How to accurately estimate ARV (After Repair Value)

Question

I am looking at purchasing a particular rental property. It is a foreclosure which needs quite a bit of repairs. I have a budget and cash for all of this, but I am curious to know, what can I do to estimate the ARV of it? I know very little about construction and what adds value to properties. I can guess what would add value but how do I determine how much? Any help would be appreciated.

Thanks!

Frank

Bryan L. · Answer

@Frank Coppola - You're looking at it wrong. Don't think in terms of your rehab as adding value. You need to rehab the property to be similar to other properties in the area in features and quality. Maybe a little better, but not a lot. So, you want to look at the other average houses in the area and see what they are selling for. The other thing is this: If you plan to hold this for a rental, you need to also consider how much it will rent for (market rent) and calculate your projected cash-flow.

Bryan L. · Answer

I'll expand on that a bit. You don't want to look at a rehab project like this: Bought it for 30, fixed the kitchen which adds 10 in value, put in granite counter-tops which ads another 5, replaced the flooring which cost me 10, fixed the roof which cost me 10, replaced the windows which cost 5 but adds 10 in value, so the ARV will be the sum of all of this. That's not the correct thought process. The amount of money that you spend on a rehab has virtually no correlation to how much the home is worth after the rehab. It's very possible to spend more than the home is worth. With the small amount of Realtor work that I do, I often talk to sellers who say something along the lines of "well we bought it for 100, and we've put 30 into fixing it up with new blah, blah, blah". And I have to tell them, "yes, but it's only worth 110, because that's what the house next door sold for".

Patrick T. · Answer

@Frank Coppola You received very good advice from @Bryan L. It's a subtle difference, but very important. Your goal isn't to guess at the value after the rehab. It is to be sure that your rehab establishes the same value of other homes in that neighborhood. Maybe just a little better to give it an edge in the market. Find out what other properties like yours that are in good condition have actually sold for. Then ask yourself "what will I need to do to make this property just a little better than those. You should not be guessing or speculating on the value. Work with the formulas you find here on BP. If it is a solid neighborhood with houses that sell, and you match those houses' quality, the dollar amount is already determined. Your job is to purchase, rehab and sell it within a budget that makes you some money.

Manny Cirino · Answer

here is what I do, I pull the property in zillow(not the best but visually you can't beat it). I filter the catagories to recent sales only with the same amount of beds, baths, garages, etc... I make sure the sq. ft. of the living space is about 200 sq. ft. under and 200 sq. ft. over. after the filter is done. I use 3 different comps, Foreclosures, short sales and retail sales in the area. I take pick 3 properties from every catagory and calculate the dollar per sq. ft. and average that out. It is simple and effective for me since zillow match's recent sales in my area 100% to the county sales records. and it also gives me high and low comps to work with.

Chris Mills · Answer

Hi Frank, A good Realtor who knows the market intimately will be able to give you a pretty accurate ARV since they know what things are selling for and how fast. They will also be familiar with buyer preferences for the neighborhood. If the Realtor is an investor, all the better.

Patrick T. · Answer

Good luck @Frank Coppola !

Frank Coppola · Answer

Thanks @Bryan L. I completely understand what you mean. My intention was never to think that the amount of money I spend will correlate to a certain amount of value. I was simply asking what factors do actually determine ARV and everyone seems to be saying that it is the market and comparable homes that determines value more so than anything else. I have never done a rehab like this before and your insight is very helpful and I thank you.

John Moore · Answer

If the house is in Hoboken the neighborhood and location and condition of the property will be a big influence. If it is a foreclosed property you can use a realtor to do the paperwork and it won't cost you a dime. Get his opinion on rents, comps and what if anything you should repair. If the apartments are rented or vacant shold influence you on how much repair is necessary. Your realtor can get on the computer and give you the information you want rather quickly. Good luck.

Manny Cirino · Answer

@kieth ellis it depends what you are looking for the wholesale value or retail. If your are looking at wholesale value then you could look for those REO and short sales. If you re looking at a retail price then you compare to those newly remodeled homes. I always get both low and high comps.

Keith Ellis · Answer

@Manny Cirinoso in the first part what are you pulling are you pulling the property first that you want to compare or are you just pulling market value comps first.