Determining the after repair value for real estate investing
Hey, great blog. How are you coming up with your ARV values? What's your process?
|LM says: Eduardo, thanks for the positive comments. Coming up with the after repair value (ARV) has been one of the hardest things for me to learn in this constantly changing market. I am by no means an expert on it but I have become better at it. As much as you can use formulas for other things in rehabbing, coming up with the ARV is different for every house. |
Generally, I start by looking on the MLS for what has sold in that same subdivision within the last three months.
(Alternatively, you can carefully use Zillow to look for solds and then back it up with searching the tax records to verify Zillow information)
Why three months? Because this market is changing constantly (usually for the worst) and three months is as good a picture as you can get of what the neighhborhood is going for. If I were to look at something that sold six months ago, too many factors might have changed already plus remember that it takes me 2-3 months to get the house on the market so by the time I list it, get a contract on it and an appraiser goes out there that six month old comparable is now 9-10 month old and the appraiser might not use it.
Example. Look at House #6...when I first considered this property I found comparables that had sold in the $105-115k range and they were not as nice as this house was going to be when I was done with it. Therefore I determined the ARV to be $95-98k and made all my calculations based on that ARV.
The big red flag for me should have been not what had sold but what was on the market at the time I bought House #6. There were several homes in the market that were foreclosures. That was at the end of last year. Now those homes have sold and the appraiser that went out there a couple of weeks ago used some of them as comparables. Sure enough he ended up appraising my house for $95k, which is $5k less than the previous two contracts for that house.
Therefore when determining ARV I use both recent sales and what is on the market at the time. I do, however, look for homes outside the subdivision if I cannot find recent sales in the same neighborhood. Appraisers are allowed to use comparables up to a mile away from the subject property, so I do the same.
When looking for comparables I look for houses with the same number of bedrooms and bathrooms and similar feautures. I also look to see if they have been remodeled or are in original condition, and wether or not they have the same feautures that my house will have when I am done with it.
I have run into properties where I simply cannot find comparables that will allow me to get to
the ARV that I need to profit on that house based on the price that I can buy the house for. I have been guilty of trying to make a comparable "fit" what I am looking for and give me the ARV that I want but I have learned that I am only fooling myself into making something a deal when it really is not.
So, I have walked away from a house if I cannot substantiate the ARV that you need. It's possible that I might be walking out on a good deal but if I don't have the evidence up front I will not go for it. Maybe when I have more experience I will be able to make this call but not now.
Another thing I do is I call on the for sale signs in the vicinity of the property. I talk to the agents and see what they can tell me. From the MLS I can see how long they have been on the market but when I talk to the agent I ask things like: "why hasn't it sold?", "have you gotten a lot of traffic?", "what are the positive/negative comments you have gotten about the house/neighborhood?", etc.
Some agents will be totatl jerks and not give you the time of day but many can be very helpful. Once you ask the question, SHUT UP and just listen, let them talk until they are done and pick up on everything they say.
One more important thing...
I have created a relationship with two appraisers and when I am serious about a house, usually when I have it under contract, I hire them to do a desktop appraisal. This is basically a review of what has sold and what is on the market near the house that I am considering. This has been HUGELY helpful to me not only because it is done by someone who is more knowledgeable than me but because it is an unbiased opinion.
I give them the details of the property and what my plans for it are and then I let them do their thing. I do not give them my opinion, what I am paying or anything else as I want them to be as impartial as possible. Then they come back to me with what they think the ARV will be based on what they found out.
Only when they get back to me do I tell them whay I think the ARV is and then we see if we agree or not and why. I can tell you that for House #5 the appraiser was higher than me, on House #6 he was lower than me (and I did not listen!) and on House #7 we were dead even!! Hopefully that means I am starting to get it...
That's it...that is how I and others I know of come up with ARV's. It is definitely not an exact process but in my opinion it is the single most important part of rehabbing and flipping houses.
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