps in the last 3 six months were very good, but now there's a whole bunch of stuff on the market now that's lower than the comps."

"Yep. 100%. So live comps, right?" "Live comps." "Live comps could could hurt it. like every comp that sold sold really really good, but all of a sudden now we see all these new properties listed and they're listed for less than the comps. That used to not happen much, but it's happening a lot right now."

"Yeah. One thing that I tell a people when I'm teaching them to underwrite is the current market trumps the comps that you're seeing. The comps don't matter when the current market is less than that."

"Okay. So, let's just say there's a current market. So, obviously, if stuff's if all the comps are 200,000, now there's stuff on the market for 1901 180. That's going to hurt it. But what if what if there are no comps that are 180 190? Let's say all the comps were 200. Now everything on the market is 250, 260. Now nothing sold for that, but there's everything on the market is 250. Does that trump the comps and make stuff worth more?"

"Yeah. No, I definitely not. I mean, cuz people could ask whatever the hell they want. Like there's so many times where we're like, 'All right, we know the ARV of this property is 230.' And then we we see someone asking 310 and we're like, 'Okay, this guy's just on crack. He's never going to be able to sell this thing. It's been listed for 6 months. Clearly, it's never going to sell. They're not clearly they don't want to sell it because they're never going to sell it for that price.'"

"Exactly. We actually just did a loan on a property that the person I think paid like a h 100red,000. It was like it was almost like a tear down, right? And this person put like a hundred 200,000 in it. They listed it for like half a million dollars and um it's in the middle of nowhere. There's no houses anywhere near it that sells that in in another area. It probably was a great a house to do and a great comp. So this person thought they were going to sell it. We told them, 'Look, we're going to loan you money on it, but like doesn't make much sense you're going to make it that nice.' They're like, 'Oh, no, no, we will.' It's been months and months and months."

"They haven't been able to sell it."

"Yep. Yep. Yeah. It's It's It happens way more common than people think it happens. It's a lot. It's a lot of the onmarket properties are just way overpriced for what they are."

"Yeah. Now, I will say once in a while people get lucky and they'll sell something for more than they should because someone just falls in love with it. But I'll tell you that that doesn't happen enough and you got to be very careful."

"Yeah. So, we kind of talked about the confidence rating. What other thing could bring down just this overall percentage? Well, one is"

"I would say the area." "The area. Yeah, definitely."

"So, so there are certain areas that we know are just very good, very good areas. And then there's some areas that people just don't want to work in either because they're rougher areas where stuff gets, you know, broken into and stolen all the time or just the cities. The cities are very tough on on permits and and not letting people work. So those are the types of areas that I would I would be more careful and want to pay less in because you have to allow slack for theft for all kinds of stuff like that as well."

"Yeah. You know the the general consensus besides confidence is you know when you're buying something you have a buy box. What fits into your criteria of willing to buy and the further out it gets from it the less you have to pay because it's less desirable to you. And the same thing with anything including lending. You have to have a lend criteria that you're like I'm really strong in this area. That doesn't mean that I'm not going to lend at all outside of it, but I'm definitely going to be on the safer side and or make more money because it's just less convenient for me."

"Yeah. I thought of another one that why we would pay a lot less than 80% AV. So, if we're buying homes that are cheap homes, right? It might not be in the worst area, but the homes might only sell for 50, 80, 100,000. Do I want to make 10% doing all this work on a on a $100,000 home? That's $10,000. like there's a minimum amount I need to make on on a home to spend a couple months, you know, putting it, you know, doing all the work and then a few more months to sell it. So, I would say cheaper homes that are, you know, under 150,000, maybe even under under 200,000. I would say that you need to make more than 10% profit. So, that would make you have to pay less, you know, of the ARV because it's it's just you're still doing the work. You got to make a certain amount of money."

"100%. The other thing that I'll say now that we've kind of gone through some of these is what if it's a combination of all of them? What if it's a pre-1980s home that's a 2-1 and there's not really that many comps around it. What would you do?"

"It keeps getting worse and worse. You're going from 80 to 75 to 70 to to whatever. You got to be safe."

"Yeah. Absolutely. So, it's not just like, oh, it has one or all of these things. We're at 70%. No, it's it gets dramatically worse as they have more and more of the things that we don't like or are less appealing. I'll tell you another reason why you might pay less than 80%. You might be buying in a um a community with a HOA, whether it's a condominium or or a town home. If they have high HOA fees, you have a lot higher holding costs. So, I know I bought some expensive condos and they've stay on the market for a while and I'm paying $600 plus a month on some of these and that eats up your profit. So, I would say uh on a lot of high, you know, high price HOA type properties is is something you got to pay a little bit less on, too, because that eats up a lot of the profit."

"Yeah, that's a good one. All right, so these are all the variables that are kind of going into what we're basing it off of. I'm going to tell you another one actually I just thought of because there's there's another one that just happened recently. If I'm buying a home in a in a neighborhood and the neighborhood's pretty much good, but the house right next door to it burned down or the house across from is all boarded up, that's that's a home I got to buy for a lower ARV. Why? There's nothing wrong with my house cuz after I finish rehabbing my house, it's going to be super nice. But does someone want to buy a super nice house next to a house that's burned down or next to a house that's boarded up?"

"It it's it's risky. Like you're going to get a lot less for it. So that would be another reason. So, I would say just the neighborhood having boarded up, you know, burned down homes or vandalized homes uh right next to your home is is is a big uh a big downside. Another really big downside of why you would pay less. And this is one that is 101 everyone should know."

"Um what if it's um like on a main street? Yeah. Or near a highway or near power lines or near a railroad track where all this noise comes. So, those are ones that you've got to pay a lot less ARV cuz you can't take an ARV of a home that's on the other side of the street or a few blocks away because they might not have that busy road or they might not have that railroad track and and all that stuff. So, you can't assume that this house will go for the same amount and it's always going to go for less if they have those types of problems."

