If you don’t know how to determine a property’s ARV properly you probably won’t be in the business very long.
For those that don’t know, the ARV (after repair value) is the estimated value of a property after maintenance, repairs and upgrades are complete. Calculating the ARV is similar to doing a comparative market analysis but with a hypothetical property.
This is one of if not the most important numbers to know but one of the hardest to determine properly. There are infinite considerations but here are some tips that can apply to any property.
Mistake #1: Bad comparables. Just because it has the same bedrooms and bathrooms doesn’t mean they are comparable properties! You really want to narrow it down to real comparables. Apples to Apples.
Mistake #2: Listed prices are not comparable! Listed prices are someone’s opinion. People list their property based on emotions, sentimental values and financial needs. The reality is homes are bricks, sticks and dirt. If you’re getting comparables from listed prices on the MLS you’re going to be WAY off. Look at solds! Get a realtor to get you solds in the last 6 months or less. Make them recent. A lot can change in a quick period. Last year’s solds will be no good.
Things that need to be the same in your comparable properties and your subject property other that beds and baths are:
Must #1: Vintage – Trends and styles change! Anything outside of 10 years of your property’s age is not a comparable vintage.
Must #2: Building style – If everything is the same, rooms, square footage and they’re right next to each other, but one is a townhouse and one is a duplex, or one is a Bi-level and one is a rancher. These won’t work!
Must #3: Square footage – You simply want this to be as close as possible. As the properties get larger and larger your allowable range will increase but ideally you don’t want a difference of any more than 10%
These are the basics. But don’t forget to consider the more forgotten factors. These are often forgotten or overlooked but can mean the difference in tens of thousands when it comes to selling time and could mean the difference of making or loosing tons of money.
Location stigma, red zones (high average days on market), accessibility, zoning issues, pollution, crime rate, rivers, bus routes, schools, parks, end of block vs mid-block, undesirable adjacent properties and stadiums close by.
NOTE: Remember that these factors, although they could be used to gauge desirability, are mentioned here for determining the ARV of any property desirable or not. If you have found a property next to the train tracks for pennies on the dollar, that’s great! There could be massive profit there. Just make sure you determine your ARV properly with true comparables.
I hope this has helped you gain some tips with determining the ARV of any given property. Once you can determine this number all the other ones, like renovation budget and asking price become clearer.
KNOW YOUR NUMBERS!