What is ARV? I’m asked this question all the time from other Real Estate investors. So I’ll try my best to answer them here so others can benefit from the answers.
After Repair Value (ARV): Basically, what would a house sell for if it was in a sellable condition? If you work with an agent on occasions, you can ask them to pull a Brokers Price Opinion (BPO) for you on the property. Before asking, make sure you have worked with the agent or a least you are planning to work with that agent in the future, their time is very valuable too. If you subscribe to the Multiple Listing Service (MLS), you can pull a BPO on your own. It will give you a list of homes within a mile from your subject property and that has closed in the last 6 months or so. A BPO is like an estimated appraisal of worth. It’s not an appraisal, it’s just a close estimate of future value. You can look for comparable homes that are within a mile of your subject property that are as close in square footage and amenities as your subject property. Amenities meaning, does it have a garage, attached or detached, fenced in yard, finished basement, etc. Try to find other properties that closed within 6 months of the current date or less, don’t use closings that occurred over a year in the past for your estimates. In slower markets you might have to go further than a year and a mile to find your comparable, just try to keep them under a year from closing and less than a mile from your subject property if at all possible. The further you have to go the less accurate your estimate will be.
Once you have these numbers and addresses, drive by the comparable properties that you located during the above process. I’ve got some questions:
1. Do they resemble your subject property?
2. Does the neighborhood look comparable to your subject properties neighborhood?
3. Are they in the same type of neighborhood?
4. Always look at these properties as if you were planning on buying and living in the property, put yourself in your future buyers shoes.
5. Does your subject property’s neighborhood look trashy compared to the comparables that were pulled?
6. Does the comparable have the same number of bedrooms and bathrooms?
7. Does it have the same amenities; garage, finished basement, or a fenced in backyard, etc.?
8. When was the comparable built compared to your subject property?
9. Is your subject property an older style home? Have all the other properties in the area been facially upgraded on the outside?
10. Does the area of your subject property have boarded, abandon, or trashy properties around it and your comparable doesn’t.
11. Can you make your subject property look like the comparables you are using?
At this point you might have to pull different properties if your comparable properties are in a really nicer or worst neighborhood.
You can work up an average and this should be fairly close to what you can sell the house for after you have it fixed up. This should give you are fairly accurate estimate of the properties future worth. As I said, the further off your comparable is the less accurate your estimate will be. If you analyze your comparable neighborhoods, you can figure out how much more a property is worth if it has an extra bedroom or bathroom. At that point you can compare a 3 bed-2 bath and a 2 bed-2 bath just by adding or subtracting the amount of increase or decrease for having or not having the same amount of bedrooms or bathrooms. This is basically what an appraiser will do. They have the skill to compare a 4 bedroom home to a 2 bedroom home by knowing how much to subtract from the value of the 4 bedroom home to calculate the value of the 2 bedroom home.
In the next article I’ll cover renovation or rehab costs of the subject property itself, the one you are thinking about buying.
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