"Yeah. I I always say like and this is a generalized thing, but it is specific to this is underwriting is a critical thinking exercise. You have to kind of logic your way through. And so you have to think about, okay, an undesirable bed and bath count makes the average family may not want it. There's no master bedroom. It's not super normal. It's not really conventional. Then you have to say, oh, is it convenient for someone to be on a main road? Maybe they don't have great uh access or it's hard to pull out or it's a very busy road and it's hard to pull out in the morning or it's extremely loud. You kind of just have to think it through and say, would that make me as a purchaser be willing to pay less for it? Right. And so that's kind of what you're thinking. And so there may be some variables we're not mentioning here."

"I tell I tell you a big one that just came up that that made me think when you were talking is for families especially and you know most people have families that buy homes. Um does it have a backyard? Is the driveway like he he likes really steep driveways. He he's known for that. But most people like you know driveways that are flat. So if you have a house in one side of the street and the other side of the street that the driveway is like crazy and you know you have to take the garbage like and you're going to fall walking down you know to the post post you know to get your mail. Uh that house might be worth a lot less because the driveway or the house has no backyard no sideyard and the kids can't play the dog can't go out. That's going to take a lot of people out of the market. A lot of people have dogs, a lot of people have kids, and so I would say just the the house could be the same exact house as something that sold good, but if the yard's bad, you know, for whatever reason, that could really kill a house, too."

"Definitely. I also will say that the percentages like let's say um the house we're talking about is 200,000 and it has an undesirable trade. Well, maybe I'm going down, you know, from 80% to 75% or 70%. But let's say it gets to a more expensive home. Those like those people have more options. they have the ability to buy a lot more homes. So now it may go down even more. It may dramatically increase what you need to deduct that by because that person has the ability to just buy another house that doesn't isn't on a main road or something else. So it affects it more heavily."

"Yeah. No, for sure. So um I think this is a good idea. There's a lot more things of course of of why we would pay less, but I think this, you know, again, we're talking about logic and just, you know, knowing stuff. These are the basic most common things. So, let's get into actually uh figuring out how all these formulas come out. So, you're at ARV times 80% minus rehab. Let's let's take an actual property and underwrite that exact property. So, yesterday we went to a property, we walked it for the first time, we just bought it. Let's break down a real property and we'll we'll walk you through the property as we go through it and then show you these numbers."

All right. So yesterday we went to this house, but before we get into the rehab portion, let's figure out what this house is really worth. So Abraham, what do we use to determine like what software are we using to determine the ARV? We use Zillow for everything. We use it. The only time we go in the MLS is if we need to see pictures of other properties, but Zillow is the best for a lot of different reasons. We don't have time to get into why on this video, but just trust me, it can do a lot more stuff than any other uh any other place you're going to use for comps.

"Perfect. So, as you can see on my screen here, as soon as you type in an address, this is kind of what pops up, right? So, it'll show this estimate, which we take zero into account."

"I wouldn't say zero. I I would say that just don't trust it. But like if someone's asking $400,000 for a house and the estimate is 270, you're probably wasting your time. But but once in a while Zillow's wrong. But um on cookie cutter type neighborhoods, Zillow's pretty close on on a lot of them. So you just got to be careful on which neighborhood Zill's right, which ones they're wrong. But um I use it a little bit just for when people send me high pricing and and I see Zillow's so much less. I'm like, you know, it's a red flag."

"Sure. As soon as we pull up an address like this, where do our eyes initially go to kind of start this underwriting process?"

"Yeah. So, we want to know the year built. We want to know the square footage. Those are the two most important things. So, once we get the year built and square footage, that's how you get your comps."

"Perfect. All right. So, in this particular instance,"

"and you know, there's going to be like people are like, 'Oh, that's not the only thing that's important.' You're like, 'You're an idiot.' Yeah. Of course, bedroom bath counts important. Of course, how big the lot is is important. Of course, you know, there's a million things important, but the two most important things that we use are going to be the square foot and of course the year built. Now, if there's a ton of properties and they're all the same, you know, now now you start getting into other stuff, but it's not that important. Is it a one story? Is it a twotory? Is it brick? Is this Of course, all that stuff matters, but don't get hung up on all that stuff or it'll take you 5 hours to comp every property."

"Yeah. Right now, all we're trying to do is just filter through to more comparable houses. And as those more comparable houses arise, then we're going to start looking at those things a little more in depth and be like, 'All right, is this that good of a comp?' And then we start looking at the stuff you just mentioned. All right. So, this house is 2250 square ft approximately and it's built in 2006. So, what I'm going to do is I'm going to click off the property. And Zillow has a more tab right here on the right hand corner of the screen. And what we're going to do is we're going to adjust the square footage and the yearbook that we were looking for. So, this house is 2250 ft. So, what we're going to do is we're going to go one level above that. So, in Zillow, there's this drop- down menu, and after 2250 ft², there's a 2500 range. So, I'm going to go and click on that. So, I'm one criteria above when it comes to square footage. And then I'm going to go two below. What I'm trying to do here is just get as many like like- sized houses in this filter, right? I'm just trying to dwindle down to houses that are somewhat comparable in size. Not fully comparable, not exact, but relatively close. That's what I'm doing there. Then for year builts, this house was built in 2006. So I'm going to go a decade above, which in this case would be 2016. And then I'm going to go a decade below. So I'm 1996 to 2016. Why are we only going 10 years before and why are we only going 10 years later?"

