Forced Appreciation

What it is

There are two types of appreciation. market appreciation is the house sitting there, used to be worth $200,000, just by sitting there a few years later it’s worth $220,000 because the market has risen. Then there’s forced appreciation, and that’s where this formula comes into play.

Acquisition price plus rehab equals ARV. If I buy a house for $100,000 and do a $50,000 renovation, the house is now worth $200,000. That $50,000 I put into it is forced appreciation. That’s what you do by doing work — manually forcing value, equity, into that house.

The other way people describe it: market appreciation is working out every day, getting stronger over time. Forced appreciation is taking steroids. You want the value to go up fast, not wait 5, 10, 20 years for the market to drift up on its own. The steroids are the renovation.

Why it matters

Here’s how I lost $200,000 on a house: I got the ARV number wrong. I was really relying on market appreciation. I thought, okay, the project is going to take me this long to get finished and then get back on the market, and by the time I get it on the market it’ll be worth this much based on how much the market is increasing. Well, the thing is the market doesn’t always increase and you really can’t count on market appreciation. What happens when you just rely on market appreciation is you’re speculating and that is risky and that’s not what we do as house flippers.

What we do as house flippers is we calculate what our profit is going to be and then we land this plane.

The other big thing: forced appreciation determines how much equity you can extract through refinance. Banks lend on appraised value. If you forced appreciation on a house, you can refinance at the new value, pull money out, and recycle that capital into the next deal. That’s why BRRRR works.

How it shows up

Say the ARV is $300,000, you buy it for $150,000, do $50,000 in renovation. Total in: $200,000. Sell for $250,000. You made the difference. That’s a house flipper. Now some flippers choose not to sell it — instead they refinance at that new value and hold it. Let market appreciation take hold from there.

The trap is over-renovating past the range of comps. If everything in that neighborhood is selling for $300,000, I don’t care if you put gold-plated backsplash in that thing — it’s still selling for $300,000. Forced appreciation moves a barely bankable house to the baseline of the range. Everything above the baseline is over renovating and earns diminishing returns.

Related

market appreciation, psychological appreciation, scale of livability, baseline, refinance, speculation, over renovating