Scale of Livability

What it is

There are basically three different ranges that houses sell for. You can see it in the sales data for any neighborhood — the clusters are right there. The first cluster is bombed out. These are the ones that need to be gutted or already are. Then you pass what I call the line of livable into barely bankable. These houses are livable and a bank would give you money to buy one, but they’re very outdated — they need work to really take them to the next level. And then you have the range of comps. This is where all flippers are trying to put their houses on the market.

I find it easier to look at these three ranges on a flat line. That line is the scale of livability. As a house flipper, you’re trying to buy houses on the left side and move them to the right — ideally into the range of comps. That’s where the money is. But not equal money. And that’s where it’s important to understand return on investment.

Why it matters

The best return on a rehab dollar is always the move across the threshold — from bombed out to barely bankable. That’s where a $30K investment can add $100K of value, because you’ve just crossed the line where banks will lend and mortgage-backed buyers will buy. Value doesn’t climb gradually across this spectrum. It jumps at the line.

The problem is when you have a house that’s already in the range of comps and you try to take it further along that line. That’s where you really get in trouble. You can move a house up through the range of comps without spending one-to-one money to do it — that’s what psychological hacks and the big three are for. But past the top of the range, every dollar comes straight out of your pocket.

I ran into this just recently. What I wanted to do was just buy a house and creep it forward through the line of livability into the barely bankable category. After getting into it a little bit, I found out I wasn’t going to be able to do that. I was actually going to have to gut it, bring it all the way down to bombed out, and then try to hop all the way over to the range of comps. Because once you’re at bombed out, you really don’t push it to barely bankable. You have to go all the way.

The road from bombed out to range of comps is not totally linear — it’s that last 5% that gives you basically all of that two-to-three times ROI. If you’ve done 95% of the work, you’ve been in there for months, and you just want to get that thing on the market — don’t. The buyer who just walked in for the first time doesn’t see a house that’s improved from trash. They see a house that’s 95% done. That last 5% matters.

How it shows up

Different flip types sit at different positions. A wholesale play trades a bombed-out house to another investor without moving it. A wholetail moves it a few inches right with minimum work. A cosmetic flip moves a barely bankable house to the range of comps. A full gut job takes something close to bombed out all the way across the scale — highest risk, highest capital, highest skill version of the business.

The scale also explains why hard money exists. Below the threshold, conventional lenders can’t underwrite the asset. Above it, they can. Hard money bridges the gap during the phases where the house is untouchable to a bank. As soon as you cross the line of livable, you can refinance into conventional debt or sell to an end buyer. That crossing is the single moment where the most equity gets released in the entire project.

Related

bombed out, barely bankable, range of comps, baseline, over renovating, hard money, forced appreciation