"Well, every 10 years the price of houses just change so much. So like a 2010 house is not going to be worth the same as a a 1970 house. It's just you can't compare them. They're they're totally different. Within 10 years, they're pretty they're pretty comparable. But, you know, to even be a little bit more precise, when you start getting to homes that are built in the 2000s, I really think like 5 years is is a lot. So, um, on a 2006 house, I I might potentially you could you could start a two 10 years, 2016, but 5 years is actually, um, okay to do on new homes. Uh, once you get to older homes, 1950s, whatever, you you could even um, you know, go down a lot more. So, um, yeah, but if you want to get even more comps to be on the safe side, you could even go down 20 years like like older and 10 years newer. And that gives you again um, a little bit more homes to look at. and you're on the safer side because the older the home, the cheaper it's usually going to be."

"Yeah. The the one thing I'll say that keeps you honest is let's say in this case, let's let's just pretend that a comp came up that was built in 2016. You'll know pretty quickly from the curb appeal and the interior of the houses in the pictures that these houses are not alike, you know, and I think from there it kind of just makes you, you know, void that comp a little bit or at least adjust for it because, you know, it's it's clearly looks so much newer."

"All right. And that that that's again, you know, if you go 10 years, you go eight years, you go 12 years, does it really matter? I mean, it doesn't matter that much. You got to use a little bit of common sense. Just like when we were talking about before, you've got to use a little common sense. It's not 100%. You put the numbers in, it's exactly right. There's going to be stuff that you have to look at and use judgment and, you know, make good judgments on."

"Now, is there a year that, let's say, let's say a house is just super old. Let's say it was built in 1910 versus 1920. Is there that big of a difference for pricing?"

"No. the older you get, the the 10 years, 20 years, you could go even further because they're just old and the stuff's the same. Once once I get to like honestly the 1940s, 1940s, 1930s, 1920s, 1910s, I mean, there's a little bit of a difference, but for the most part, they they all have everything you need to change. They're going to have cast iron, they're going to have fuse boxes, they're going to have the old wiring, they're going So, it's all it's all pretty pretty similar. you know, once you start getting the 50s and 60s, they they jump from, you know, breakers to breakers from fuse boxes that, you know, the plumbing is a little different. It's not cast iron now. You start seeing some other different things, but pretty much once once you're in the 50s, 40s, you know, a lot of that stuff is just"

"Old is old. Old is old. Yeah."

"Yeah. So,"

"all right. Cool. So, now we've adjusted the square footage, we've adjusted the year built filters, and now the last thing is sold in the last and then it's the range in which they've sold. So, we now only look at comps that have sold in the last 90 days. And the main reason is is the market is changing. The market is not where it was 6 months ago. And if you look too far back and then take that as today's value, you're going to be you're going to be in for a rude awakening. So, we're currently going back 90 days. Now, it's okay to go back 60 days if there's no comps. I mean, yeah, 6 months or even 12 months, but you got to be like, look, if it's all 6 months ago, we're taking off 15%. If it sold 12 months ago, we're taking off 20%. As long as you understand how much you got to deduct from those comps is okay. It's always best to use within the last 90 days. But in some areas there there's no comps in 90 days. So you have to go further out. You you know you have to go further back. And if you go further back, it's okay if you have to. You just got to understand how to adjust for for the market from then to now."

"and that line of reasoning applies to a lot of things. It applies to the square footage. If a house is 150 ft larger than yours or 200 foot larger than yours or if yours has uh one less bedroom, you adjust based off of, okay, maybe I'm going to deduct, you know, 5% less, 10% less or a certain dollar amount less because there's an extra garage here, extra garage there. So, you have to logically think through and see what's adding value or what's taking away value from your subject property based on the comps. Yeah, I mean garages are important, carports are important, pools are important, all these things are important, but again, once you get your comps, just now you could look at little details like that and figure out how much you needed it up."

"All right, so we're going to apply and then zoom back in to this neighborhood. So this is our house right here, right? Is it What was our address on this one? Yeah, perfect. So this is the subject property right here. So what we're going to do is we're going to zoom out just a little and start seeing what comps have sold. Now, ideally in a perfect world, right, you'd love a house in the same street or same subdivision, but it doesn't always work that way. So, when we are going a little bit of a further distance, which you have to on a case- by case basis, you have to determine if that makes sense to do or not. And some of the things that determine that is does it have a similar curb appeal? Does it look like a similar house? Is it in the same zip code? Cuz even if it's down the street, it could be in a completely different zip code, completely different school district. and you got to see if it makes sense to use that as a as a comp no matter how close it is. You know, one thing that's always been strange to me is like when people would be sending us their comps, they'll be like, 'This house is less than a quarter mile out.' And it's like, I could give a Like, that means nothing to me. Like, what I really want it to be is, does it have similar curb appeal? Is it the same zip code? Is it a true comp? Is it has similar square footage, similar builds? Those are the most important variables. Not necessarily how close in proximity or how far in proximity, but more so how comparable is it. So, in this particular case, this house does have slightly different curb appeal for sure. It doesn't feel like the same neighborhood to me. What would you think based on this one?"

"It's a little bit different, but but it's it's close."

"Sure. Sure."

"So, I'm going to zoom out just a little bit further. So, here here's another thing we didn't talk about earlier."

"That house sold for 294,000. I think that's more than our house is worth, right?"

"But I wouldn't use that house as a comp if I'm trying to buy the house cuz I know it's a better house. Sure."

"But if I'm selling the house,"

"I'll show people that house. I'll be like, 'Look, you know, this is a house um that that's that's similar and, you know, let them decide how similar it is.' I mean, I know it's similar, but I know it's not quite as good, but it's it's close."

"Sure. Yeah. Absolutely."

"I would chill on that."

"Perfect. So, now we're in a position where there's one thing that sold in the last 90 days. So, what are we going to do from here?"

