What is ARV?

[Jason Utley]

I know what ARV is, I just want to know how you evaluate deals.

Some may strictly look at comps and place no value on upgrades others shoot from the hip. What ever your strategy I appreciate the feedback. 

[JD Martin]

More or less, here's how I do it from a layman's point of view on something I am considering (not something I own). 

1. Considering the neighborhood and size of the house - the two most important factors in the ultimate value of the house - and using comps and my knowledge of the local market, I figure out a "drop-dead" offer, a likely offer, and a "fire sale" offer. That gives me a range of maximum value for the house if it were completely rehabbed. I more or less ignore the seller's pricing here except in considering whether we might work a deal in point 2, since a house is worth what it's worth regardless of what the house is listed at. 

2. I consider the same figures from a purchase point of view, only in reverse, where the "drop dead" number is getting the house for some ridiculous low price, and the "fire sale" price being the absolute maximum I would pay for the house, and where I think we (the seller and I) are likely to settle between those numbers. These figures are already predicated on me having a rough idea of #3, below.

3. Now I have two ranges to work from. I work up a basic rehab and a nice rehab figure and compare those to my ranges. For a deal to work for me, my two figures together have to absolutely end up at no higher than the "fire sale" figure, but in reality must end up somewhere around 80% or so of the "fire sale" figure, since I don't like to work for free. 

Example:

I believe House A would sell at a fair price for $100k if rehabbed, $110 in some dream condition, and $90k if the seller wanted to be rid of it immediately. (House is listed at $100k).

I would be willing to pay $70k as a reasonable sales point, $60k would be me giving them a quick close, and $80k as an absolute maximum.

House needs $10k for a basic rehab and $15k for a nice rehab. 

If I get the house at the drop-dead figure ($60k), I can do the nice rehab ($15k) and be in at 75% ARV. If I get the house at the fair figure ($70k), I can do the basic rehab ($10k) and be in at 80% ARV. If I get the house at my maximum ($80k), and do the basic rehab ($10k), I am in at 90% ARV.

Note that in all examples, I still have to get the house below the seller's fire sale price. That means I either need to beat other investors to the punch, offer something they can't offer (cash, quick close, whatever), or just be at the right place at the right time. As you can see, in this example, the seller has listed the house at the rehabbed price and will have to be educated by the market. Sometimes a seller is able to get away with this approach if they find a buyer that plans on living in the house and combining their need for shelter with sweat equity in order to make the numbers work. As an investor, I can't do that, and won't make any money unless I receive consideration for the work that needs to be done. 

Caveats and thoughts in no particular order:

1. Materials don't mean a whole lot in the houses I look at, because I hold everything I buy and rent it long term, all <100k houses. In my opinion, and experience, people overestimate the value of granite, nice tiles, etc in terms of what the house is worth. Those materials are great when it comes to separating from the competition, but it doesn't really make the house worth much more than the size and the neighborhood.

2. You have to have a solid working knowledge of the market that you are looking at: neighborhoods, sale prices, housing strata, employment marketplace, etc. And you have to be constantly educating yourself, as these things change. 

3. Once you've done this long enough or enough times, you can almost do this in your head while you're walking the property.