Determining After Repair Value

Last week we wrote about determining the real spread on a residential property.  One of the key components to do this is determining the After Repair Value (ARV).  This is what the property should sell for after it is all fixed up.

Determining the correct ARV is one of the most important skills to understand in real estate investing. 

We use the following formula to determine if there is potential profit in a property.  You have to purchase the house at between 60 and 70% of  ARV  (after repair value)  minus fix up costs.   We always say you make your money when you buy your property and realize it when you sell.   If the ARV number is not correct and the house is not really worth that much, the profits are less, maybe non-existent and worst case, maybe negative!

So how do you get that correct ARV.   Many programs advise you to get a Realtor to do it for you.  We have found that Realtor’s skills in determining ARV vary widely so we have learned to do this ourselves.  If we have time, we perform some or all of the following analysis steps.  If we are very busy we ask a trusted Realtor to do this for us and we figure a way to pay them for their efforts, such as give them the listing when it is time to sell.

If you can get direct access to the Multiple Listing Service (MLS) in your area we highly recommend that.  In many areas a Realtor can give you limited access to the MLS.  Limited access means you can see everything but the confidential stuff, like how to get into the house, etc.  MLS access is important because it contains so many of the key data points required to perform an accurate ARV determination. 

We have a friend who recently went to refinance a rental home he has.  He wasn’t happy with the appraisal so he asked us to perform a sanity check.  We went into the MLS, found comparable homes (comps) that had sold and came up with a projected value almost identical to that of the appraisal.  Bottom line, the method we use is fairly accurate.

Sometimes a seller will say they went to zillow.com or Trulia.com.  These sites offer projected values but we have not found them to be accurate enough, especially when the spread (see previous blog) is tight.  These sites do offer some of the comparable data points and provide a good general ballpark estimate most of the time.

  • You will need the following information on the subject property.
    • Where is the house located
    • How many square feet is the house
    • How many bedrooms and bathrooms
    • Garage and basement information
    • Lot square footage
    • Year the house was built
    • Tax Assessment  (sometimes helps, sometimes doesn’t)
  • Once you have all that information, you are ready to search for houses that have sold in the same area, that are as similar as possible to the house you are determining the ARV for.  You should try for at least three sold houses for comparable sales more than six would be overkill for most situations.  These houses should have the following:
    • If at all possible be within a 1 mile radius.  (the less dense the population the wider the circle will have to be, just remember the closer the better)  For the best comps try to stay in the same neighborhood, the further away, the greater the risk the comp is not truly comparable.
    • The more recent the sale date, the better the comp.  Something within three months is good, something two years old has little meaning.
    • The house should  match the items of the home you are determining the ARV for as closely  as possible, i.e. same style, (rancher, colonial, split level, etc.)  number of bedrooms and baths, basement or no basement, garage or no garage, square footage, lot size, you get the idea.  When differences do occur, you need to make adjustments, either plus or minus, in your ARV.  For instance an extra 200 square feet and two bedrooms would mean you would need to subtract the value of those for the comp’s selling price to determine your ARV.  If your property had a garage and the comp did not, then you would add to the comp’s sold price the value of the garage.  The value’s for these additions and subtractions will be dictated by the market you are working in.
    • If possible look at pictures of your comparable sold houses.  Are they fixed up to the same degree you plan to fix up your property?  Do they look brand new or good or not so good.   You are trying to compare apples to apples.  Once again additions and subtractions may be necessary.
    • Do not use short-sales or foreclosures for comps if you don’t have to.  Yes these properties will be your competition when trying to sell but there is a very real difference between a retail sale where the buyer can take possession quickly and easily and a short sale or foreclosure sale.
    • It also helps to take a look at (on line) the active properties for sale around your property.  This will give you a good idea of what your competition is.
  • Now that you have your comparables you start with their individual sold prices.  Calculate the additions and subtractions as described above on each of the comparables.  The resulting adjusted prices should now be as close to your property’s ARV as possible.

As you can see from the discussion above, determining ARV is a science that may require a little creativity to get to the right number.  Once you master this, you will know if you have a potential deal or not.

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