"From here, I'm going to go back and look at six months. I'm going to go back and look at six months and see what sold in the last six months."

All right. So, a couple more comps have kind of popped up in a in a higher area to our neighborhood. So, a little bit further out. Not in the same subdivision necessarily. But now I'll click on it and look. And this one has a little more similar curb appeal than the last ones for sure.

"Mhm. That one's pretty those are pretty similar."

"Yeah."

"I even like ours a little bit better than those two."

"Yeah, definitely. Now, you know, before as up until relatively recently, we actually didn't even use the FMLS or JMLS for access, but what did we do? We would be able to determine based on the outside of a house what we could assume the inside looks like. Is it 100% accurate? No. But I will say that I think it's pretty damn close. Like, I think you can look at the outside of a house and kind of understand its general condition. Because if the house on the outside is super pimped out with super modern wood and you know black painted shutters sort of thing and it clearly is nice new roof, you would assume that the inside probably matches that some. Or if it looks outdated but in decent shape, the siding is washed or it's freshly painted but it still has maybe like old cobblestone, you could"

Assume maybe the inside is probably in similar condition, maintained but probably old and outdated. And and most of the time that that is the case. It definitely is.

All right. So, the next thing that we do because if you still don't have a lot of comps, let's look to see what's on the market. We we'll eventually just go see, okay, what's for sale on the market. And there's nothing in our neighborhood, but if you look at all these other neighborhoods, you you see properties in the 270s, 290s, three, there's a 300, a 290. So, again, a lot of these homes are similar. A lot of the homes we're going to look at to see how how nice were they rehabbed. And, uh, a lot of these homes are not rehabbed. Very nice. So like if you see something selling for a lot less but it's not rehabbed, you know, you got to take that in consideration as well.

You know, one one of the things uh before I do that, one one of the things that in the beginning when I first started underwriting took me a little bit of time to understand is you obviously saw or you're going to see the walkthrough of this house and it needs work. Like there's things that are unavoidable for us to change. For example, let's say this isn't a case in this house, but let's say the cabinets were unrepable. they didn't need to be replaced or they needed to be replaced no matter what we did. But all the comps have painted cabinets with exterior hinges which are kind of older. Well, does it cost us much more just to go with a nicer shaker cabinet? Well, no. So, now our house is going to be nicer than everything else in the market. So, you have to kind of take that into account. You can't just say, "Oh, just because every other comp sold with old cabinets, it means that ours is still going to sell for the same price even though it's a little nicer." No, ours should sell for a little bit more than that. You have to take that into account.

Yeah. They they either sell for more or they sell faster or usually both.

Sure. All right. So now when we go to 6 months, we don't love to meaning it's not ideal to go back in time or to expand some of those filters. But when we do, I think about it like as soon as I press that button, my brain goes to anything that pops up, I have to deduct a certain amount. And same thing with if it, you know, if I'm going a little bit further in year built or if I'm going to adjust the square footage immediately as soon as I expand that filter, I understand what I really need to do is all right, I have these comps aren't perfect. They're not ideal and I have to account for them. So I'm almost like as soon as I see a number, my brain is doing the math as to the deduction that needs to take place or addition. Or addition sometimes you have to add.

Yep. Exactly.

So now I went back 12 months and there are more comps. Not necessarily in this neighborhood. This isn't the case in this particular instance because there aren't that many houses. If you see there's like one street here, there's one there's one other thing I like to do sometimes just for fun.

Yeah.

Um, and you know, again, we could talk for like a whole day about this, but sometimes when you put square footage on Zillow, sometimes it only includes the main level, sometimes it includes the basement, and sometimes it's tricky. So sometimes you think the house's a lot bigger and it's not. So what I like to do sometimes when there's not a lot of comps is just get rid of the filters besides the three months or six months. just get rid of um the the amount of square feet and and and just see what other stuff sold in that neighborhood cuz sometimes there's more stuff that's sold in that neighborhood and it just wasn't listed right on Zillow.

Yeah. Now,

and look at look at this case right here and we just got one. So, let's click on it and see why it didn't come up on our our our

It didn't come up because the square footage wasn't there. And so, if you're putting a square footage range, the minimum square footage is higher than zero. So, so now it doesn't come up.

This is a great example of what we just talked about. So, this doesn't happen like most of the time, but it happens sometimes. And you've got to see these properties. Now, this is an older property also. It also went that came up cuz it's older, but it went that came up mainly because of the square foot, even if it wasn't older.

Yeah.

So, I like to just do that, especially if I don't see a lot of comps. If I see a lot of comps, I don't even do that. But, that's just another thing you can do.

Yeah. The the other thing u that's important to mention while we're doing all of this is like I almost look at every single thing that we're looking at every single property or comp as a data point that's kind of guiding my mind like guiding the direction of my thoughts as opposed to being like oh I saw one this is such a good comp it's the strongest comp so I'm going to take it for face value cuz that's not how it works cuz there's outliers there's people that get lucky and they go on market or things that sell that make zero sense. Oh, the other thing that's very important, um, you were going to touch on that in a second, but now that you mentioned it, sometimes stuff sells on the market, some stuff doesn't sell on the market. Sometimes people are selling stuff to like their family members. Some stuff, sometimes there, you know, there's a probate, they just inherit it, they don't live in town, they're just blowing it out for stuff. So, a lot of these things come in play. So, what do you what do you look at like as far as MLS sold on MLS? How do you comp differentiate the price if it's sold on market or off market?

Yeah, absolutely. So, I'll say 90% of the time when you see a super super low price in comparison to everything else around it, like this is 170 that that that happens to be on market. But in general, I will say it's very common for outliers to not have these logos right here. Sometimes this is inaccurate.

Keep in mind the reason why that's low is because we took the filters out. So, it could be smaller, older houses.

