Estimating ARV - After Repair Value
The most important piece of the process of finding a good deal is understanding what you are going to be able to sell your home for when you do the proper rehab. This number is the starting point for evaluating properties and where you will understand if there is profit to be made or if the deal doesnt have enough of a spread. Estimating the ARV is both a science and an art and even the most experienced real estate agents or investors sometimes have trouble producing this number. If you understand the process and how to go about figuring this number, you will be able to come up with accurate After Repair Values.
By being able to accurately and consistantly estimate the resale value of a home, you are going to be able to reduce the risk on your investments for yourself and your investors. I am going to describe the process that you should take in order to come up with an accurate number for this specific step in the process.
#1) Pulling comps: If you are not famililiar with getting information on compartive properties, this is a step that you may need help with. You will need to get information on other properties within your area that have recently sold, have a simliar structure and similiar features as the property that you are looking to sell. There are several different sites on the internet that are useful such as zillow, trulia and movoto but the most accurate information is found on the MLS (multiple listing service). In order to have access to the MLS you have to have passed the test to become a real estate agent and paid the fee to be a member. If are not a licensed real estate agent yourself, you will need to begin working with them on this step to make this process easier on you. Agents will be willing to pull these comps in anticipation that you will work through them to list & buy your properties.
Once you find access to the MLS through an agent of your choice, you are going to want them to pull some comps for you in comparision to your subject property. "Comps" are simliar properties to what your property will be after the rehab process. If you can get a good idea of what these houses have solf for you should be able to come up with accurate number that you will be able to sell your home for. This is a simple concept and should be fairly simple to do if you have an adequate agent working on your team.
Just to touch on what I mean by similiar, let me explain what you are looking for when you or your agent are pulling comps.
Time of sale - Properties that have sold in the last 3-6 months
Location/ proximity- Properties that are close to yours, Know your neighborhoods, because prices differentiate from neighborhood to neighborhood.
Age & Style- Homes that are within 5-10 years of being built and are similiar styles (Ranch, Contempory, Raised Ranch, Split level etc)
Size/ Square feet- Want simliar sized homes
Bedrooms/ bathooms- Adjust property to same bedrooms & bathrooms
Condition- Is the comparable property in excellent condition, good, fair, or bad
These are all features of your comparable properties that you will have to look into so that you can adjust your subject property to give you an accurate reading of your ARV.
Now your job is to go out and find 3-5 properties that will fit the mold to match your subject property and move on to step #2 which we will discuss next.
#2) Adjusting your Comps: At this point you should have atleast 3 good comparables for your analysis. This next step is a little more complicated but after you do it a couple times you will begin to get the hang of it.
The purpose of this step is to make adjustments to your comparable properties to give you a more accurate prediction of what your subject property will sell for. By making the proper adjustment you are going to give yourself an apples to apples comparision. If the comparable properties are different you will need to make adjustments to give yourself a better comparison for your investment.
Heres a quick example, lets say that one of your comparable properties is basically identical to your subject property except your comparable property has 4 bedrooms and your subject property has 3. You find out that this comparable property sold for 150,000 two months ago. Now this is a very good comp and one that you want to use in your comparision since they are so similiar. To make the proper adjustments you want to ask your agent, what does an extra bedroom increase the value of your home by. In our market (Syracuse NY) an extra bedroom will usually increase the sales price by 7,000 (just an estimate). So what you want to do is take the comps sales price of 150,000 and deduct 7,000 to give your subject property an adjusted ARV of 143,000.
In order to make the proper adjustments you take each comparable property and compare the features to your subject property and make the pricing adjustments to give your property an adjusted sales price. Like I said this can be confusing but the more properties you evaluate the easier it gets. I have created an excel sheet that does the math for you. If you are interested in this excel sheet, let me know and I will send it over to you.
#3) Determing the sale of the subject property (your investment property):
After you run the number on all of your comparable properties, it is time to put all the adjustments together and come up with an average number that you are comfortable with calling your ARV. Remember this number is very important in determining if you have a good or bad investment on your hand. For example see below for a set of adjusted comparable properties
So based on this analysis it is fair to say that our subject property is worth anywhere between 106,000 and 112,000. You always want to be conservative with your approach to ARV and ensure that the numbers work with the most conservative number. For our sake we will use 106,000 to work our numbers.
Conclusion: Determing the ARV will take some time but with an accurate determination of the resale value you will be able to limit your risk with your investments. In this business if you are able to compute accurate data you will limit your exposure to making a bad investment. Just like any investment, the possibility of losing money is always there because we usually dont completely know what rehabs entail until we open up all the walls and get into the project. This is why you want to be conservative with your ARV and give yourself a contingency on all your projects.
I hope this helped to give you a better idea of how to accuratly predict the resale value of your investment.