Sure. Sure. Sure. Yeah.

So, good thing you mentioned

you put the filters back on it.

Yeah. It would it wouldn't come up. Yeah. But but but let's say there was just an ally of a property. This logo right here shows that it was listed on market. Now, sometimes things that were listed on market may not always have this, but it's kind of the immediate indicator that I see.

But if you click on it, you could you can scroll down.

Yep. This is how you really tell is when you scroll down to the price history. If it has source and it says GMLS or FMLS, that means that it was sold on market. If it has something like, let me see, right here where it says public record and it says a report, that means it was sold offmarket.

And look how cheap it sold for off market

and it sold for $37,000. So offmarket could, like you said, means inherited. It also could mean a wholesaler stole it, right? We talked about wholesalers in the previous videos. They're sometimes direct to seller and they're trying to get really low prices and that doesn't necessarily affect market value.

And sometimes they sell it to a family member for cheap because it's a family member.

Sure. Sure. All right. So, here we are at this house. We are going to walk it. We're going to show you what we think it's going to cost to rehab it. Then, we're going to underwrite it and tell you what we want to pay for it, what we think it's going to sell for, and how much profit we think we're going to make. So, as you can see, there's a whole bunch of stuff out here. The first step of a rehab is getting everything out of the house so you can work on the house. This is called the trash out. And this is going to cost us probably about $1,500 to take everything out of the house, make it nice and clean, so we can go in and do what we got to do. This is uh when you first walk in the house. So, the kitchen here, I don't I don't like this feel. It feels really tight. Uh, they have like this sink like on the angle here. It kind of blocks makes really tight. I think we're going to do is just going to make this straight. We're going to turn the sink to where it just faces the the window and make it all straight. So, uh, it's kind of a little bit nasty. It's rat crappings everywhere. It's like I don't know what the hell they did here, but it's kind of nasty.

These cabinets you would repaint when you

We're going to paint everything white. So, all these cabinets here we're going to paint white, which is weird is the tops and the bottoms don't even match. They were bought at different times, but they look close enough to where when you paint them, they'll look the same. And then we'll get all new knobs and and stuff. Look how much ratchet shit's on top here.

One of the things that, you know, we also look at is like what condition the consold in, right? Do they have brand new shaker cabinets or like painted cabinets that look good? And that's also adjust how we actually plan on doing the rehab of the actual home.

Do they have granite or do they not have granite? So, I looked at the comps here and we get to the office, we'll go through them, but I saw homes selling for around 270 grand and I don't believe they had granite. So, which is good. We're going to We always put granite in because people have a very high perceived value for it and it doesn't cost that much. Especially on a kitchen like this, there's not that much space. So, we'll definitely uh it's a wow factor for people when they come in and it makes them want to buy it more. So, if you look, the ceilings are really nice. This is really a mostly cosmetic flip. There's not like a whole lot of like very concerning stuff. So, we're going to definitely do paint and flooring. Even the light fixtures are good enough probably. I don't know that I would change any of the light fixtures. The blinds are good. So, let's go out to the deck here. So, the first thing I see here is we're probably going to have to pressure wash and paint the deck. We're definitely going to have to pressure wash the building. It's disgusting. It's full of of crap. But once you pressure wash this house, it's going to look brand new. All the windows are good. We don't have to mess with any of the windows. That's really nice. This deck here, it's pretty sturdy. I feel pretty good about it. So, we don't have to spend any money on this besides pressure washing and and painting it. There might be a couple pieces of wood we'll uh replace, but very minor. And um, you know, one of the other things that we look at that I know for a fact that we took into consideration underwriting is in this neighborhood, it seems like all the backyards are like this just based off of what it's looking like. But do you notice how like there's no walking space? There's no like flat land that we can like lounge at. The backyard's really just this kind of patio area. As long as all the comps are like that, then we don't have to adjust what we think the ARV is. But let's assume that some of the comps had like a lot of flat area that we could have used and is usable. Well, then we have to deduct what we think this house could sell for cuz someone's going to look and be like, "Man, that house had a really nice backyard and sold for that price." This house doesn't really have that.

Could you imagine that shit's locked?

There's no way to get it down.

The one cool thing about this house is that it's got a big sideyard here. If you can see, and you can play on the sideyard. But yeah, a lot of families won't buy a house if they don't have a yard for their kids to play. But I think this one should be okay. It's not the best yard, but I think it's doable on on the sidey yard over there. Lots of wind. It's already got a lot of built-in storage, which is great. Look, there's storage up here. Here. This is uh more than normal. It's got the water heater here. Just a lot of crap in here. They need to sweep all this out. Get it get it ready. So, this garage door is completely fine. We're not going to do anything with this fully off like

Yeah. So, one of the first things we're going to do is get a new garage door because you can't lock the uh can't lock the house up as good. We could lock that door, but plus you don't want all the neighbors complaining and calling uh code enforcement stuff. So, we just want to get all this stuff. Here's Donnie. He's the one that does all the cleanouts here.

How y'all doing? How you doing?

Yeah. So, uh, let's go upstairs and check out see what we got to do. And this is all cosmetic. It looks nasty, but it's uh it's not that bad. Master bedroom. It's full of ratchet in this bathroom here. The layout's good. The tubs are good. Uh, again, it's a lot of clean up, a lot of painting. We'll we'll put some granite on the uh over here on the sinks, countertops, and then change the lighting and we'll paint the paint the cabinets and put some new knobs and stuff on there. Make it look brand new. Nice. So, this is relatively cheap to do all this. Secondary bedroom. Secondary bedroom. Same thing. It's just really cosmetic. It's just paint and flooring. There's rat everywhere. If they had kids, the kids live with rats. This is crazy. But I've seen 100 times worse. But again, people I don't understand why they do what they do. But, uh, not much to do here. You know, the ceiling's good. The fans probably reusable. U, but once we paint this, put new flooring, this is going to be really, really nice. All right. So, we saw the main level and the upstairs. We're going to go downstairs and see what all we need to do. Smells a little bit mild dewy. Definitely some moisture down here. I saw a crack in the driveway that water was coming down. I'm pretty sure that's what all that is over here. So, we're going to fix that. Just put pour some new concrete. But here, you can see there's a little bit of mold on these walls here. we are going to get rid of that, treat it, make sure it never comes back.

Like one of the biggest mistakes that we see even from people that like really know what they're doing is they overvalue the basement. So what do I mean by that? Like let's say a house is above grade, meaning everything above the basement is 1,500 square ft and the basement is an extra 700. They'll comp it as a 2100 square foot house, but you really likely should be comping it based off of what the neighbors are selling as. So, if the next door neighbor just sold down the street for at a 1500T house and we're comping it as 2100, it makes zero sense. It doesn't matter if it's finished, it doesn't matter if it looks just as good as the upstairs, like same flooring, same paint, same lighting, everything. It's still worth significantly less. So, yes, it's a great addition. It does add some value when you have a finished basement, but nowhere near what the rest of the square footage is worth. So, we we'll go through that in depth at the office, but that's a super important thing to mention.

All right. So, now that you guys have seen how we're trying to determine the ARV, right, where we're getting a whole bunch of data points, we're critically thinking through, we're making deductions in additions to a lot of the comps that we're seeing. some of which are great comps, which means they're very similar to the property, and some of which aren't exactly the same, and we have to still use them as data points to kind of lead us to a conclusion. So, on this particular property, after looking at everything we looked at, after seeing some older properties sell for um a high price, fully rehabbed, after seeing some sell in maybe a little bit different uh or further away subdivisions, but with similar curb appeal, we're pretty confident that this ARV is at a $270,000 price point. Now, we have one of the three variables we need that we talked about in the beginning, right? Now, we have the ARV. The second thing that we need is the rehab cost. Now, a lot of the times, we're not actually going to these houses on site. We're getting the pictures, which is why it's so important that we have to have seen them. And when we're looking at those pictures, we're trying to determine a couple of things. We're trying to determine one, what does it need, right? How much will it cost us to do it? And I think that can be really overwhelming for a lot of people that aren't super super experienced in the space. Well, we actually have guidelines of the types of rehabs that are needed. So, everything that I'm about to write down right now, I will say the starting point of it is that the house is livable. Not saying that me or you guys would live in it. I'm saying that if a storm was happening, you could physically live in it and it not be like, you know, you getting soaked in horrible condition, right? So, it's a livable house, right? it's structurally sound. So, there's ranges of rehabs. And what we're going to do is we're going to go off of the square footage. So, right now, we're going to show and break down the price per square foot. So, a $10 a square foot price is usually equates to flooring and paint. All right? So, you're, you're putting in LVP, you're going to start painting some of the walls, all the ex, all the interior paint. So, $10 a square foot, wrap, flooring, and paint. And obviously, again, these are all frameworks. These are all things that are guiding our thoughts to determine a conclusion. These aren't set in stone. This isn't like, oh, it I know it needs foring paint. That's it. There's there's more critical thinking that is to be involved in this process. So, please keep that in mind as we're saying these prices. Now, let's go to $20 a square foot. And also, there's inbetweens of these, right? They don't have to exactly be $10 or $20. So, $20. Now you're going to start. All right, we're going to start. We're going to paint cabinets. We're going to obviously do everything above, right? So like this one's also going to include flooring and paint new fixtures as far as on the cabinet doors. You know, one of the things that is very common and it's a very good move is painting the cabinet doors and then putting in modern handles to kind of modernize the cabinets a bit. So you don't necessarily have to replace the cabinets, but you can actually make them look a lot nicer. and you might put new fixtures in the bathrooms. $20 a square foot is getting you flooring and paint and then putting modern small modern touches on things. $30 a square foot. Now we're getting into new cabinets, new vanities in the bathrooms, and then everything that we mentioned above. All right, $40 a square foot is all right. We're starting to get into the pimping out a house territory. We're we're going to put nice backsplashes. We're going to make it really modern. We're going to put new quartz in. We're going to put undermounted sinks. We're going to really, really make this house nice. So, now we're getting into the nice and modern rehab space of a of a rehab. Now, when we're getting into like the $50, $60 range, now you're talking about these are luxury rehabs. These are these are what you would put in $600,000 homes, million-dollar homes. These are the types of rehabs that you're doing. You may be putting things like barn doors or really nice glass showers, things that aren't necessarily for the average home, but they are luxury rehab. You look at them and you're like, "Man, these light fixtures are really nice." The, you know, things like more expensive switches, more expensive, you know, small little fixtures and elements of the house that add up. That's what we consider $56 a square foot. It's kind of that more luxury luxury rehab. So, when we have this range here that'll kind of guide the type of rehab that we need, how are we determining where we're going to go with this? Well, one, how bad a shape is the house currently in? Like I mentioned, when we're going through Zillow to determine the ARV, let's say our house needs new cabinets. Whether whether every comp around it has new cab has old cabinets, our house needs new cabinets. So, we kind of have to do this, right? But let's say it didn't. We have the choice now to should we just replace the cabinets or should we paint the cabinets. How do we determine that? Well, then we're going to look at the comps and we're going to see what condition do those comps sell in and that'll determine how much we spend, right? If everything around it has a nice modern rehab, well, guess what? I'm going to have to do a nice modern rehab. If everything around it has a flooring and paint rehab, right? Where it's like not new quartz, not new cabinets, just new flooring and paint. Well, guess what? That's what I'm going to have to do to match the the average. I don't want to be an outlier in any market. I don't want to be the house that sells for the most. I want to be the the average, right? So, that's kind of how we're determining how much we want to spend on these rehabs and the type of condition we want. In the same note, what I don't want to do is I don't want to make a luxury, ultra luxury rehab in a neighborhood that's all flooring and paint rehabs. So, this is a framework as to what it should cost per square foot based on the type of rehab you need. Okay. So, now we're we're we kind of understand what we're looking at. What isn't included in these prices? So, this is what's not included in those prices. HVAC, right? So, that's central heating and air, right? That's not included in the flooring, paint, cabinet, modern luxury rehab. If a house needs a new HVAC, the price that we use as a ballpark range, again, this will vary on size of house, how many units it needs, but for the most part, if it's an averageized home with one HVAC, this could expect us to cost us around 7,500 bucks. All right, so that's what's not included. So, let's say it needs a uh paint cabinets and new fixture rehab for $20 a square foot, and it needs a new HVAC. Well, it's going to be $20 a square foot times the size of the home plus the HVAC, right? So, these are additional costs. A roof again will vary on size of the house. But as an average, again, like the way we're putting it for an HVAC, the average home you could expect to spend around $10,000. All right. What else is not included is exterior repairs. So, what do I mean by this? All right. Let's say it has siding, right? and the sighting needs replacement or it's super old or maybe you need to fix certain siding or maybe the gutters are falling off or maybe you don't need to replace the roof but you need to patch the roof or you need to pressure wash the outside. These are all additional costs that that you need to account for cuz they're going to cost you money, right? So, that could also include cracked driveways. If it's a really bad driveway and it has horrible curb appeal because of how bad the condition of the driveway is, you might got to replace it. That amount can heavily vary, right? Right? So, you have to use your best judgment. If it just needs all new sighting around the house, it could be 5, 7, 10 grand depending on the size of the home. If it needs small patchwork, if it needs pressure washing, you can account it for a couple of grand here, a couple of grand there. But, you're just doing a mental check mark of where you think it could be. So, this this could range, right? So, this ranges. What else isn't included is foundation. So, let's say there are foundation issues with the home. How do you see foundation issues? Maybe we can have some examples as I'm talking about them so you can see what I mean. But when there's cracks coming off door frames, that could usually mean settling of the house, which means the house is shifting, right? So there might be foundation issues, and that could range dramatically. That could be a $5,000 fix. That could be a $20,000 fix. The other thing is if there's moisture in the basement and you see on bricks there's like major cracks, that could be a major foundation issues. So foundation is another thing to consider. that would be on top of this overall cost. So, foundation issue, it also ranges. The other thing that's not included is pools. So, if you have the average home we buy, right, is not a super luxury rehab. We do have some that that are, but for the most part, these are average to lower than average homes. And if they have a pool that's unmaintained, for the most part, it will be cheaper and better to just break the pool and fill it. But guess what? That's not free. It costs money. So, if there's a pool that needs to be addressed, that could cost us anywhere from 5 to 10 grand. So, if there's a pool that needs to be addressed, whether it's being fixing it or it's us filling it, we still have to address, we still have to account for it. So, now that we have the price per square foot and the things that aren't included within them, now we can start kind of playing with the ballpark of how much things will cost. So, the the comps for this particular home, right? The one that we said has an ARV of 270. As we're walking it, you can kind of see it obviously is going to need flooring, paint, new fixtures. We're probably going to paint the cabinets cuz the cabinets were in pretty decent shape. We're going to put new modern fixtures on it. I mean, all the comps in the area aren't really putting in new cabinets with quartz countertops and undermounted sinks. They're not really putting in that stuff. So, we think that a $20 a square foot range is very reasonable. But there's another main element to keep in mind. The bigger the house becomes, the less this really applies. Let me tell you why. Abraham's house is 14,000 square ft. Okay, 14,000 square ft. Now, I know, poor him. So, his house is 14,000 ft. So, you're not going to do Let's say I was like, "All right, Abraham's house needs a $20 a foot rehab." Or, let's say, you know what? It needs a $30 a square foot rehab. It's 14,000 ft², which this is considering is that the kitchen is the most expensive area of a home, right? The kitchen and bathrooms are the place that you spend the most money in the home. Everything else is kind of just paint and flooring for the most part. There's there is more stuff. There could be windows, there could be this, there could be that, but for the most part, the kitchen and the bathrooms are where you spend the most amount of money. So, if you're going to a 13,000t house, well, it only has six bathrooms. It still only has one kitchen, right? So, now the price per square foot has to come down. So, the way that I think about it is, okay, let's say 2,000 square ft out of Abraham's 13,000 is the most expensive stuff, which is the kitchen and the and the bathrooms. I'm going to take 2,000 ft and I'll multiply that by three that by $30. But the rest of the square footage is just flooring and paint. So, I'm going to deduct that amount. I'm going to take the $11,000 remaining, right? And then I'm going to put $20 a square foot, right? Because it may need only paint and then cabinets here and there or $10 a square foot of only needs flooring and paint. So, when the houses become bigger, just know that these won't always apply. You have to use critical thinking, right? Again, it's going to be the main words of the videos. Really logic your way through underwriting. It it's not a complex thing. What it is is you have to really think through, okay, how much does this make sense? Does it make sense to comp it this way and to get the ARV of this number? Does it make sense for me to spend that much money on this home? That's basically what it boils down to. So, with this particular home, it was approximately 22,500 square ft. I I I think we can get away with a $20 a square foot rehab. So, now we're at 45,000. The house is 2,250 ft. It needs a $20 price per square foot type of rehab based on the comps that we saw, right? So, painted cabinets, new fixtures, flooring, paint, etc. So, $20 is the right number for it. So, I'm going to multiply the square footage by $20 a square foot and we're at $45,000. Now, I did see when I go into the house, there might be some siding that needs to be replaced. There may be some window repair. There may need to be some pressure washing. So, I do think this will likely need an additional 5 to10,000, likely closer to the $5,000 range in exterior repair. So, now what our rehab costs is 50,000. So, when I get to this number, this is my moment of step back. I step back and I say, all of this stuff has guided me to this conclusion. Does it make sense? There are times where I apply it and I'm like, damn, that's way too much money. I could just tell it's just my gut instinct that that doesn't feel like a $50,000 repair. So, I take a step back here and I look at 50,000 and that makes sense to me. I could see how we're going to spend 50,000 on this house and I could see what it's going to look like once we spend 50,000. So, that is my like final level of confirmation is does it make sense? These numbers are not rules and laws that we cannot break. What they are is it's a framework to guide us, right? So, that's kind of how we got here. So, at this point, I'm going to erase everything here. And we've gotten two out of our three variables, right? We're at $270,000 for the ARV. We're at $50,000 for the rehab. The last thing is to plug this into our formula. I highly encourage that you guys take a screenshot of this cuz this really is the framework I use every single house that I underwrite. And it's proved to really help me nail down my rehab numbers. Is it perfect? Absolutely not. but it's a great framework to get you in a really accurate ballpark. Okay, so now we have the variables we need to finally get to what we all been waiting for, the number that we can either buy or lend on this. So we have 270,000 for the ARV and we have 50,000 for the rehab. Now we have to plug it into our formula, right? Again, just so that we have it in mind, ARV times 80% minus the rehab. We plugged it into the formula. 270,000 times.88 minus 50,000 in our rehab gets us to a number of $166,000. Now, keep in mind before we went to the house, we didn't see it. We didn't walk it, right? So, there's like a certain level of unknown, right? We we've got to be safe on it. But the price that we were able to actually get this at was our purchase price was 154K. So we bought this $12,000 under what our purchase price actually was. So that's a really good deal, right? We're we're going to make more than 20% on this deal based on those numbers. So let's say I felt like super confident. I'd walked the house. I knew that it wasn't going to be worse than 50,000. 166 could have made sense, right? So, if I was like 100% gunhill, 1666 could have made sense. But the person that brought it to us said 154, we maybe slightly negotiated. You never want to just say yes. We actually ended up buying it for less than we were willing to pay for it or what our formula says we could pay for it. So, we should be doing really, really good on this house. Now, because we've kind of touched on what we needed for for lending, a lot of the times people will say, "Okay, at this point, is this also your lend amount?" And or sorry, is this also your lend amount? And what I will say is it can be it can be our max lend amount, but there's another variable that kind of comes into play that I touched on earlier, which is does the borrower have skin in the game or have we worked with them a ton to where I'm willing to lend them the entire amount? We have sometimes when we're super safe on a deal, we'll lend the entire amount. But most of the time, especially with first-time borrowers, we're going to go even less than this because we want to account for oh, if they need to have a vested interest. The second thing to consider when lending, right, is this is our this is our max purchase price. But guess what? If we had to foreclose, there's some foreclosure costs. There may be holding periods. It may take some time. So, we have to go a little bit less than this to account for that, right? So we have to account for let's say x amount of attorney fees, x amount of holding costs, x amount of x amount of time that has gone by. So those are the type of variables that we consider if we were going to use this as a lend amount. We might just be a little bit safer because of those reasons. However, for the most part, yes, this could be our max loan amount in the right circumstance.

All right, guys. So I'm sure you've noticed at this point in the video that Abraham is no longer in it. Um, the main reason why is as I'm teaching underwriting, he actually has to continue underwriting. you have some emails to catch up on. But I hope you guys found this super helpful. I I highly recommend that everyone who watched this a few times, ask questions. If you guys have access to us, please feel free to reach out. Um, you can you can message us, you can email us, and you can text us all your questions. We're more than happy to help and kind of walk through. As much as I've said throughout this video, which I'm sure there's like a huge counter. It's like I've said it a thousand times. This is a critical thinking exercise, right? you're you're logicing through everything that you're mentioning and it takes time to basically really hone in on getting an accurate ARV and rehab number. So do reps constantly check yourself and the truth is the biggest gauge if you are lending on something or you're trying to sell something and you're trying to underwrite it is sending it to us and being like, "Hey, would you guys lend on this for this amount? Here are my numbers." and I'll tell you the reason why I'm off on your numbers is because your rehab is off and here's what I'm seeing that determines that. Or here is why I think your ARV is off. Tell us your numbers when sending us things. Whether it be deals that you want to sell us, whether it be deals that you want to borrow on, use us as the guide to be able to tell you how far you're off. And we're more than happy to take the time and tell you why. Now, we'll do that two, three, four, five times so you guys make sure you're able to get it. And at some point, if you're really committed to really learning our process, you will get really accurate really quickly. So, it's a it's really a test of time and just repetition and doing it over and over again. And every time you do it, you're just going to get a little better at it. So, if you guys have any questions, leave them in the comments below. I know this is a longer video than usual. I know it's a lot more um, you know, educational than we're trying to be as entertaining as possible, but this is the most anticipated video we've had in a very, very, very long time. So, we're excited to share it with you guys. We hope you guys got a lot out of it. Now, let me get Abra up here so he can give you his closing thoughts and uh he can say bye to you guys. All right. So, I hope you guys liked today's video. We made this video especially because we got so many comments asking for underwriting. So, if you want to see other types of videos or you want to see more different things that we didn't talk about today on underwriting, let us know in the comments and we'll make sure to make those videos in the future.